The stock market climbed the wall of worry to impressive gains in 2023. After that big run, the stock market forecast for 2024 hinges on a key question: Will the Federal Reserve achieve a soft landing for the U.S. economy? And in a related question, can stocks extend gains?
Wall Street is mostly convinced that the Fed will reach its goal of a soft landing for the U.S. economy. That means there will be slower economic growth, but no recession, leading to interest rate cuts in 2024.
In that environment, most analysts predict improved corporate earnings growth for S&P 500 companies. As for how the stocks will perform in the coming election year, 2024 forecasts for the S&P 500 vary widely, but the consensus seems to fall in the range of 8%-9% gains, a little under the index's historical average of about 10%. Among other trends, artificial intelligence is widely considered to remain a key investing theme in 2024.
The stock market enters the new year with the wind of a stellar 2023 at its back. The year ended with the Nasdaq composite making its fifth-best annual performance. The rebound was especially welcome after the index plunged 33.1% in 2022. Taking into account 2020's 43.6% explosion, the Nasdaq is now on pace to have two of its best six best years in history in the current decade.
The S&P 500 climbed 24.2% in 2023.
That's more than double its historical average annual return. It also rebounded nicely from a 19.4% loss in 2022.
Stock market gains accelerated in November and December as the Nasdaq and S&P 500 rallied 16.8% and 16.2% respectively. November marked the best monthly gains for both indexes since July 2022. At the end of December, the two indexes and the Dow Jones Industrial Average were at or near record highs. But the first week of January has been a different story, with the Nasdaq and S&P 500 on extended losing streaks.
2023 Stock Market Performance
For 2023, the Nasdaq composite climbed 43.4% and the Dow 13.7%.
But the year's gains were concentrated in a handful of huge stocks, such as Apple, Microsoft, Nvidia and Tesla. Outside the so-called Magnificent Seven stocks, the stock market's performance apart was more sedate.
The Invesco S&P 500 Equal Weighted ETF (RSP) rose about 12% as of Dec. 27. The Direxion Nasdaq 100 Equal Weighted ETF (QQQE) gained 32.3%. In comparison, the market-cap-weighted Nasdaq 100 surged nearly 54%.
The IBD 50 index slightly underperformed the S&P 500 with a 20.8% advance through the end of the year.
Narrow participation during most of the 2023 stock market created a difficult environment in which precise stock picking became an essential skill.
But in the final two months of 2023, the stock market saw breadth improve as the major indexes rallied.
In the Nasdaq and NYSE, the 10-day moving average of new highs started to outpace new lows starting in mid- to late-November. And since November, stocks up in volume have exceeded those down in volume. That's a significant shift because decliners in volume held the upper hand since at least September.
Indeed, one reason why the stock market has surged since November is that buyers started spreading their wealth among a larger pool of stocks. Since the Oct. 27 low, the Invesco S&P 500 Equal Weight is up more than 18%, outperforming the S&P 500's 15.9% gain through the final session of 2023. First Trust Nasdaq 100 Equal Weight is up 18.7%, matching the cap-weighted Nasdaq 100's increase over the same period.
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Historical Precedent Offers Bulls Hope
Historical precedent gives market bulls some hope for the stock market forecast for 2024.
Since the introduction of the S&P in 1957, the index has averaged a 9% average return in the year following a 20%-plus annual gain, according to Dow Jones Market Data. The best following year was in 1997, when the S&P soared 31%. The worst year was 2022, with a 19.4% decline.
Nicolas Colas, co-founder of DataTrek Research, says 2022 saw the S&P 500 decline by a statistically unusual amount.
Despite outsized gains, 2023 has been basically normal in terms of historic total returns — within a band of one standard deviation.
Starting with unusual losses in the 2022 bear market, the third year of such up-down combinations is usually bullish.
"Since 1928, the third year of such a sequence has an 80% win rate. The only exception was at the dawn of World War II," Colas said in a Dec. 13 note. "Barring a large exogenous shock, history suggests 2024 will be another good year for U.S. large caps."
Stock Market Forecast 2024: AI Stocks
While it's impossible to make a stock market forecast with certainty, some of the major themes in 2023 will carry over to the new year and influence stock performance.
Fluctuating Treasury yields, economic performance, the rise of generative artificial intelligence and the so-called Magnificent Seven stocks will continue to play major roles in 2024. The November election adds another layer to the outlook.
Excitement over generative artificial intelligence in 2023 fueled heavy investments by tech companies in semiconductors, computer hardware and software.
Generative AI can create content — including written articles, images, videos and music — from simple descriptive phrases. Artificial intelligence systems analyze and digest vast amounts of data to create new works. Generative AI also can write computer programming code.
There was no bigger AI stock than Nvidia in 2023. And investment firm Evercore ISI in November called Nvidia "arguably the most important stock in the world right now." For 2023, Nvidia stock boasted a 238% surge.
Demand for graphics processors and data-center hardware for artificial intelligence applications has been fueling huge sales and earnings growth for Nvidia this year.
On Nov. 21, Nvidia smashed Wall Street's targets for its fiscal third quarter thanks to massive growth in sales of AI processors for data centers. The Santa Clara, Calif.-based company's earnings rocketed 593% vs. the year-ago period, while sales soared 206% to $18.12 billion.
"We believe a theme in 2024 will be less about AI's 'creators' and more about AI's 'adopters' — across the spectrum of industries and sectors — as companies increasingly focus their capital spending on productivity-enhancing investments," Liz Ann Sonders, chief investment strategist, and Kevin Gordon, senior investment strategist, wrote in Charles Schwab's 2024 outlook.
Key AI stocks include the Magnificent Seven, along with C3.ai and Palantir Technologies.
Stock Market Forecast 2024 And The Magnificent Seven
The Magnificent Seven — Amazon.com, Alphabet, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — shouldered most of the stock market performance in 2023.
As of Dec. 15, the Magnificent Seven had contributed more than two-thirds of the S&P 500's return this year, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The Magnificent Seven stocks represent about 30% of the S&P 500's market value, according to Goldman Sachs Global Investment Research. The combined weight of these companies is greater than any combined weight of the top seven companies in the history of the S&P.
Magnificent Seven Stocks, 2023 Gains
| Company Name | Symbol | 2023 YTD Performance |
|---|---|---|
| Alphabet | +58.3% | |
| Amazon | +80.9% | |
| Apple | +48.2% | |
| Meta Platforms | +194.1% | |
| Microsoft | +56.8% | |
| Nvidia | +238.9% | |
| Tesla | +101.7% |
Source: IBD data as of Dec. 29, 2023
Even with market breadth widening, the Magnificent Seven should command much of the market's attention and performance.
For now, most of the seven are in good shape; however, cracks are starting to show. Apple is below its 50-day line, while Microsoft and Nvidia remain in buy ranges as of Jan.4. Alphabet and Amazon are below their latest buy points, while Tesla is nearing a new buy point. Meta is extended from their its breakouts.
Staying In Tune With Stock Market Direction
The stock market saw three main uptrends in 2023. Investors who stayed in tune with those phases — and IBD's market assessment on its Investors.com homepage and IBD Weekly newspaper — sidestepped the downdrafts.
On Jan. 6, 2023, the Nasdaq surged 2.6%, triggering a follow-through day and a new stock market uptrend, according to IBD's The Big Picture. Over the next few weeks, the Nasdaq rallied as much as 16% to a high of 12,269.56.
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After a 10% decline to a mid-March low, the major stock indexes staged another trend-changing follow-through March 29. To the July 19 highs, the Nasdaq steadily advanced as much as 21% to 14,446.55.
On Nov. 1, the Nasdaq triggered the final uptrend of 2023, with another follow-through day. At that time, the Federal Reserve kept the fed funds rate unchanged and Fed Chair Jerome Powell signaled that the central bank felt its interest rate hikes were cooling prices and growth. Put simply, Powell & Co. got less hawkish.
Ahead of that follow-through, the Nasdaq had tumbled around 13% from its July 13 high to its lows on Oct. 26 at 12,543.86. That fall directly stemmed from the spike in the 10-year U.S. Treasury yield to 5% from below 4%.
Stock Market Forecast 2024: U.S. Economy Soft Landing
Most of Wall Street agrees that the 2024 stock market outlook is largely dependent on whether the Federal Reserve can engineer a soft landing. While there is no official definition of a soft landing, Wall Street is evaluating whether the Federal Reserve can keep rates just high enough to slow the economy and reduce inflation without causing a recession. A recession would be a hard landing.
By many measures, the economy is slowing in controlled fashion. Tightening credit conditions, combined with cooler consumer spending and inflation, are expected to slow the U.S. economy. The severity of that weakening will likely shape the stock market forecast for 2024.
"The labor market is unmistakably cooling after running red-hot for the last few years," said Bill Adams, chief economist for Comerica Bank, in a research note.
"U.S. economic growth will likely be considerably slower in the fourth quarter of 2023 than the third quarter's blistering 5.2% annualized increase, but a contraction is unlikely. Many of the downside risks to the fourth quarter that economists were worrying about a few weeks ago — war in the Middle East, government shutdown, the UAW strike — look like they will exert only modest and short-lived headwinds to growth."
The November U.S. jobs report showed that hiring moderated but hasn't rolled over, as employers added 199,000 payroll jobs, including a big boost from the end of auto strikes. The unemployment rate surprisingly fell to 3.7% from 3.9%, but annual wage growth slipped just below 4%.
While few analysts on Wall Street see the U.S. economy contracting, there is a wide range of U.S. GDP forecasts for 2024.
On Dec. 11, S&P Global Market Intelligence upped its 2024 forecast for U.S. real GDP growth from 1.4% to 1.5%, while the Congressional Budget Office also projects U.S. economic growth of 1.5%. Meanwhile, FactSet's consensus estimate for 2024 is growth of 1.2%.
Further, Darrell Cronk, president of the Wells Fargo Investment Institute, and his strategists believe the U.S. economy will slow to an annual growth rate of 0.7% in 2024, down from the 2.2% forecast for 2023.
Fed Rate Cuts And The 2024 Stock Market Forecast
"Don't fight the Fed" is a common mantra in the investing world. It will be the case in 2024 as well.
At its December meeting, the Fed stopped just short of saying it is done raising interest rates, and policymakers penciled in rate cuts totaling 75 basis points for 2024.
The new batch of quarterly projections shows that Fed committee members expect to cut their key policy rate to 4.6% by the end of 2024, down from the current range of 5.25% to 5.5%. That's down from September projections, which showed the federal funds rate ending next year at 5.1%.
"Inflation keeps coming down. The labor market keeps coming into balance. So far so good," Powell said in comments after the policy announcement.
As of Dec. 28, CME FedWatch showed a 14.5% probability of a quarter-point rate cut at the Jan. 31 meeting, with an 81% chance by March. Fed funds futures are pricing in a substantial number of Fed rate cuts in 2024, eventually lowering the target rate to 4% to 4.25%.
Wells Fargo's Cronk isn't so dovish. He and his team see a tremendous amount of uncertainty for many reasons, including the strength of the U.S. economy and persistence of high inflation.
On Dec. 12, the consumer price index showed that core prices firmed up a bit in November on hot services prices, though cheaper gas contributed to a drop in the CPI headline rate.
Even if inflation continues to trend down in 2024, prices remain high for consumers. To make sure the embers of inflation are out, the Fed seems reluctant to cut rates too soon. But as Powell noted, monetary policy must take into account the risk of tightening for too long.
Stock Market Forecast 2024: The Presidential Election
The November election comes with a lot at stake, from control of the White House and Congress to state legislatures, governorships and other centers of power.
Yet that's a plus for the 2024 stock market forecast. Stocks tend to climb in election years. Since 1952, the S&P 500 has never had a down year during a presidential reelection year, Comerica Chief Investment Officer John Lynch noted. The only down years were in 1960, 2000, and 2008, years when both parties offered new presidential candidates.
"It is also interesting to note the equity market's performance while anticipating the election's outcome. The S&P 500 typically outperforms in presidential election years when the incumbent party wins," he added. "It stands to reason that if the economy and markets are performing, voter sentiment is likely behind the sitting president."
The stock market has a long history of outperformance in presidential election years and even the preelection years, according to the Stock Trader's Almanac.
"It is no mere coincidence that the last two years (preelection year and election year) of the 48 presidential terms since 1833 produced a total net market gain of 772%, dwarfing the 336.5% gain of the first two years of these terms," Almanac editor Jeffrey Hirsch writes. Wars, recessions and bear markets tend to occur in the first two years of the term. Prosperous times and bull markets happen more often in the second half of the term.
2024 Large Caps, Small Cap Stocks
Meanwhile, Michael Arone and Matt Bartolini of State Street Global Advisors recommend in their 2024 ETF Market Outlook that investors focus on "high-quality companies with strong price power, stable earnings and healthy balance sheets." These types of companies are better able to withstand margin pressure and higher financing costs during higher interest-rate environments.
To target quality growth, Arone and Bartolini recommend the SPDR MSCI USA StrategicFactors ETF and the SPDR NYSE Technology ETF, among others.
Wells Fargo's Cronk agrees, saying that investors should be overweight in large caps because small- and mid-cap stocks will struggle during economic slowdowns. Later in 2024, Cronk says investors should pivot to riskier asset classes, as the U.S. economy should begin to recover from its first-half weakness.
But Ronald Temple, chief market strategist at Lazard Asset Management, and Francis Gannon, co-chief investment officer at Royce Investment Partners, also see potential for U.S. small-cap stocks.
The high number of unprofitable small-cap companies likely means smaller companies are struggling with rising financing costs, which should ease when the Fed shifts to rate cuts, Temple said in a report. But investors should maintain a bias toward higher-quality companies among the small caps.
Gannon said in a research note, "Small-cap stocks are poised for a recovery after several challenging years on both an absolute and relative basis vs. large caps. And while we are not in the business of economic predictions, we do believe that many small caps have already priced in a recession or economic slowdown. To be sure, many companies have been preparing for those possibilities for some time."
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2023 Regional Banking Crisis
While immediate concerns have abated, 2023's regional banking crisis created shock waves throughout the financial industry, as rapidly rising interest rates led to large unrealized losses for some banks.
The bank turmoil started in early March with the rapid collapse of Silvergate Capital. It announced plans to wind down operations and voluntarily liquidate Silvergate Bank on March 8.
Two days later, on March 10, Silicon Valley Bank became the first FDIC-insured financial institution to fail in 2023. Santa Clara, Calif.-based Silicon Valley Bank had been the go-to lender for many tech startups. Then on May 1, regulators seized First Republic Bank and immediately sold it to JPMorgan Chase.
While the emergency has passed, regional banks KeyCorp, Citizens Financial and Truist reported big profit declines for the third quarter, signaling a potential long-term overhang.
Weighing on bank profits are the rising expenses for banks to get and keep deposits, along with losses associated with the value of bonds that banks bought when rates were low.
Looking ahead into 2024, rating agency Fitch said that U.S. regional banks will face continued challenges in 2024. "Regional banks lacking in scale will be disproportionately pressured to reduce cost bases and optimize loan composition," Fitch said in mid-November.
Fitch added that this would "diminish their ratings headroom, leaving larger players relatively well-positioned to continue to gain market share."
SPDR S&P Regional Bank ETF rallied as much as 57% to its December high from its October low, indicating investors are less worried about the health of the industry. But much of that strength is from falling interest rates. Declining, less-inverted yields are bullish for regional banks, which rely on a traditional strategy of lending at higher rates than they borrow.
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Stock Market Forecast 2024: Wall Street Price Targets
The year 2023 saw weak earnings growth for the S&P 500, with annual EPS expected to grow less than 1% and a 2.3% increase in revenue, according to John Butters, senior earnings analyst at FactSet.
On a quarterly basis, the S&P 500 reported earnings declines of -1.7% and -4.1% for the first quarter and second quarter of 2023. However, the index had earnings growth of 4.9% in Q3 and is projected to report earnings growth of 2.4% for the fourth quarter, per FactSet estimates.
Growth is expected to improve in 2024. Analysts are calling for year-over-year earnings growth of 11.5%, Butters says.
But not all of Wall Street is convinced.
"Looking ahead, we anticipate that the economic slowdown will weigh on equity markets, allowing for a potential pivot toward investments that we believe are most likely to benefit from a subsequent recovery," Cronk said.
His 2024 year-end target for the S&P 500 ranges from 4,600 to 4,800. With the S&P 500 ending 2023 around the 4,700 level, that doesn't leave a tremendous amount of upside for equities. Other investment firms are more optimistic, though.
Among notable Wall Street firms, Yardeni Research holds the most bullish price target, with an anticipated gain of over 14%. On the downside, JPMorgan expects the S&P 500 to fall roughly 11% in 2024. The consensus price target appears to be the 5,100 level, which would signify modest gains for equities next year.
2024 S&P 500 Forecasts
| Wall Street Firm | Price Target | Performance % |
|---|---|---|
| Yardeni Research | 5,400 | 14.4% |
| Oppenheimer Asset Management | 5,200 | 10.2% |
| Fundstrat Global Advisors | 5,200 | 10.2% |
| Citi | 5,100 | 8.1% |
| Deutsche Bank | 5,100 | 8.1% |
| BMO Capital Markets | 5,100 | 8.1% |
| RBC Capital Markets | 5,100 | 8.1% |
| Goldman Sachs | 5,100 (up from 4,700) | 8.1% |
| Bank of America | 5,000 | 6.0% |
| Barclays | 4,800 | 1.7% |
| UBS Global Wealth Management | 4,700 | -0.4% |
| Wells Fargo Securities | 4,625 | -2.0% |
| Morgan Stanley | 4,500 | -4.6% |
| JPMorgan Chase | 4,200 | -11.0% |
Source: MarketWatch; 2024 S&P 500 performance uses Dec. 15, 2023, closing price.
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