2024 Market Outlook
Markets in 2023 rebounded from the decline in 2022. All the major indices finished near all-time highs. More often than not, markets tend to rebound after a double-digit decline the year prior.
2024 Bear Case
The name of the game is what the Fed will or will not do. As of January 22nd, the yield curve depicts rates will be a percentage lower a year from now, implying the Fed will cut rates, easing monetary policy.
Price action in the market suggests investors are pricing in rate cuts. However, the December CPI came in hotter than expected. I would argue that inflation squeaking in higher than expected suggests the Fed will be reluctant to cut rates in the coming months. Their arbitrary goal of inflation increasing by 2% has not been met as year-over-year price increases came in at 3.4%.
Adding to the Fed not cutting argument is recent earnings reports beating expectations. The Fed cutting would make a hot market hotter. I am not arguing that the Fed will hike rates again, but I would subscribe to the Fed letting the market do its work for them. With rate cuts priced in, no rate cuts would be a negative shock to the market, which denotes a bearish point of view. It will be interesting to see how quarter four earnings change the probability of rate cuts in the first fiscal quarter.
Bull Case
Earnings for the S&P in Quarter 3 were great. 80% of companies in the S&P beat EPS expectations, while the S&P as a whole had a13.9% year-over-year EPS Growth. The appreciation in stock prices has been backed by strong top and bottom-line earnings. The market growth in 2023 was centralized in the magnificent seven, which are immune to rapid rate increases thanks to healthy balance sheets.
If the Fed does cut rates, small-caps, which underperformed in 2023, become attractive. It is hard for small companies to succeed in a “high” interest rate environment as borrowing costs make conducting business difficult. If the bullish narrative does come to fruition and the Fed does cut rates, it would serve as a catalyst for small-cap stocks to rally in 2024.
Lastly, AI was at the forefront of the minds of investors in 2023. In 2024 I believe the story will remain the same. The “Magnificent 7” dominated the market through earnings growth and AI. This year, the difference is that companies will now adopt and implement AI into their business processes, as opposed to mentioning it in earnings calls. .The question to be answered is: Will companies increase their margin or efficiency by utilizing AI as a tool?
Conclusion
There are endless interpretations and factors to consider when forecasting the market. Consumer spending, geopolitical tension, politics, labor/housing markets, and energy prices are all relevant elements that can cause head/tailwinds for the market. Markets are nearing all-time highs, contributing to higher valuations poses a fascinating setup given the VIX had an average price of 16. I lean bearish for the beginning half of 2024. I do not see a world where the Fed cuts rates in the first quarter, for reasons listed in the bearish case.