Will 2024 Be a Good Year for the Stock Market?

Going into 2024, investors are still reeling from an unpredictable and fascinating year in the stock market in 2023. What started out as something of a gloomy year ended with stock market gains enormously outpacing economic growth.

The question now is what will become of these trends as a new year begins. We examine some of the key macroeconomic factors that could play into this year’s stock market performance to see where stock prices could go over the next 12 months.

Economic Growth and Consumer Spending

Overall economic growth is expected to slow in 2024, though a full-year contraction appears unlikely. Research from J.P. Morgan suggests an expansion of just 0.7 percent in the American economy this year. This year may include a mild recession, as projections put the probability of such a downturn in 2024 at 51.8 percent.

Other factors seem to confirm this expectation of slower growth in the year ahead. Data from Q3 of last year, the most recent currently available, shows that US household debt rose to $17.3 trillion. This includes a record $1.08 trillion in credit card debt.

The high debt load, paired with what is expected to be a cooling labor market, could put downward pressure on consumer spending. The personal savings rate in America has also fallen to just 4.1 percent, limiting the amount of money consumers have in reserve for purchases.

Needless to say, neither of these trends bodes well for the US stock market. Slow growth and truncated consumer spending could both detrimentally impact earnings increases. Given the highs that stocks are already trading at after 2023’s market run, a real threat of stagnation exists for many companies.

Interest Rates Forecasts Predict Decline

One of the key supports for the US stock market in 2024 is likely to be the Fed’s plan to cut interest rates in response to cooling inflation.

Most observers expect the central bank to cut its baseline interest rate by 0.75 percent this year. Although the market has already partially priced these cuts in, lower rates could provide buoyancy to stocks and support somewhat higher prices throughout 2024.

For this year, though, cash and bonds will likely remain relatively good investments. Even with interest rates beginning to fall, investors will probably still be able to earn 4 percent or more with very little risk.

As such, the effect of lower interest rates is likely to be a small component of overall stock market performance. If rates continue to drop in 2025, the pressure they exert may very well become more pronounced.

International Pressures

Although domestic spending and economic performance exert considerable influence on the stock market, international affairs can also affect prices.

One of the top international matters investors will have to keep an eye on is the ongoing Russia-Ukraine conflict. This conflict has caused the average price of crude oil to rise by over 50 percent, raising costs on businesses globally.

While Russia remains cut off from the Western oil market, investors can expect higher energy prices to remain the norm.

Continued turmoil in the Chinese economy also has the potential to bog down global growth. The country faces significant deflationary pressures going into 2024, caused in large part by its ongoing real estate market contraction.

Heightened trade tensions with China increase the odds of affecting US stocks. The semiconductor market, for instance, is still adjusting to the Biden administration’s ban on sale of advanced chips to China. Further trade restrictions from the US or reciprocal restrictions from China could compound these problems and potentially slow economic growth in both countries.

Technological Gains From Generative AI

The excitement around generative AI was one of the major engines powering the stock market in 2023. Seven massive tech companies, led by NVIDIA, produced the vast majority of the S&P 500’s 24.7% gain last year.

This year, however, could be a somewhat different story. Investor enthusiasm for AI technology is at a fever pitch, and more realistic expectations may be setting in.

In August, research firm Gartner placed generative AI at the apex of inflated expectations in its famous hype cycle for emerging technologies. Assuming AI follows the usual cycle, it’s due to shortly enter the trough of disillusionment as it fails to live up to these inflated expectations.

Some early signs of this disillusionment may already be showing. Following Q3 earnings, NVIDIA shares fell in spite of revenue growth of over 200 percent. This may be an early sign that investors are unwilling to continue bidding high-growth tech stocks up to larger value multiples. We can’t ignore however a recent technical breakout and follow through thereafter showing the bull run in AI may not be over yet.

Generative AI is set to produce real benefits for businesses in 2024. Economists project that the technology could increase annual labor productivity by as much as 1.5 percent over the next decade as businesses adopt it. 2024 is likely to be the beginning of that trend, and many businesses will be laying the groundwork for general AI deployment.

Political Dynamics To Create Stock Market Turmoil?

Finally, 2024 is forecast to be the single biggest election year in global history. More than half of the world’s population will be eligible to vote in elections this year, including in major countries that can have profound impacts on global economic growth.

By far the most important of these is the 2024 US election, expected to be a rematch between incumbent Joe Biden and former president Donald Trump.

While it’s not yet clear exactly how the election will impact markets, the chances are that the months leading up to election day will see increased volatility.

This trend is likely to be especially pronounced if the economy is experiencing a slowdown by that time, as this would likely result in greater electoral focus on economic matters.

So, Will 2024 Be a Good Year in the US Stock Market?

With both positives and negatives ahead, 2024 looks to be a potentially volatile year in the American stock market. So far, the S&P 500 is up 0.7%. More concrete trends will likely emerge as Q4 earnings reports begin to come in.

The general consensus is that negative pressures will keep stock returns low throughout the year. Goldman Sachs projects a 6 percent return in the S&P 500, far below both last year’s massive run and the long-term average of approximately 10%.

Indeed, the current pricing of stocks is one of the factors that could limit 2024’s upside. The average forward price-to-earnings ratio of the S&P 500 is currently 22.1, well above the historical average. As such, stocks may not have much room left to run in a year that will likely be marked by anemic economic growth.

Furthermore, the top seven stocks that produced most of 2023’s gains are trading at even higher average multiples that seem to have reached their natural limits.

Taking expert projections and macroeconomic trends into account, it doesn’t seem that 2024 will be a particularly good year in the stock market. While the market is unlikely to lose ground, its gains in the coming 12 months are apt to be fairly weak.

This doesn’t mean, however, that investors should avoid buying stocks this year. For those buying index funds, investing during weaker periods can help with dollar-cost averaging strategies. Investors who prefer individual stocks may also be able to find companies that are undervalued, even in a difficult market environment.

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