Why the 2024 Stock Market Forecast Is Dire
The year 2023 will go in the books as a period in which the stock market started on shaky ground but, throughout the year, put on a stellar performance. As of this writing, key stock indices are hovering close to their all-time highs.
Now, stock investors might be asking: How will 2024 look?
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While investors generated hefty returns from stocks in 2023, things could be completely different in 2024. Expect lots of volatility, and don’t be shocked if the stock market moves down by 20% to 30% in a very short period.
Here’s why.
Using the S&P 500 as a measure of the overall stock market, since 2000, whenever the market has increased by more than 20%, its performance in the next year has almost always been worse than in the previous year. At the time of this writing, the S&P 500 is up by about 24% year-over-year.
But that’s a naïve and extremely simple way of looking at what happens to the stock market.
Interest Rate Cuts Could Add More Volatility
Over the past few years, interest rates have really spiked. The Federal Reserve increased interest rates at their fastest pace in the past few decades.
Now, though, the Fed has been changing its view. Recently, there’ve been hints that the Fed will make a few interest rate cuts in 2024. It doesn’t really matter how many rate cuts follow, but know this: the first few rate cuts usually affect the stock market in a big way.
Central banks don’t change interest rates without some prevalent economic issues. So, when there’s a rate change, investors start taking a hard look at their portfolios and adjust them. This results in volatility in the market.
It’s also important to note that not all types of stocks are created equal. Some do well in high interest rate environments, and others do well in low interest rate environments. Rate cuts could cause sector rotations, ultimately having an impact on the overall stock market’s performance and volatility.
Earnings Expectations Are Solid, But Will They Remain the Same?
Digging into more details, don’t forget this basic characteristic of investing: the stock market is a forward-looking animal.
Business earnings outlooks affect the direction of the market. If earnings are expected to be good, the stock market will likely rally. If earnings are expected to be dire, the market will usually crash.
Wall Street analysts are optimistic about 2024.
They expect S&P 500 companies to report year-over-year earnings growth of 6.2% for the first quarter and earnings growth of 10.5% for the second quarter. For the entire year of 2024, analysts are projecting year-over-year earnings growth of 11.5%. (Source: “Earnings Insights,” FactSet Research Systems Inc., December 15, 2023.)
Wall Street analysts have 11,319 ratings for S&P 500 stocks. Of those ratings, 54.9% are “Buy,” 39.7% are “Hold,” and 5.3% are “Sell.”
Clearly, stock market analysts are optimistic at the moment. However, it’s important to note that these analysts are almost always optimistic at first. Over time, they revise their projections.
The U.S. is headed toward a soft economic landing, which could certainly affect companies’ earnings. Think global as well: while the U.S. may be doing just fine for now, it’s certainly not the case for the rest of the world. Major economic hubs have been struggling, and this could have negative impacts on business earnings.
Investors Beware: Don’t Get Complacent in 2024
Dear reader, the last thing an investor should do in the new year is get complacent. 2023 was great, but there’s no certainty that 2024 will be similar. In fact, it’s probable that the stock market will be volatile in 2024.
Earlier, I warned that investors shouldn’t be shocked if the stock market drops by 20% to 30% in 2024.
Here’s why: there are still many risks that have been under the radar, and if they play out, there could be severe selling across the board. Five of the risks are 1) problems in the commercial real estate sector, 2) regional banks remaining bruised, 3) interest rates being volatile, 4) the existence of an immense number of interest rate-backed derivatives, and 5) the global economy continuing to suffer.
Make no mistake, this isn’t a recommendation to sell everything and sit on the sidelines. Volatility creates opportunities, too. In 2024, investors could find shares of good companies selling at amazing discounts.
