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The S&P 500 generated an impressive 26.29% total return in 2023, rebounding from an 18.11% setback in 2022. Heading into 2024, investors are optimistic the same macroeconomic tailwinds that fueled the stock market’s 2023 rally will propel the S&P 500 to new all-time highs in 2024.
Despite ongoing concerns about inflation, interest rates, debt levels and political dysfunction in Washington, D.C., investors are optimistic that the Federal Reserve will achieve a soft landing for the U.S. economy and soon pivot from interest rate hikes to rate cuts.
Falling interest rates and earnings growth could be a bullish combination for stocks. However, some analysts are concerned about bloated valuations in the technology sector, and the 2024 U.S. presidential election could create some major volatility in the market.
2024 Stock Market Predictions
The finished off 2023 with plenty of momentum after re-entering bull market territory in June. The index punctuated the start of the new year with a nine-week winning streak that put it within striking distance of its first new all-time high since December 2021.
Since 1921 through 2023, the average S&P 500 bull market has generated a return of 157% and lasted more than four years, according to Sam Stovall, chief investment strategist of CFRA Research. That pattern suggests the stock market rally could continue for the foreseeable future.
One of the best-performing investment themes of the current bull market has been artificial intelligence technology. Several of the top-performing tech stocks of 2023 were AI technology stocks, including AI chipmaker Nvidia.
James Demmert, chief investment officer at Main Street Research, says the AI-fueled bull market could be just getting started.
“The market’s recent strength is indicative of a new and very real AI-led bull market and business cycle that could last a decade thanks to the productivity growth and tailwinds from AI,” Denmert says.
“Experienced investors know that this kind of broad based strength across all sectors and capitalizations is reminiscent of the first year of previous bull markets that has much further to run, with inevitable corrections along the way.”
Monetary Policy Outlook
The Federal Reserve made significant progress in bringing down inflation in 2023, but the central bank still has work to do in 2024.
The personal consumption expenditures price index increased 2.6% year-over-year in November, down from 2.9% in October.
Core PCE, which excludes volatile food and energy prices and is the Fed’s preferred inflation measure, was up 3.2% in November, still well above the Fed’s long-term target of 2%.
Fed Projections
In its latest long-term economic projections released in December, the Federal Open Market Committee projects core PCE inflation of 2.4% and GDP growth of 1.4% in 2024. FOMC members also anticipate just three interest rate cuts by the end of 2024.
Higher interest rates increase borrowing costs for consumers and businesses, weighing on economic growth and eating into profits. Investors and analysts generally see rate cuts as bullish for stock prices as long as the cuts are not accompanied by an economic recession.
Fed officials have downplayed the possibility of an imminent rate cut. But many investors remain optimistic that the FOMC will cut rates soon in 2024 and more aggressively than anticipated. The bond market is pricing in a 70% chance the Fed will issue its first interest 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’s still a risk that Fed policy tightening could tip the economy into a recession in 2024. In fact, the New York Fed’s recession probability model estimates there is still a 62.9% chance of a U.S. recession within the next 12 months.
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Market Sectors To Watch In 2024
Analysts project 11.5% earnings growth and 5.5% revenue growth for S&P 500 companies in 2024.
Fortunately, analysts see positive earnings and revenue growth for all eleven market sectors this year.
The healthcare sector is expected to generate a market-leading 17.8% earnings growth in 2024, while the information technology sector is expected to lead the way with 9.3% revenue growth. On the other end of the growth spectrum, analysts forecast 2024 energy sector earnings growth of just 2.9% and revenue growth of just 1.9%.
Within the technology sector, many investors will pay particularly close attention to the so-called “Magnificent Seven” mega-cap stocks that led the S&P 500’s charge in 2023: Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL), Microsoft (MSFT), Meta Platforms (META), Tesla (TSLA) and Nvidia (NVDA).
Nigel Green, founder and CEO of deVere Group, says many investors are questioning the valuations of the Magnificent Seven after their strong performances in 2023.
“But while uncertainties remain and there are compelling reasons to believe that these stocks may not surpass the highs of last year, we expect them to continue to perform well, captivating global investors’ attention in 2024,” Green says.
Those seven stocks may experience a correction in early 2024, but Green says investors would be foolish to abandon them given their impressive businesses.
“Their maturing market positions, commitment to innovation, resilience in economic downturns and alignment with global megatrends position them for sustained success in 2024 and for years to come,” he says.
The energy sector has the highest percentage of analyst “buy” ratings heading into 2024 at 64% followed by communication services at 62% and healthcare 59%. The consumer staples sector has the lowest percentage of analyst “buy” ratings at just 47%.
How Stocks Perform in Election Years
In past U.S. election years, stock market returns have been lackluster.
Since 1952, the S&P 500 has averaged only a 7% gain during presidential election years, below its roughly 10% average annual total return in a typical year.
Fortunately, the S&P 500 has delivered positive returns during each presidential re-election year in which an incumbent president is on the ballot since 1952. In fact, it has averaged a 12.2% gain during those re-election years.
Since 1973, the financial services and energy sectors have been the top-performing S&P 500 sectors during presidential election years, while the information technology and materials sectors have been the worst performers.
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How To Invest in 2024
Growth stocks and technology sector stocks performed extremely well in 2023 as anticipation for a Fed pivot grew.
Investors expecting a soft landing for the economy and aggressive rate cuts in 2024 can consider leaning into these two themes. Likewise, those concerned about sticky inflation and a potential 2024 recession can consider increasing their exposure to defensive market sectors with relatively stable earnings, such as the healthcare, utilities and consumer staples sectors.
From a valuation perspective, the S&P 500’s forward price-to-earnings ratio of 19.3 is currently above its 10-year average of 17.6. This premium valuation suggests S&P 500 companies would need to deliver some impressive earnings growth this year for the stock market to reach new all-time highs.
The information technology sector has the highest forward PE at 26.7, while the energy sector has the lowest at 10.8.
Jeffrey Buchbinder, chief equity strategist for LPL Financial, says investors should expect stock market volatility in 2024 leading up to the November election.
“LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) recommends a neutral tactical allocation to equities, with a modest overweight to fixed income funded from cash,” Buchbinder says.
LPL recommends large-cap growth stocks over value stocks heading in 2024.
“The STAAC believes that growth-style large-cap equities may benefit from lower inflation and stabilization of interest rates in the intermediate term,” Buchbinder says.
In addition, he says growth stocks may have superior earnings opportunities relative to the rest of the market in a slowing economy.
As a whole, analysts are optimistic about the outlook for stock prices in 2024. The consensus analyst price target for the S&P 500 is 5,090, suggesting roughly 8.5% upside from current levels.
