Editor’s note: We earn commissions from Forbes Advisor partner links. Commissions do not influence editors’ opinions or ratings.
The S&P 500 rebounded from an 18.11% drop in 2022 to produce an impressive total return of 26.29% in 2023. Looking ahead to 2024, investors are optimistic that the same macroeconomic tailwinds that fueled the stock market rally in 2023 will propel the S&P 500 to all-time highs. It will reach its highest value in 2024.
Investors are optimistic the Fed has achieved a soft landing for the U.S. economy and will soon shift from raising rates to lowering them, despite continued concerns about inflation, interest rates, debt levels and political dysfunction in Washington, D.C. are doing.
Lower interest rates and higher earnings could be a bullish combination for stocks. However, some analysts are concerned about inflated valuations in the technology sector, and the 2024 US presidential election could cause significant market volatility.
Stock market predictions for 2024
The S&P 500 ended 2023 with plenty of momentum after re-entering bull market territory in June. The index began the new year with a nine-week winning streak, and is now within striking distance of hitting its highest level since December 2021.
The average S&P 500 bull market from 1921 to 2023 produced a 157% return and lasted more than four years, according to Sam Stovall, chief investment strategist at CFRA Research. This pattern suggests that the stock market rally may continue for some time.
One of the best-performing investment themes in the current bull market is artificial intelligence technology. Some of the best-performing tech stocks in 2023 were AI technology stocks, including AI chip maker Nvidia.
James Demmert, chief investment officer at Main Street Research, says the AI-powered bull market may have just begun.
“The market’s recent strength points to a new and very real AI-driven bull market and business cycle that could last a decade thanks to productivity gains and AI tailwinds.”Denmart he says.
“Seasoned investors believe that this kind of broad-based strength across all sectors and market caps is a sign of the first year of the past bull market, which is likely to continue for much longer, with inevitable corrections along the way. I know it reminds me.”
Monetary policy outlook
Although the Fed made significant progress in curbing inflation in 2023, the central bank still has work to do in 2024.
The personal consumption expenditure price index in November increased by 2.6% from the same month last year, down from 2.9% in October.
Core PCE, the Fed’s preferred inflation measure that excludes volatile food and energy prices, rose 3.2% in November, still well above the Fed’s long-term target of 2%.
Fed forecast
In its latest long-term economic forecast released in December, the Federal Open Market Committee forecasts core PCE inflation of 2.4% and GDP growth of 1.4% in 2024. FOMC members also expect only three rate cuts by the end of 2024.
Rising interest rates increase borrowing costs for consumers and businesses, putting pressure on economic growth and profits. Investors and analysts generally see interest rate cuts as bullish for stocks, as long as they are not accompanied by a recession.
Fed officials are downplaying the possibility of an imminent rate cut. But many investors remain optimistic that the FOMC will cut rates more aggressively than expected near 2024. Bond markets are pricing in a 70% chance that the Fed will make its first rate cut by March, according to CME Group.
The market sees a greater than 80% chance of at least five rate cuts from current levels by the end of 2024.
Investor optimism about the economic outlook has improved dramatically from a year ago, but there remains a risk that the economy could slide into recession in 2024 due to Fed policy tightening. In fact, the New York Fed’s Recession Probability Model estimates that there is still a 62.9% chance of a recession. The likelihood that the United States will enter a recession within the next 12 months.
Featured partners
1
SoFi automatic investing
1
SoFi automatic investing
Annual advisory fee
0.25%
Market sectors to watch in 2024
Analysts predict that S&P 500 companies’ earnings will grow by 11.5% in 2024, with sales increasing by 5.5%.
Fortunately, analysts expect positive earnings and sales growth in all 11 market sectors this year.
The healthcare sector is expected to deliver market-leading revenue growth of 17.8% in 2024, while the IT sector is expected to lead with 9.3% revenue growth. At the other end of the growth spectrum, analysts expect the energy sector’s earnings to grow by just 2.9% and sales to grow by just 1.9% in 2024.
Within the technology sector, many investors are focusing on the so-called “Magnificent Seven” megacap stocks that led the S&P 500’s surge in 2023: Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL). , Microsoft (MSFT), Meta Platform (META), Tesla (TSLA), and Nvidia (NVDA).
Many investors are questioning the valuation of DeVere Group founder and CEO Nigel Green after the Magnificent Seven’s strong 2023 performance. says.
“However, while uncertainty remains and there are compelling reasons to believe that these stocks may not surpass last year’s highs, these stocks will continue to perform well and continue to grow into 2024. We expect it to attract the attention of investors around the world,” says Green.
These seven stocks could see a correction in early 2024, but Green says investors would be foolish to abandon these stocks given their impressive businesses.
“Our mature market position, commitment to innovation, resilience to economic downturns and alignment with global megatrends position us for sustained success in 2024 and in the years to come. ” he says.
The energy sector has the highest percentage of analysts rating it as a “buy” for 2024 at 64%, followed by communications services at 62% and healthcare at 59%. The consumer staples sector has the lowest percentage of analysts with a “buy” rating at just 47%.
Election year stock performance
Stock market returns in past US election years have been lackluster.
Since 1952, the S&P 500 index has risen an average of 7% during presidential elections, lower than its average annual total return of about 10%.
Fortunately, since 1952, the S&P 500 has delivered positive returns in presidential reelection years when the incumbent president is on the ballot. In fact, his average increase in those reelection years was 12.2%.
Since 1973, financial services and energy have been the best-performing S&P 500 sectors in presidential election years, while information technology and materials have been the worst-performing.
Looking for a financial advisor?
Connect with a pre-screened financial advisor in under 3 minutes
How to invest in 2024
Growth stocks and tech sector stocks performed extremely well in 2023 as expectations for a change in Federal Reserve policy grew.
Investors hoping for a soft economic landing and aggressive rate cuts in 2024 could consider leaning toward these two themes. Similarly, those concerned about persistently high inflation and the possibility of a recession in 2024 may seek exposure to defensive market sectors with relatively stable returns, such as healthcare, utilities, and consumer staples. You could consider increasing it.
From a valuation perspective, the S&P 500’s forward price/earnings ratio of 19.3x is currently above its 10-year average of 17.6x. This premium valuation suggests that S&P 500 companies will need to achieve some impressive earnings growth this year for the stock market to reach new all-time highs.
The information technology sector has the highest forward P/E at 26.7, while the energy sector has the lowest at 10.8.
Jeffrey Bachbinder, chief equity strategist at LPL Financial, says investors should expect stock market volatility in 2024 ahead of the November election.
“LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) recommends a neutral tactical allocation to equities, with a moderate overweight to cash-funded bonds,” Bachbinder said.
LPL recommends large-cap growth stocks over value stocks heading into 2024.
“STAAC believes large-cap growth stocks could benefit from lower inflation and stable interest rates over the medium term,” Buchbinder said.
Additionally, he said growth stocks may have better earning opportunities than other markets as the economy slows.
Overall, analysts are optimistic about the stock’s prospects for 2024. Analyst consensus price targets for the S&P 500 are 5,090, implying approximately 8.5% upside from current levels.
