Investors are entering 2024 with renewed optimism that stocks will continue their upward climb after a volatile yet ultimately positive year for markets in 2023. Several key factors have analysts forecasting further gains, though risks remain that could derail the bull run.
Fed Pivots Toward Rate Cuts Boost Sentiment
A driving force behind the upbeat outlook is an expected policy pivot by the Federal Reserve. After aggressively hiking rates in 2022 and early 2023 to combat surging inflation, the Fed is now projected to cut rates in 2024 as price pressures ease.
“We anticipate two 25 basis point rate cuts from the Fed in the back half of the year,” said Bank of America stock strategist Savita Subramanian. “This should be supportive for equity prices.”
The potential for rate cuts has markets betting on a continued economic expansion rather than recession. Lower rates would ease financing costs for businesses and stimulate growth.
Earnings Growth Back on Track
Also lifting investor spirits are expectations that corporate profit growth will accelerate after the pandemic-induced turbulence.
Earnings for S&P 500 companies are seen rising approximately 8% in 2024, a solid clip after essentially remaining flat in 2023. The table below summarizes the earnings outlook:
| Year | Earnings Growth Estimate |
|---|---|
| 2023 | 0% |
| 2024 | 8% |
Key factors driving the earnings rebound include:
- Improving consumer and business demand
- Subsiding cost pressures
- Rebuilding profit margins
“We see mid to high single digit earnings growth returning in 2024, which should excite investors,” said Goldman Sachs equity strategist David Kostin.
Attractive Stock Valuations After Pullback
Another pillar of support for stocks is their attractive valuations following the 2022 decline. The S&P 500 forward price-to-earnings (P/E) ratio currently stands below its 10-year average at around 17x.
This indicates stocks have room for expansion as growth picks up steam. Continued economic recovery could propel earnings higher and make equities look even cheaper by historical standards.
“Equities remain attractively priced relative to still-low interest rates,” said Morgan Stanley wealth management analyst Andrew Slimmon. “We advise overweight positions as we believe 2024 will be a stock picker’s paradise.”
Lingering Risks Could Spell Trouble
However, analysts caution there are always variables that could dramatically alter the investing landscape. Key macroeconomic uncertainties include:
Inflation: If pricing pressures reignite due to factors like energy supply shocks, the Fed may be forced into more aggressive tightening. This would likely derail the projected rebound.
Geopolitical turmoil: Conflicts like the Russia-Ukraine war could escalate and roil global markets. Any related supply chain disruptions or commodity price spikes would dampen growth.
Policy missteps: If the Fed misreads economic data and makes errors calibrating interest rates, it could tip the economy into recession. Similarly, fiscal policy mistakes out of Washington could undermine sentiment.
While the base case is clearly bullish, investors will want to monitor these risks as 2024 unfolds. Defensive positioning may become prudent if warning signs emerge.
Overall though, analysts see room for double-digit S&P 500 returns in 2024 on the order of 10-15% as tailwinds overpower lingering headwinds.
“Recession looks avoidable, the Fed has turned supportive for markets, and valuations across most asset classes remain favorable relative to interest rates,” said PIMCO investment strategist Joachim Fels. “The wall of worry has crumbled and given way to FOMO (fear of missing out).”
Stocks and Sectors to Watch
With another potentially prosperous year ahead, where should investors focus their attention for 2024 outperformance?
Reopening plays: Sectors like airlines, hotels, restaurants, and bricks-and-mortar retail with upside exposure to the economic reopening. These groups lagged in 2023 due to recession worries but could bounce back strongly.
Beaten-down tech titans: Growth stalwarts like Apple, Microsoft, Amazon and Alphabet that suffered in the growth stock selloff. With valuations more reasonable and demand steadying, they are ripe for renewed investor affection.
Commodity champions: Energy, mining and material stocks with leverage to still-tight commodity market supply/demand balances. Their profits and payouts to shareholders should remain sturdy.
Financial leaders: Banks, insurers and asset managers that benefit from higher net interest margins in a rising rate environment. Improving credit conditions provide an added catalyst.
While trying to pick individual winners is tough, investors can take advantage of 2024’s promising backdrop through broad market exposure. Allocating to index funds tracking the S&P 500 and other major benchmarks seems prudent given analysts’ sunny projections.
Just don’t get too complacent – the potential for pullbacks persists if risks collide with optimism. Maintaining disciplined, balanced investing principles will be key to navigating 2024’s bull run.
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.
