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State of the Markets Report: 2024 Forecast

State of the Markets Report: 2024 Forecast

February 13, 2024

Welcome to the third post in our 3-part series on the State of the Markets. In this series, we're focusing on three key areas: how stocks performed in 2023 and what drove performance, where we are now, and what financial experts forecast for 2024. We’ve looked at some factors affecting market performance in 2023 and where we are now. Now, let’s see what financial professionals have to say about where they think the market is headed in the context of a more detailed discussion of some of the possible headwinds and tailwinds we just finished reviewing.

Corporate Earnings

Before discussing Wall Street analysts' predictions, let's examine some important inputs that may impact the stock market's direction in the coming year.

As many of you know, corporate earnings may be a key driver of stock market performance in 2024.

According to FactSet, a leading financial data and analytics firm, earnings are expected to trend higher in 2024, plateauing by the fourth quarter. While that is a good sign, it's also difficult to say how much of that earnings growth expectation has already been priced into stocks, especially in light of their current valuation level.

Estimating quarterly earnings is difficult, but such estimates can help guide decisions about what price to pay for a stock. If earnings are healthy, it may support higher prices. Conversely, should earnings come in short of expectations, it may put downward pressure on stock prices.

It's important to remember that forecasts or forward-looking statements are based on assumptions, subject to revision without notice, and may not materialize. And if we've learned anything during the past couple of years, the outlook for financial markets can change quickly.

Inflation and Interest Rates

The course of stock prices in 2024 may be correlated to the Fed's decisions about interest rates. One tool traders look to understand where rates may be heading is the CME Fedwatch tool, which analyzes the probabilities of future target rates, as implied by the 30-Day Fed Funds futures pricing data.

If we look at where the market thinks the Fed is going, we see that the market believes there is almost a 42.5 percent probability of the Federal Funds Rate falling by 50 basis points, or a half of a percentage point by June-end. In early December 2023, the Fed Funds Rate was 5.25 percent to 5.5 percent. Traders also price a nearly 20 percent probability for a 75-basis point decrease within the first six months of 2024, while there is a 30 percent likelihood of just a quarter of one percent cut. There is only a 7 percent chance that rates will remain unchanged by mid-year. The market’s optimism has often raced ahead of the Fed’s intentions, so investors should be cautious. However, if these cuts come to fruition, it may have positive implications for stocks.

Keep in mind the CME Group's table changes daily. Probabilities are based on assumptions and are subject to revisions. Financial, economic, political, and regulatory issues may cause the actual results to differ from the expectations expressed in the table. The data from this tool does not constitute investment advice and is not a personal recommendation from CME Group.

GDP & Unemployment Rates

Economic forecasters surveyed by the Philadelphia Fed in the fourth quarter updated their outlook for Q4 2023 and all of 2024.

They slightly increased their expectations for Q4 GDP growth to 1.3 percent from 1.2 percent. In 2024, they anticipate positive growth each quarter. So, at this point, no recession appears in the forecast.

Interestingly, their unemployment rate projections stay flat throughout the first half of 2024, with a slight uptick toward year-end. It will be interesting to see how–or if–economic growth influences the unemployment rate. 

We've said this before, but it’s important to remember that forecasts are based on assumptions and subject to revisions over time. Financial, economic, political, and regulatory issues may cause the actual results to differ from the expectations expressed in the forecast.

Pulse of the Job Market

Aside from interest rates and inflation, one of the most critical factors that may decide how the economy–and the stock market–do in the new year is the health of the consumer. Consumer spending represents about two-thirds of the American economy, and if consumers pull in their spending in 2024, it could have consequences for the markets.

Consumer spending trended higher following the pandemic, first on goods as Americans spent time sheltered in their homes buying stuff, and then on services like travel once the COVID restrictions were lifted and they felt comfortable leaving their homes. This bulge in spending was lifted by what economists called "excess savings," i.e., the amount of savings over the level that would have likely been reached without the pandemic. The primary sources of those excess savings were: 1) not spending on things like commuting to work, clothes, and dining out, and 2) government transfer payments, e.g., stimulus checks.

As we can see from the chart on the left, the amount of excess savings has declined with time, leading some economists to wonder if consumers can maintain their pace of spending.

Now, if we look at the chart on the right-hand side, we see consumers' debt levels, from auto loans to credit cards. Credit card balances often get the most attention in financial news, but all five categories are important to watch.

Will the combination of shrinking savings and changes in household debt influence consumers' spending habits? That's difficult to answer, but consumers can surprise the experts. One key positive is that Americans are broadly employed, and, for now, they can find work if they need to.

Domestic Stock Prices

So, what are the major financial firms forecasting for domestic stock prices in 2024?

As they did for 2023, analysts are painting a mixed year for stocks, as the average forecast sits about where stocks ended in 2023. You’ll notice significant divergence in these forecasts, running from as low as 4,200 to 5,100.

This range of sentiment from bearish to modest optimism may be largely attributed to many of the issues we discussed in this presentation. Will the Fed cut rates or keep them high for a longer time? Will we have a recession? Will it be that hoped-for “soft landing,” or will the economic landing be harder? Will corporate profits grow into current valuations? Will inflation continue to decline? Many of these are binary events. For instance, the Fed will cut rates, or it won’t. This set of binary possibilities has resulted in much uncertainty as we head into 2024, and that uncertainty is shared by market experts from the most prominent firms.

Of course, no one knows what equities will do in 2024, and predictions at this stage are just that–predictions.

Like other images in this presentation, this image includes a forecast, so it’s important to remember that forecasts are based on assumptions and are subject to revisions over time. Financial, economic, political, regulatory, and, in this instance, health issues may cause the actual results to differ from the expectations expressed in the forecast.

The Value of Discipline

We’ve covered a lot of information, focusing most of our discussion on what drove the market and what we expect to move the market over a short period.

We want to end our investment discussion with a word on the importance of investment discipline or sticking with your investment strategy. The potential of stocks to help build wealth over the long term may be challenging when investors move in and out of the financial markets. If we look at this image, we see a direct correlation to the probability of having positive gains in stocks with the time such investments are held.

So, for instance, over the last 94 years, 73 percent of all one-year periods had positive returns. However, if we travel out to longer holding periods, we see the likelihood of investment success rise to 84 percent for three-year periods, 88 percent for five-year periods, and 94% for 10-year holding periods.

In this illustration, stocks are represented by the S&P 500 Composite Index, an unmanaged index considered representative of the overall U.S. stock market.

Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index. Stock prices' return and principal value will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

Action Items for 2024


What can you do in 2024 to move closer to your goals? Here are some action items:

  • If your life or personal situation changes, keep us in the loop. We want to hear about important family events, like births and deaths.
  • We also care about health issues, employment changes, and any financial developments that may change your situation. If you find yourself thinking about new goals or reevaluating your priorities, share your thoughts with us so we can help you pursue the life you most desire.
  • On top of specific adjustments in your financial life, we also want to know how you feel about investment changes. These could be details like risk tolerance shifts or market environment concerns.
  • Finally, review your estate documents, beneficiary designations, and other paperwork to ensure they’re all up-to-date. A well-organized estate is one of the best gifts you can give to your family.



Throughout 2024, we will focus on delivering the following:

  • We’ll keep you informed through regular communication.
  • We’ll manage your investments according to your personalized strategy.
  • And we’ll remain abreast of economic factors and adjust accordingly.

We’re here to discuss any financial questions or worries you may have. Our priority is always to help you make informed choices and stay on track. If you have any questions, please contact us. 


Sources:

FactSet.com, December 2023 https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_120823A.pdf

CMEGroup.com, December 10, 2023 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

Philadelphia Federal Reserve Bank, November 13, 2023 https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q4-2023

USbank.com, November 2023 https://www.frbsf.org/our-district/about/sf-fed-blog/data-revisions-and-pandemic-era-excess-savings/

Frbsf.org, November 2023 https://www.usbank.com/investing/financial-perspectives/market-news/consumer-spending.html

Finance.yahoo.com, December 7, 2023 https://finance.yahoo.com/news/wall-street-bull-gives-highest-2024-sp-forecast-yet-192122201.html

Capital Group, 2023 https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html