Many of the largest Wall Street institutions say the S&P 500 will end next year only about 3% higher than its current level. The chances of a possible U.S. economic slowdown or recession is among the biggest risks for the markets in 2024. These predictions come courtesy of a recent sampling of Wall Street strategists, economists and portfolio managers. The average Wall Street target for the S&P 500 is 4,720, above its current level of 4,550, but below the January 2022 all-time high of 4,797.


The S&P 500 has historically averaged about a 10% annual return, which, of the "Big 5" Wall Street Firms in Figure 1 above, only Bank of America is targeting a "typical" return in 2024. Largely driving the muted excitement is the belief that a recession is still a possibility, earnings will be sluggish, and stocks are expensive from a historical price-to-earnings perspective.

The notable outlier on the Street is Ed Yardeni of Yardeni Research who forecasts the S&P 500 to reach 5,400 by the end of 2024, 18% higher than its current price and some 13% above its all-time high. Yardeni attributed the 2022 selloff to widespread fears that soaring inflation would force the Fed to raise interest rates to levels that would cause a recession. However, as Yardeni notes, the economy has yet to show signs of a recession, unemployment remains near historical lows and the economy appears to be strengthening.⁽⁶⁾


Figure 2 - United States Gross Domestic Product (GDP) Annual Change


Figure 3 - United States Unemployment Rate


At WT Wealth Management, we agree with Yardeni and feel Wall Street is too bearish on the health of the economy and the outlook for the stock market heading into 2024. If unemployment remains low, it is likely there will be no recession. In fact, we feel that for each day interest rates remain elevated we are one day closer to an eventual rate cut from the Federal Reserve. Boosting that narrative, over the last several weeks stocks have rallied, mostly aided by the view that the Federal Reserve is done hiking interest rates and may begin to cut them mid-to-late 2024. The stock market loves low interest rates. Below are our top five reasons supporting this view.

1. The end of the Fed's tightening cycle

We believe the Fed's historic tightening cycle is nearing the end (if it is not already over) despite strong (5.2%) third quarter GDP growth. The Core Personal Consumption Expenditures (PCE) index (the Fed's preferred inflation gauge) shows an ongoing trend of disinflation (decelerating inflation). If this continues, it should bode well for stocks.


Figure 4 - United States Core PCE Price Index Annual Change



2. Lower interest rates

The economy is clearly softening in pockets like housing, auto sales along with larger price-point consumer discretionary items. Continued declines in inflation should limit the upside in interest rates and continued softening should lead to interest rates falling, not rising. We think the Fed could start cutting rates by mid-summer 2024.

3. Solid mega-cap tech earnings

The S&P 500's earnings slowdown appears to be over, largely thanks to the solid results from mega-cap tech companies like Microsoft, Alphabet/Google, Meta, Amazon and Nvidia. For example, a composite of MAGMAN posted blended earnings per share (EPS) growth of 44% year-over-year, crushing Wall Street estimates.⁽⁷⁾

MAGMAN refers to the earnings results from Microsoft, Amazon, Alphabet/Google, Meta, and consensus estimates from Apple and Nvidia. If recent history is any guide, the markets will likely go the way of big tech. The top 10 names in the S&P 500, which are primarily tech companies, account for over 30% of the index.⁽⁸⁾ That is astounding by any measure.

Figure 5 - Top 10 Company Weightings in the S&P 500




4. Bearish sentiment flashes contrarian signal

Investor optimism towards stocks has diminished over the past several months as August, September and October's negative returns weighed on sentiment. That represents a contrarian buy signal to many institutional investors. Like many, we believe most retail investors do the wrong thing at the wrong time. After a difficult 2022, a 5.5% or 6.5% yield in short-term treasuries or short-term corporate bonds now looks appealing, but we feel that is stepping over a dollar to pick up a dime.

5. Record cash and money market levels

Just last week, investors poured $22 billion into money market accounts despite the equity markets rallying 15 of 18 trading days (October 30th through November 22nd). In fact, in a year where the S&P 500 and NASDAQ are higher by 19.0% and 35.9%, respectively, money market assets grew by over $1 trillion in 2023 to an estimated total of $5 trillion.⁽⁹⁾ We believe the FOMO (fear of missing out) dynamic will take over and the resulting cash injection into equities will propel markets to a new all-time high by late spring next year.

In conclusion, we at WT Wealth Management are optimistic about the prospect of strong performance in the stock market through the end of next year, but as prudent investors, acknowledge there are always risks involved. Our Investment Committee and Research Team work hard every day to construct portfolios for our Clients that seek to capture this potential upside, while also having the pressure valves in place if unforeseen events arise that might negatively affect the stock market's short-term course.

As we enter the Holiday Season, we hope this article helps you rest assured that your investments are in good hands, so you can focus on what really matters - spending quality time with friends and family. Happy Holidays!


Sources

1. The S&P 500 Index is forecast to return 6% in 2024
   Goldman Sachs
2. Morgan Stanley has boosted its S&P 500 target
   Morningstar
3. Investment Strategy - Current Tactical Guidance
   Wells Fargo Advisors
4. UBS pushes out S&P 500 mid-2024 target forecast to year-end
   Reuters
5. Bank of America forecasts S&P 500 to reach record 5,000 in 2024
   Yahoo! Finance
6. Ed Yardeni sees S&P 500 rising to a record as high as 5,400 within the next 18 months
   CNBC
7. Here are 5 reasons why U.S. stocks will likely rally into the end of 2023, says one Wall Street veteran
   Morningstar
8. S&P 500 ETF Components
   Slickcharts
9. Investors on track to pour $1.3 trillion into cash funds in 2023 - BofA
   Reuters