Stock Market Outlook: After a Stellar Year, What’s in Store for 2024?

As investors chill the bubbly for their year-end celebrations, they should lay in more for 2024. While the S&P 500 isn’t cheap at 19 times next year’s expected earnings, and the timing and pace of rate cuts are uncertain, stocks look poised for another strong year, with this year’s narrow rally broadening out to encompass many more issues.

It is likely to be a volatile year, with markets buffeted by shifting expectations for the economy and interest rates, geopolitical surprises, and the political surprises of a presidential election season. But important debates about the trajectory of inflation and rates presumably will be settled by year end, leaving investors to look forward to more good news in 2025.

Barron’s recently canvassed six market strategists and chief investment officers about their market and economic forecasts for 2024. Their average year-end S&P 500 target: 4838, up only 3% from Thursday’s close of 4719. Then again, the benchmark index has rallied 12% just since the start of November. Like this year’s late rally, there is good reason to think that 2024, too, will end with a bang, lifting the stocks well above Wall Street pros’ targets.

Earnings, for one, will return as a positive driver for stocks next year. Based on consensus estimates, Wall Street analysts expect a 12% rise in S&P 500 earnings, to $245, compared with meager growth of 2% this year. But even with bond yields likely to fall further, strategists don’t expect investors to be willing to pay more for those earnings than they have in 2023.

Lower interest rates nonetheless will grease stocks’ path higher, lowering the cost of doing business and boosting liquidity. How low remains the subject of heated discussion, however, even after Wednesday’s meeting of the Federal Reserve’s policy-making committee.

Fed officials have raised their benchmark federal-funds rate target by 5.25 percentage points since March 2022, to a target range of 5.25%-5.50%, to cool the worst inflation in more than 40 years. Now that price growth is decelerating, they are contemplating three rate cuts of a quarter percentage point each in 2024, based on median estimates in the Fed’s latest “dot plot” of rate projections.

Investors are betting on more cuts than that. Futures-market pricing suggests that the Fed will start lowering rates in March, according to the CME FedWatch Tool. The market is pricing in a total of 1.50 percentage points of cuts by year end.

The Fed could trim interest rates for two reasons: to bolster a flagging economy or to keep its policy stance from growing more restrictive as inflation continues to fall. With economists increasingly betting against a recession, and Fed officials signaling at least several more years of modest economic growth, the Fed might need to lower its fed-funds target to keep real, or inflation-adjusted, interest rates constant, notes Gargi Chaudhuri, head of iShares investment strategy, Americas, at BlackRock.

Chaudhuri calls any such rate reductions calibration cuts. She sees three quarter-point rate decreases in the back half of 2024.

The period before the Fed begins to cut rates could be a good one for the market. “In the previous five hiking cycles since 1990, the Fed paused an average of 10 months between its last hike and its first cut,” says Chaudhuri, who has a year-end S&P 500 forecast of 4850. “On average, stock and bond returns have been higher during the pause period than in easing periods immediately following the first cut.”

That’s one of many arguments for staying invested in 2024. Waiting to buy until the Fed finally starts cutting rates could mean waiting too long.

That’s not to say that 2024 will deliver only good news for investors, especially after 2023’s late-year rally. Saira Malik, chief investment officer at Nuveen, expects a rocky first half, followed by a second-half rally that could take stock indexes to new highs. “Valuations are fairly full,” she says. “It’s a setup for a tougher first half of 2024 with a lack of positive catalysts for the market.”

Malik has a 2024 year-end forecast of 4950 for the S&P 500, but warns that stocks could drop before rebounding to that level. Election-year seasonality could play a role. “Historically, in presidential election years, [the S&P 500] has finished up three-quarters of the time—by an average of 7.5%,” she says. “Typically, you get some volatility around the election and then a relief rally through the end of the year.”

Christopher Harvey, head of equity strategy at Wells Fargo, has a year-end target of 4625, below the index’s current level. Harvey expects a tumultuous year for stocks, citing the currently low reading on the Cboe Volatility Index, or
VIX.
A reading of 13, he says, is “signaling overconfidence, that nothing is going to surprise you, and there’s nothing to fear here.”

To the contrary, he says, “there is a lot of uncertainty about earnings and the economy, plus geopolitics and the U.S. election that are even harder to handicap. That’s not priced into the market right now.”

Harvey sees a “trader’s market” in early 2024, affording opportunities to buy on selloffs and sell on rallies. Investors are likely to be disappointed by the timing and quantity of Fed rate cuts next year, he says.

Wells Fargo economists forecast three quarter-point reductions in the fed-funds rate in the second half of 2024, to a target range of 4.5%-4.75% by year end.

Michael Wilson, head of U.S. equity strategy at Morgan Stanley, has the lowest S&P 500 target of our group: 4500. He expects a weaker economy in 2024 as more companies and consumers feel the impact of higher interest rates, although he looks for an improvement in both sentiment and earnings in 2025.

Wilson estimates that S&P 500 earnings will grow only about 4.5% next year, to $229, as the U.S. economy slows and companies continue to spend heavily on AI and other technologies. But those investments should begin to pay off in 2025. “We’re in the middle of a pretty big [capital expenditure] cycle,” he says. “We don’t think there’s a big boost in 2024, because it takes time. But by the time we get to 2025, this investment will be more widely diffused across the economy and will begin to bear fruit from a margin and productivity standpoint.”

Wilson looks for earnings to rise 16% in 2025, to an estimated $266—an upswing that he expects investors to discount later in 2024.

Edward Yardeni, president of Yardeni Research, is the most bullish strategist of the bunch, with a 2024 S&P target of 5400. Last December, he forecast that the S&P 500 would end this year at 4800, a prediction that looks uncannily accurate. 

Yardeni’s optimism is grounded in a still-strong labor market and the ability of consumers to continue spending, as wages in the aggregate are now growing faster than prices. Consumer spending accounts for about two-thirds of U.S. gross domestic product.

“If the economy is doing reasonably well and inflation is coming down, the Fed isn’t going to rush to lower interest rates—there isn’t going to be any need for it,” Yardeni says. “These are the kinds of rates that we had before the financial crisis, and the stock market did well, the economy did well. We’re basically back to the old normal.”

That’s good news for fixed-income investors, as it implies that bond yields won’t return to the near-zero level of recent years. On average, market strategists see the
10-year U.S. Treasury note
yielding 3.9% at the end of 2024, about where it is now. The 10-year yield hovered just below 5% as recently as mid-October.

Government budget deficits will keep Treasury supply high, helping to support yields.

Chaudhuri recommends that investors extend the duration of their fixed-income portfolios to lock in high yields for a longer period. She favors the intermediate portion of the yield curve, which offers a good balance of yield today and the potential for capital appreciation as the Fed begins to cut rates. The
iShares 3-7 Year Treasury Bond
exchange-traded fund and the
iShares MBS
ETF both offer a way to invest in such securities, she notes.

Nuveen’s Malik likes municipal bonds for 2024, with the yield curve sloping upward and fundamentals looking strong. She highlights the Nuveen High Yield Municipal Bond fund as an attractive play. 

In the equities market, stock-picking should be easier next year than in 2023, when the so-called Magnificent Seven stocks—
Apple,

Alphabet,

Amazon.com,

Meta Platforms,

Microsoft,

Nvidia,
and
Tesla
—dominated trading and contributed most of the gains. But don’t count these companies out, as their valuations aren’t egregious, and their growth prospects exceed those of the overall market.

“They are expected to grow revenues more quickly at better profit margins, and they’re plowing a lot more of their cash back into the businesses as compared with the typical company,” says David Kostin, head of U.S. equity strategy at Goldman Sachs.

Wells Fargo’s Harvey hails these companies’ pristine balance sheets, superior growth rates, and defensive attributes. He recommends a portfolio balanced between growth stocks in the software and communications-services sectors and defensive stocks such as healthcare and utilities.

“Quality” stocks, broadly defined, are a favorite of many market watchers for next year. They earn that moniker because of better-than-average balance sheets, wider profit margins, and qualitative characteristics such as competitive moats. Chaudhuri recommends the
iShares MSCI USA Quality Factor
ETF, whose top holdings include
Visa,
Microsoft, and Apple, as a way to scoop up a basket of such stocks.

Kostin expects widespread economic anxiety to keep stocks with quality attributes in vogue in 2024. Companies that score highly on his quality metrics include
O’Reilly Automotive,
Alphabet,
Accenture,
and
Cadence Design Systems.

Healthcare is one of the strategists’ favorite investment ideas for 2024, following the sector’s poor performance in 2023. The industry’s earnings don’t depend on the economy’s growth; the stocks are cheap, and a wave of mergers is boosting shares of smaller biotech companies. The
Health Care Select Sector SPDR
ETF provides exposure to the S&P 500 healthcare sector.

Next year won’t be only about playing defense, however. An economy that avoids a meaningful recession will support the results of cyclical firms, many of which are trading at more pessimistic levels. Kostin’s screen yields beaten-down cyclicals such as
Caterpillar,

Paccar,

Cummins,
and
Delta Air Lines,
all of which could rally if economic data prove better than expected.

Wilson prefers cyclical stocks that tend to do best late in economic cycles. Such cyclicals, rated the equivalent of Buy or better by Morgan Stanley, include Delta,
ConocoPhillips,

Knight-Swift Transportation,
and
Howmet Aerospace.

And don’t forget the AI trade, which could still be in its early years. Chaudhuri prefers to invest in AI via the semiconductor industry, which is rebounding from a multiyear downturn. The
iShares Semiconducto
r ETF offers wide exposure to the sector.

Wilson cites AI beneficiaries in industries outside of tech, such as
DraftKings,

Hilton Worldwide,
and
S&P Global,
that are Buy-rated by Morgan Stanley.

Perhaps the main message for 2024: Don’t try to time the market. Although many investment strategists see a back-end-loaded year, better returns could come even sooner, depending on the pace of rate cuts, the evolving economic outlook, and turns in investor sentiment. 

Here’s to a happy New Year.

Write to Nicholas Jasinski at [email protected]