Stocks closed out 2023 with substantial gains, continuing their rally from mid-2022 and setting the stage for further advances in 2024. Though risks remain, confidence is growing that the bull market still has room to run.
Strong Finish to 2023 Boosts Optimism
The S&P 500 surged over 24% in 2023, marking its best annual performance since 2019 [1]. Other major indexes also posted robust returns, with the tech-heavy Nasdaq gaining over 31% and the Dow rising 18% [2].
This rally defied expectations, as most analysts predicted lackluster single-digit returns at the start of 2023 given recession fears and the Federal Reserve’s aggressive interest rate hikes [3]. However, peak inflation passed faster than anticipated, allowing the Fed to pause its rate hikes. Meanwhile, consumers kept spending and the job market held up well. This combination of moderating inflation and resilient economic data revived investor sentiment and powered stocks higher [4].
| Year | S&P 500 Return | Dow Return | Nasdaq Return |
|---|---|---|---|
| 2023 | 24.7% | 18.1% | 31.7% |
Now major indexes sit just shy of all-time highs, and expectations are growing for the bull market to continue into 2024 [5].
Fed Policy, Earnings Growth Hold Keys for 2024
The Federal Reserve’s policy actions will remain crucial for markets in 2024. Though the Fed paused rate hikes in late 2022, questions linger regarding how long rates will stay elevated before cuts begin [6]. Most analysts expect the Fed to start easing in the second half of 2024 if inflation trends down near its 2% target. Rate cuts would provide a catalyst for stocks, though the timing and pace remain uncertain [7].
Earnings growth also looks set to accelerate after stalling in 2022 amid high inflation and rising rates. Consensus forecasts call for S&P 500 earnings per share to climb 7% in 2024, a solid increase from 2023’s flat growth [8]. If estimates rise further as the economy strengthens, stocks would have room for additional gains [9].
Bulls Target New Highs for S&P 500
Encouraged by 2023’s big rebound, several prominent analysts foresee stocks powering to fresh record peaks in 2024. Fundstrat’s Tom Lee reiterated his year-end S&P 500 price target of 5,200, implying 14% upside from current levels. Lee believes inflation will decline toward normal levels, paving the way for Fed easing and renewed economic growth by late 2024 [10].
Morgan Stanley’s Mike Wilson also turned bullish, raising his S&P 500 target to 4,400 from 3,900 previously. Wilson cited falling inflation and stabilizing yields for his more constructive outlook. “Recession is off the table for 2023 and likely 2024 as well,” he wrote [11].
Other firms including BofA Global Research and Wells Fargo also forecast new highs, with targets reaching as high as 4,600 next year [12].
Rotation Toward Cyclicals Expected
Sector rotation could emerge as a key theme in 2024, with cyclical groups regaining leadership after defensive sectors dominated for much of 2022-2023. Areas such as energy, financials, industrials and materials are poised to benefit as inflation moderates, the Fed eases policy, and economic activity picks back up [13].
At the same time, high-growth tech and consumer discretionary stocks could take a back seat after big runs off 2022 lows. Their valuations still appear stretched relative to earnings potential if the economy slows [14].
“We recommend tilting portfolios toward inflation-benefitting sectors over hyper-growth sectors in 2024,” wrote Wells Fargo strategist Chris Harvey [15].
Risks Remain Despite Bright Outlook
While optimism reigns as 2024 begins, stocks still face risks that could derail the bull market. An unexpected recession if consumers retrench or geopolitical tensions flare up stands out as the biggest concern. Meanwhile, inflation could reaccelerate if supply chain problems resurge or the job market overheats [16].
There is also the chance the Fed has to hike rates higher than expected if inflation persists above its target. This would pressure equity valuations. However, most economists think inflation will continue slowly declining toward the Fed’s goal [17].
Overall while risks remain, confidence is high that the bull market still has room to run in 2024. Barring an outside shock, economic trends point toward solid if not spectacular gains for stocks amid falling inflation, Fed easing and recovering growth. Lean bullishly, but hedge risks where possible.
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To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
