One of my favorite aspects of what I do is that every year in markets is different.
Indeed, unlike so many other businesses, the circumstances of every market year change, and often quite dramatically. Hey, it’s one of the reasons this is such an interesting business.
In a recent issue of my morning briefing, Eagle Eye Opener, we covered two of the most important changes from the current year that I anticipate occurring in 2024. This week, I want to share those thoughts with you, The Deep Woods reader, because these changes mean that events that were tailwinds for stocks in 2023 will become neutral to potentially negative in 2024.
How will that be? And what are those two changes? I’m glad you asked.
The first big change is that falling bond yields will no longer be positive for stocks. Now, consider that there were two overarching reasons for the rally in 2023: The first was artificial intelligence (AI) enthusiasm powering the “Magnificent Seven” stocks higher and pulling the S&P 500 higher with it. The second was expectation of a dovish Fed pivot that essentially saved the 2023 rally in late October.
Falling interest rates were a clear positive in 2023 because they eased valuation headwinds and signaled that Fed hikes were ending, which reduced recession chances. But as we start 2024, the dovish Fed pivot is now fully priced into stocks with the S&P 500 just under 4,800, and the market now has priced in six Fed rate cuts and a year-end 2024 Fed funds rate below 4%.
So, the dovish pivot and expected easing of monetary policy is already priced into stocks and Treasuries. If we see the 10-year Treasury Note yield continue to fall to the low-3% or sub-3% range, that’s not going to be a major tailwind for stocks, because that won’t be forecasting a dovish Fed, it’ll be forecasting slowing economic growth. And those falling yields will then become a harbinger of a potential economic slowdown, and not the welcomed signal of a Fed that’s finally turning dovish.
The second big change is that earnings results won’t have low expectations to excuse poor performance. Earnings from companies in the S&P 500 weren’t particularly great in 2023, but they were much better than some of the awful expectations that were prevalent when the year started.
To put some numbers on it, many analysts penciled in 2023 S&P 500 earnings between $220 and $225. But there was a definite minority that had estimates much lower, anywhere from $185 to $215, as these analysts expected the recession that never appeared.
As we start 2024, it’s the total opposite. Consensus S&P 500 earnings growth is nearly 10% year over year, well above the long-term averages of around 5%-ish annual growth. And keep in mind, at 4,800, the S&P 500 is trading over 19.5X that $245 earnings estimate, which means there’s little room for disappointment from a valuation perspective.
The point here is that just “okay” earnings won’t be good enough to drive stocks higher, and we got a preview of that in the third-quarter numbers (which weren’t great) and especially in December, as earnings results were generally poor. Now, that doesn’t mean the upcoming fourth-quarter earnings season (which begins in mid-January) won’t be positive, but for it to be positive it’ll have to be because of actual good results, not just better-than-feared results that were good enough in 2023.
The bottom line here is that markets will need something “new” to power stocks higher in 2024, because the dovish pivot (which powered stocks higher since October) is fully accounted for, while low expectations for earnings and economic growth no longer exist.
That doesn’t mean we won’t get new, positive influences on stocks, but it will have to come from something new in 2024, because the low hanging fruit of a dovish pivot and not-as-bad-as-feared earnings have already been picked to fuel the Santa rally.
If you’d like analysis such as this in your inbox every trading day, then I invite you to check out my Eagle Eye Opener, right now. For the cost of a morning latte, you’ll be completely up to speed on all of the essentials you need to thoroughly understand this dynamic market.
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Franklin Forever
“The things which hurt, instruct.”
–Ben Franklin
Putting wisdom in the pithiest of proclamations is something that the great Ben Franklin can do like no other. In this quote, he reminds us that the best source of knowledge is that which burns us emotionally.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
In the name of the best within us,
Jim Woods
