Last week saw a rise in stocks, with the S&P 500 closing at 4,594.63, up 0.8%. As of right now, the index has gained 19.7% for the year, up 28.4% from its closing low of 3,577.03 on October 12, 2022, and down 4.2% from its record closing high of 4,796.56 on January 3, 2022.
This is the time of year when Wall Street’s top strategists share with their clients their predictions for the direction of the stock market in the next year. The group’s average projection typically calls for an around 10% increase in the S&P 500, which is consistent with historical trends.
This year, there’s a good variety of perspectives offered by strategists. Some see fragility. Some see power. The 4,200–5,500 range is the range of targets. This suggests profits from Friday’s market of between -8.5% and +19.7%.
Before we continue, let me advise against placing an excessive amount of importance on one-year goals. Accurately predicting short-term market movements is quite challenging. Very few people on Wall Street have ever been successful in doing this. Nonetheless, I believe that the analysis, research, and discussion that go into these projections may be instructive.
There is disagreement among the experts these stock market analysts consult over whether the US economy will enter a recession at some point in the coming year, which might have an impact on revenue among other things. Those who anticipate further expansion anticipate moderate growth, and those who anticipate a recession anticipate a short-lived, shallow decline. (Scroll down to see Wall Street’s forecast for the US economy in 2024.)
Interestingly, despite weak GDP growth estimates, most analysts still see rise in S&P 500 profitability in 2024. This might be related to the anticipation that consumer spending will return to purchasing products rather than services and the fact that the U.S. GDP is more exposed to the services sector than the goods sector, while the S&P is more exposed to the goods sector.Analysts anticipate
Many — but not all — strategists anticipate that profit margins will remain high due to enhanced operational efficiencies, which may assist boost profits growth even with low sales growth.The profit margins have remained stable. (Refer to BMO)
Even while the majority of S&P 500 companies have long-term fixed low interest rates on their debt, an increasing number of businesses will still need to refinance at market rates, which are now at an all-time high. Growth in earnings is hampered by increased interest costs.The low borrowing rates that major corporations are paying are a result of refinancing activities during the low interest rate period. (Refer to BofA)
The majority of strategists concur that we have passed the worst of the inflation problem. This implies that the Federal Reserve may once more find itself lowering interest rates in order to relax financial conditions in the event that the economy dramatically deteriorates. Even if a recession would be undesirable, the fact that the Fed appears to have capacity to boost the economy is nevertheless positive news.
Regarding whether or not values are fair or excessively high, strategists disagree. Given that values have traditionally revealed virtually little about short-term market movements, this dispute is unlikely to end anytime soon.Although the majority of strategists concur that values are high, not all of them think this will stop prices from rising. (Refer to Deutsche Bank.)
As of November 29, $225 EPS “We view 2024 consensus hockey-stick EPS growth of 11% as implausible due to a slowdown in economic growth the following year (US GDP to decline to 0.7% YoY by 4Q24 from 2.8% 4Q23), the erosion of consumer surplus savings and liquidity, and tightening credit. Sharply lower projections early in the coming year should be a result of negative company sentiment.”
“A rebound in profits should take the place of near-term uncertainty… Our 2024 EPS estimate [of $229] is in line with the results of our top earnings models, which indicate that growth will go up the next year and our economists’ growth projections for that year. A robust environment for earnings growth (+16%Y) is anticipated in 2025 as margin expansion is fueled by tech-driven productivity growth (AI) and positive operational leverage. Regarding valuation, we predict that at the end of the following year, the forward P/E multiple will be 17.0x (20-year average P/E is 15.6x; now 18.1x).
According to the Financial Times: “We questioned Americans on practically every topic, and they constantly answered negatively. They vastly overestimate the rate at which inflation is dropping, the rate at which salaries are growing faster than inflation, and the extent to which they have been wealthier or less affluent. My recommendation is to examine Americans’ spending habits to find out what they truly believe about the state of the economy. US consumers are back on the pre-pandemic trendline and making more purchases than ever, in contrast to cautious Europeans.”
September saw a 0.3% month-over-month increase in house prices, according to the S&P CoreLogic Case-Shiller index. Craig Lazzara of SPDJI says: “The National Composite has increased 6.1% year to date, which is much higher than the typical growth for the whole calendar year in more than 35 years of data. While the increase in mortgage rates this year has undoubtedly reduced the number of houses sold, the relative scarcity of available inventory has served as a strong driver of price increases. The scope and quality of this month’s report are in line with an optimistic assessment of future outcomes, barring a general weakening of the economy due to higher rates or external events.”