S&P 500 outlooks for 2024 differ widely among forecasters. Is the index in danger of ending the year lower than its closing price in 2023?

Expectations of multiple interest rate cuts at the start of the year, fueled by deflation fears, gave way to softer forecasts, leading to a reassessment of market dynamics. Despite concerns about rising interest rates, experienced investment strategists offer a reassuring outlook. Despite popular belief, investors should not be alarmed by the prospect of rising rates, experts say. Based on historical data, they point out that periods of economic growth accompanied by rising interest rates have not only been manageable, but have even coincided with some of the strongest growth phases in the S&P 500 over the past decade. This claim challenges the traditional view that higher interest rates are inherently bad for stocks.

This argument is based on the notion that the near-zero interest rates that have prevailed since the 2008 financial crisis are an anomaly rather than the norm. As investors accustomed to higher rates need an adjustment period, such a transition should ultimately create a favorable environment for stocks. This essentially suggests that interest rate normalization is more in line with sound economic fundamentals.

A series of inflation reports starting in January forced Jerome Powell to reconsider his decision, causing market volatility. Still, history shows that the market tends to perform well during periods of growth and rising interest rates. While higher rates may increase volatility, they have historically been consistent with sustained gains in the S&P 500 as a whole.

Contrary to the view that higher yields are bad for stocks, experts suggest the opposite, stressing that lower rates can signal a slowdown in economic growth, which historical data also confirms. The S&P 500 did well when interest rates were above 6%. For example, with the 10-year US Treasury yield at 4.6%, the S&P 500’s annual return of 9.1% outperforms the 7.7% return when rates are below 4%. Analysis since 1990 shows that stocks outperformed during periods of rising rates, with the average annual return more than double that during periods of falling rates. Moreover, despite eight rate hikes since 1990, stocks have consistently performed well during these periods, highlighting the market’s resilience to rising rates. Interest rate dynamics within broader economic trends offer a compelling argument for investors to remain bullish on the long-term outlook for stocks despite the specter of rising rates. In an environment of prevailing uncertainty, this outlook thus serves as a beacon in the dark, highlighting the continued resilience of stocks in the face of changing market conditions.

Optimistic outlook

On an optimistic note, the S&P 500’s trajectory for the rest of 2024 looks dynamic. Despite revised expectations for the Federal Reserve’s rate cuts, the argument remains that these adjustments will not hinder the market’s upward momentum. The rationale hinges on the resilience of the economy, underpinned by favorable corporate earnings and strong economic growth. In particular, forecasts point to strong current-quarter earnings growth of at least 7%, along with expected first-quarter US GDP growth of 2.9%. Moreover, despite a brief increase in headline inflation, core inflation indicators remain within the Federal Reserve’s target range, suggesting a manageable inflation environment. Thus, from this perspective, the prevailing conditions signal a favorable path for continued market growth, with any deviations likely to be tempered by the overall strength of the economic environment.

A more cautious outlook

Conversely, a more cautious outlook highlights potential risks that could detract from the S&P 500’s performance, contrary to prevailing optimism. While the bullish stance suggests a sustainable market trajectory, there are latent weaknesses that could play out and accelerate the decline. Realizing the risk associated with unexpectedly high inflation highlights a key concern. If inflationary pressures exceed forecasts and trigger a rate hike response from the Federal Reserve, the resulting market turbulence could undermine investor confidence. The recent shift in their sentiment caused by abandoning rate cut expectations in response to the latest inflation data points to the market’s sensitivity to external shocks. This recalibration, evidenced by the weakening of the expected rate cut in 2024, reflects increased sensitivity to macroeconomic indicators and policy changes. So while the prevailing theory remains bullish, the specter of an unexpected rise in inflation looms ominously, casting a shadow of uncertainty over the S&P 500’s outlook for the rest of the year.

The focus on earnings is in place for the S&P 500. It has struggled since March 28, when it set its record, and the Federal Reserve has signaled it is in no rush to cut interest rates after a series of better-than-expected inflation data. The index is trading at a two-month low, down 5.5% from its all-time high. However, a strong first-quarter earnings season could give US stocks a nice boost, especially given the big selloff we’ve seen. All in all, upcoming financial reports from U.S. corporate giants offer the U.S. stock market an opportunity to change the script after three consecutive weeks of losses for the S&P 500, the longest streak since September. However, the results should be reason to change the recent narrative.

A balanced view

Finally, a balanced view combines the competing versions surrounding the trajectory of the S&P 500 and acknowledges both the bullish-backed optimism and the major risks associated with the current economic environment. The optimistic outlook, based on favorable economic indicators and strong corporate earnings, presents a compelling argument for continued market growth. However, this optimism is tempered by an acknowledgment of potential pitfalls, particularly the specter of higher-than-expected inflationary pressures. Although recent data points to a manageable inflation environment, the volatility caused by unforeseen events highlights the inherent unpredictability of financial markets. The recalibration of rate cut expectations serves as a stark reminder of the market’s vulnerability to external stimuli, necessitating a cautious approach. So while the prevailing sentiment may lean toward optimism, prudence calls for a careful assessment of both the opportunities and risks shaping the S&P 500’s trajectory in 2024.

Conclusion

Overall, the recent market weakness should not deter investors from looking for opportunities, especially in AI companies. Stocks fell at the start of the new quarter, with concerns over lingering high interest rates and tensions in the Middle East sending the S&P 500 down nearly 4% this month. Still, this decline isn’t indicative of a market slowdown, but rather a healthy consolidation ahead of Q1 earnings season. A favorable macroeconomic climate is expected to drive equity returns throughout the year, albeit with occasional fluctuations.

Opportunities are opening up for AI-related software and semiconductor companies, as well as global commodity producers, particularly those involved in copper mining. Demand for AI technologies and software remains strong and significant growth potential is expected. In addition, undervalued companies supporting energy transformation and technological progress also represent attractive investment prospects.

Solid corporate earnings are expected, and companies are likely to confirm and possibly raise their forecasts amid cost-cutting efforts and net profit growth. Despite inflation concerns, earnings growth is expected to support resilient consumer spending, which will support long-term investor confidence in the stock market.