NEW YORK – A wild 2023 for the US stock market is drawing to a close, and investors are full of optimism for 2024 as the S&P 500 Index sits within striking distance of its first all-time high in nearly two years.
With the Federal Reserve signaling that it’s likely done raising interest rates to tame inflation, markets are increasingly focused on risks beyond monetary policy, such as the outlook for the economy, earnings and the November US presidential election.
One key challenge for investors will be assessing the lagging impact of the Fed’s hiking cycle, which has Wall Street strategists split on where stocks are headed next year.
Of course, many were caught on the wrong side in 2023, as they predicted gloom and doom but the S&P 500 jumped more than 24 per cent despite bank collapses, recession fears and the highest borrowing costs in decades.
Here’s a look at five key themes for traders in 2024:
Equities have drawn support in recent months from growing speculation that the Fed will start lowering borrowing costs by mid-2024. Markets are pricing in earlier and deeper rate cuts, with swaps traders wagering that the central bank will reduce rates by roughly 150 basis points next year, double the forecast of Fed officials.
The S&P 500 is less than 0.5 per cent away from a closing record last reached on Jan 3 2022. It’s also roughly 1 per cent below the average full-year gain predicted by nearly two dozen analysts in a survey published on Dec 19, which forecast the index would end 2024 at 4,833.
Big tech’s growth status
From Nvidia Corp. to Microsoft Corp., the seven-largest US tech stocks were responsible for 64 per cent of the S&P 500’s rally this year through last week as the artificial-intelligence frenzy took off. The Magnificent Seven – which also includes Amazon.com Inc., Apple Inc., Google parent Alphabet Inc., Meta Platforms Inc. and Tesla Inc. – are expected to post 22 per cent earnings growth next year, twice the S&P 500’s advance, data compiled by Bloomberg Intelligence show. The key is how much of that is already baked into share prices, especially with expectations for a soft landing building.
As Louis Navellier of Navellier & Associates sees it, six of the seven stocks are looking good heading into 2024. Only Apple will be sitting on the sidelines absent a cutting-edge product – or technology – to boost its bottom-line, he wrote in a report.
US presidential vote
An election year with a sitting president running is historically a bullish scenario for US stocks. Since 1949, the S&P 500 is averaging a gain of nearly 13 per cent in those election years, per the Stock Trader’s Almanac. When there’s an open field without an incumbent president, the index averages a 1.5 per cent loss for the year.
Part of the reason for equity gains is incumbents typically implement new policies or push for lower taxes to boost the economy and sentiment ahead of the vote.
Asia Risk: BoJ, China and India elections
While the Nikkei 225 Stock Average climbed to a three-decade high in 2023 on the back of the Bank of Japan’s ultra-loose policy and a weak yen, Japanese shares face a hurdle in early 2024. The central bank is maintaining the world’s last negative rate, but two-thirds of economists forecast it will deliver its first rate hike since 2007 by April.
Meanwhile, after another disappointing year for China bulls, investors will watch meetings of the National People’s Congress and the third plenum for Beijing’s growth target in 2024 and clues on fiscal stimulus.
India is a big bullish bright spot, as the nation bags high-profile manufacturing contracts, ramps up infrastructure spending and emerges as an alternative to China.
ECB, BOE policy
With the Stoxx Europe 600 Index near its highest level in two years, cyclical shares that are heavily exposed to Asia may hold the key to further gains given China’s potential fiscal boost. While a soft economy will likely weigh on European earnings, analysts’ consensus estimates are for roughly 4 per cent profit growth in 2024, mostly relying on rising margins, BI data show.
Bond markets expect the European Central Bank to cut rates by April, which could provide an additional boost to the region’s shares. The Bank of England is expected to trail both the Fed and ECB in easing since the UK has one of the highest inflation rates among Group of Seven nations. BLOOMBERG