Why Wall Street Is So Optimistic About the Economy In 2024

The Fed and President Biden's economic policies appear to have eliminated the chance of a recession and interest rates are now expected to start declining, leading to improved corporate, stock and bond market performance. Most companies have figured out the work from home/return to the office situation and hiring remains well balanced.

Plus, of special significance this election year, the markets have risen in 73% of election years since 1929. JL 

Charley Grant reports in the Wall Street Journal:

Behind the dramatic turn in attitude is a growing belief among investors that the Federal Reserve’s campaign to fight inflation is winding down, ending the interest-rate hikes that buffeted markets in recent years. The year culminated with an “everything rally” that pushed prices higher in nearly every asset class, including stocks, bonds, gold and even cryptocurrencies. The S&P 500 returned 24%. The benchmark 10-year Treasury yield settled at 3.860%. Wall Street’s fear gauge, the Cboe Volatility Index, closed at 12.52, near several-year lows. Wall Street is expecting a return to brisk growth in corporate profits. (And) the S&P 500 has risen in 73.9% of presidential election years since 1929

Wall Street is feeling sunny about the stock market as the calendar flips to 2024.

Last year’s widespread skepticism proved to be misplaced. Stocks rose through much of 2023, powered by the rise of artificial intelligence and an economy that stayed stronger than nearly all of Wall Street had anticipated. The recession that investors had largely agreed was imminent never came.

Now, with the S&P 500 within 0.6% of a record high, the crowd is much more optimistic.

Behind the dramatic turn in attitude is a growing belief among investors that the Federal Reserve’s campaign to fight inflation is winding down, ending the interest-rate hikes that buffeted markets in recent years. Many now expect the central bank will likely next cut rates instead, shifting market dynamics in ways that seemed unlikely just months ago.

 

Obvious risks are on the horizon: A sharp fall in rates could follow bad news, like an economic shock or recession. The few big stocks that powered the market higher last year could run out of steam. Looming elections in the U.S., and wars in Europe and the Middle East, might make the world less investor friendly.

But 2023’s big gains, and the prospect of even smoother seas ahead, have helped dissipate much of the gloom. 

“Instead of a higher for longer rate environment, it’s lower and sooner,“ said David Kostin, chief U.S. equity strategist at 

Goldman Sachs

. Goldman has an S&P 500 target of 5100, implying a return of about 7% from current levels near 4770. Strategists at 

JPMorgan Chase

 are among the bears, with a price target of 4200.

The year culminated with a fierce “everything rally” that pushed prices higher in nearly every asset class, including stocks, bonds, gold and even cryptocurrencies. Yields on risky corporate bonds have fallen to some of the lowest levels of the past year, while bond prices have rallied.

All told, the S&P 500 returned 24%. The benchmark 10-year Treasury yield settled at 3.860%, near where it started the year, but down from a peak of 5.021% in October. Wall Street’s fear gauge, the Cboe Volatility Index, closed Friday at 12.52, near several-year lows.

 

Most investors are expecting the good times to continue.

A survey conducted in December by BofA Securities found that fund managers were more optimistic than in any month since January 2022, which coincides with the S&P 500’s last all-time high. The group is collectively the most bullish on stocks since February 2022.

More than 90% of participants, who collectively manage $691 billion of assets, predicted the Fed is done raising interest rates. More than 60% said they expect lower bond yields in a year, a record high for the survey. 

“Even with moves we’ve had recently, you still have generationally attractive fixed-income markets,” said Matt Orton, head of market strategy at Raymond James Investment Management.

He said corporate bonds look especially attractive, offering investors the best opportunity since the financial crisis of 2008-09 to diversify their portfolios and lock in higher rates longer term.

Earnings could also provide a boost, after they stagnated last year. Wall Street is expecting a return to brisk growth in corporate profits, with analysts forecasting S&P 500 earnings growth of 11.6% in the new year and 12.5% in 2025, according to 

FactSet

.

While investors love bonds and stocks in general, some are more skeptical of the “Magnificent Seven” group of big technology companies that dominated the market in 2023. Nearly half of those survey respondents identified owning shares of those seven firms—

Apple

, 

Alphabet

, 

Amazon.com

, 

Meta Platforms

, 

Microsoft

, 

Nvidia

 and 

Tesla

—as the “most crowded” trade on Wall Street.

 

The average one-year price target for stocks within the Magnificent Seven is about 11% higher than Friday’s closing price, according to estimates compiled by FactSet. Nvidia has the highest expected return at about 34%. The laggard is Tesla; analysts are projecting the stock will shed 3%. 

Many consider that crowding a sign of limited future upside. 

“I certainly would not underweight them, but I’m not sure they will outperform the rest of the market. The other 493 stocks are in a catch-up trade,” said Tony Roth, chief investment officer at Wilmington Trust, referring to the rest of the S&P 500.

 

Roth said several other sectors are attractively priced, including financials, healthcare and energy stocks.

 

Uncertainty stemming from November’s presidential election—and the potential for major shifts in fiscal policy—also looms as a possible risk for markets, some strategists said. 

But the S&P 500 has risen in 73.9% of presidential election years since 1929, according to Dow Jones Market Data. That is higher than the overall average of 64.9%. The index has returned an average of 6.15% in election years.

The major risk remains disappointment over interest rates. Fed officials released projections of at least three rate cuts in 2024 after their most recent policy meeting. Interest-rate derivatives traders are betting on more—projecting interest rates about 1.5 percentage points below current levels, according to the 

CME Group

’s FedWatch tool. That implies six or seven cuts by the central bank, with most expecting the first at the March policy meeting.

That gap has some strategists predicting market swings if the Fed is slower to cut than investors expect.  

“I just think there’s still going to be challenges with the market perhaps being ahead of where the Fed is.” said Raymond James’s Orton. “And that’s OK, because volatility presents opportunities.”