Today in the podcast, our initial 2024 outlook. Our year-end 2024 S&P 500 price target is 5,000, for a 10% gain. Today the podcast will work a little bit differently, as we’re running through the top 10 things we’re thinking about in US equities as the new year comes into view. Most of these focus on the math that gets us to 5,000.
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on the year ahead, with a YE:
• Our 2024 target implies a gain of 10% vs. the November 22nd close.
• Our target is quantitatively driven. 5,000 is the approximate median of five different models that we use focusing on sentiment, valuations, earnings, cross asset dynamics, politics, and the economy.
• The outputs of these models range from 4,500 (our bear case) to 5,300 (our bull case).
Takeaway #2: The sentiment set up is constructive for now.
igate the US equity market in:
• Currently, sentiment is recovering off of the 1 standard deviation low seen a few weeks ago but is still in a range pointing to a 10% return in the S&P 500 over the next 12 months.
Takeaway #3: Valuations can stay higher than many investors realize.
ings tripping up the bears in:
• Our model didn’t fall into that trap. We use average trailing P/E data dating back to 1962 and use consensus forecasts for inflation, interest rates, and GDP to forecast where that trailing P/E should be at the end of the year.
ur most constructive model in:
• For YE 2024, the model is baking in PCE that falls 2.3%, several Fed cuts, 10 year yields falling back down to 3.74%, and sluggish real GDP. All of this suggests a trailing P/E of 23x at the end of next year is justifiable.
o restrains our enthusiasm on:
• There are no changes to our S&P 500 EPS forecasts – we’re sticking with $223 for 2023 and $232 for 2024.
to end in:
• The one wrinkle we see for the stock market from an earnings perspective is that the stock market is already baking in a strong EPS recovery in 2024 – we could experience some short term indigestion in stocks as forecasts get adjusted.
Takeaway #5: The greater appeal of bonds seems like a dampener of US equity returns, but not necessarily a derailer of them.
• In our recent meetings one of the things we’ve talked a lot about is how the earnings yield of the S&P 500 has been close to parity with the 10 year Treasury yield.
• We looked to see how the stock market tends to perform when that’s the case, and found that the S&P 500 tends to rise by more than 12% on average over the next 12 months.
e pretty commonly seen in the:
: We see the:
• There’s a lot of drama and noise around the election and it’s not clear what issues will drive turnout.
• We’re staying focused on the numbers. On average, the S&P 500 rises by about 7.5% in Presidential election years, below trend, weaker than year three which we are exiting now.
• In terms of cadence, Presidential election years usually have a weak start, rally into the fall, choppiness as election day draws near, and a post election rally.
• One notable exception was:
• We’ve gotten a lot of questions about the election from non-US investors and worry global investors could see the uncertainty it brings as a reason to reduce US equity exposure, given expensive valuations vs. Europe.
that many investors expect in:
• Current consensus projections call for 2023 real GDP growth to come in at 2.3%, then to slow to 1% in 2024 and to stay below trend in 2025 at 1.8%.
• In the 0-2% range the S&P 500 tends to be weak, with declines in the mid-single digit range on an average basis and flat on a median basis.
ling for Fed cuts to begin in:
Takeaway #8: The new rules of thumb for the post COVID era are still emerging.
gued for quite some time that:
back to levels typical of the:
• but for GDP to remain stuck at levels similar to its weakest decade, the post GFC/pre-COVID era. All of this begs the question of whether economic forecasts are too low.
Takeaway #9: We expect the tug of war between Growth and Value to continue a bit longer.
• Our call on the Large Cap Growth trade is that we expect a tactical correction in Growth at some point, but a trigger is tough to identify and it’s hard to argue it will endure.
• The problems we see for Growth are crowding…
• and valuations that are close to peak vs. Value.
s the case throughout much of:
• These data points all argue for a tactical correction in Growth stocks.
• The problem is that economic growth is expected to stay below 2% for the next few years, and when economic growth is sluggish Growth stocks tend to outperform.
• It may take economic growth surprising to the upside in a major way to break Growth’s dominance.
Wrapping up with Takeaway #10: Small Caps are intriguing in the year ahead.
• For the last few weeks it seems like everyone wants to talk about Small Caps in our meetings.
• We would be adding to positions heading into the new year.
• Small Caps are deeply compelling on valuation vs Large Caps.
• Small Caps have also been underowned, though positioning is starting to improve in recent weeks off levels that were close to post SVB lows.
• Small Cap money flows have also been improving in recent weeks.
• We’ve been telling people for a while that Small Cap balance sheets aren’t nearly as bad as feared…
• and that Small Caps tend to outperform when the Fed starts cutting.
• No one wanted to hear it until 10-year yields peaked, the unemployment rate came in higher than expected, and the latest CPI print came in better than expected. All of that finally seemed to convince investors the Fed was done, cuts could happen, and interest rate risk was abating.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
