At the start of 2023, most economists and Wall Street leaders were convinced that a U.S. recession was imminent. With the Federal Reserve rapidly hiking interest rates to fight inflation, raising borrowing costs for already struggling businesses and consumers nationwide, economic and market forecasts were bleak. Investment banks’ average year-end price target for the S&P 500 fell to just 4,000 as bearish predictions flooded in late last year, implying the blue chip index would rise a mere 4% this year (compared to its roughly 10% average yearly gain since 1957).
But instead of struggling, stocks have soared—and the economy has remained resilient. Rising interest rates have managed to slow inflation without cracking the labor market, leading to steady consumer spending and GDP growth.
Now, instead of attempting to forecast the next recession, many economists are more concerned with timing the Fed’s interest rate cuts. “It's more likely than not that the economy will be able to move successfully into a soft landing,” Sinead Colton Grant, BNY Mellon Wealth Management’s new chief investment officer, told Fortune. But the newfound economic optimism and rate cut forecasts haven't translated into a sky-high price target for stocks. After a more than TK% jump in the S&P 500 in 2023, Wall Street’s equity market outlook is, once again, a bit tame.
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Investment banks’ average S&P 500 price target for 2024 is 4,850, implying a potential 2% gain by year-end. When Fortune collected forecasts from a wider selection of prognosticators, including wealth managers and research firms, that figure rose to 4,910, for a potential 3% gain in 2024—but that’s still far below the level of returns most investors have become accustomed to.
The economic outlook:
Slow and steady
Recession forecasts may not be as common in 2024, but many experts are still cautious after years of inflation, interest rate hikes, and rising geopolitical tensions. “I’m sure you’ll hear this a lot—but I think it will be a sluggish growth environment in 2024,” Nicholas Brooks, head of economic and investment research at ICG, told Fortune.
Brooks believes there will be “more pressure on company margins” next year, as corporations’ ability to pass rising costs onto consumers and boost their profits fades. That could lead revenue growth to be “somewhat weak”, he explained, warning of “a more difficult investing environment” in 2024.
BNY Mellon Wealth Management’s Colton Grant said she also expects weaker economic growth in 2024. She warned that she’s “highly cognizant that that last mile of inflation is harder to squeeze out of the system” as well. Stubborn inflation could lead to fewer interest rate hikes than investors are expecting in 2024, which would hold back markets. Colton Grant is forecasting 125 basis points of interest rate cuts, while the market has currently priced in roughly 150 basis points. She also expects just 2% GDP growth, and inflation of between 2.5% and 3.5% by year-end 2024.
It’s a slow and steady economic environment that many investment banks are also expecting next year after abandoning their recession calls. But unfortunately, slow and steady doesn’t win the race in the stock market.
Here’s a look at some of top investment banks’ economic forecasts:
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Timing the Fed’s rate cuts
While most experts are more optimistic than they were a year ago, there’s a wide range of economic and market outlooks on Wall Street this holiday season—with much of the disagreement revolving around the timing and depth of the Fed’s interest rate cuts.
At the December Federal Open Market Committee (FOMC) meeting, the central bank revealed that it expects inflation, and interest rates, to fade in 2024. But those are just projections, and Wall Street can’t seem to agree on what the reality will look like.
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Goldman Sachs’ chief economist Jan Hatzius, who has been more bullish than his peers throughout the year, said this week that he expects three rate cuts by the summer and five total in 2024. According to Hatzius, the “great disinflation” has begun and the Fed funds rate will drop to between 3.25% and 3.5% by the second half of 2025, which should be a boon for markets and the economy after years of rising borrowing costs.
But some experts believe that recent economic strength could lead the Fed to avoid cutting rates until the second half of the year. “I don't think we're going to see rates reverse that aggressively,” Jeffery Kleintop, chief investment strategist at PNC Wealth Management, told Fortune. “In fact, we see just a few rate cuts next year. Rates are still going to be tight and high on a real basis.”
Kleintop believes that, with rates not coming down as much as many on Wall Street are forecasting, the economy is headed for a much slower, “U-shaped” recovery, instead of the faster “V-shaped” option. “We have rates coming down as a bit of a tailwind, but maybe not as much as the market is getting excited about,” he argued.
BNY Mellon Wealth Management’s Colton Grant also believes investors anticipating aggressive rate cuts might be getting ahead of themselves. “The reason that we're more cautious is because the Fed will really want to see that inflation has been brought under control before they're going to start cutting,” she said.
Back to the old normal?
While 2024 is likely to feature a Wall Street guessing game over when the Fed will cut rates, most experts seem to agree on one thing: the days of near-zero interest rates are over. "The 0% interest rate regime—call it maybe 2008 to 2021 or so—I don't think we're going back to that era,” George Mateyo, chief investment officer at Key Private Bank, told Fortune.
Mateyo believes the U.S. economy will return to “the old normal” that preceded the Global Financial Crisis of 2008, and not to the zero interest rate regime colloquially as the “free money era.” Inflation may settle in above the Fed’s 2% target, according to Mateyo, leaving interest rates around 3.5% or 4% by year-end 2024. “That, to me, feels more normal than what we saw in 2010 to 2021,” he said.
ICG’s Brooks likewise doubts the U.S. will hit 2% inflation in 2024. “And I think it's highly unlikely we're gonna see rates going back to anywhere close to where they were back in 2020-2021,” he added.
Stock market forecasts
After plunging roughly 20% in 2022, fading inflation, the prospect of falling interest, and AI hype have helped the S&P 500 boom this year. And with much of the blue chip index’s gains coming since October, Wall Street has been scrambling to adjust its price targets for 2024. That’s led to some rising, but wide-ranging forecasts from investment banks, wealth managers, and research firms.
Capital Economics and Infrastructure Capital Management both have 5,500 price targets for the S&P 500. That's the highest on the Street and implies a potential 15% gain next year. Infrastructure Capital Management’s founder and CEO Jay Hatfield said he believes that, with inflation fading worldwide, 2024 will be the “year of global rate cuts”—and sinking borrowing costs and rising liquidity should boost corporate earnings and stock market valuations.
Fundstrat Global Advisors’ co-founder Tom Lee is also bullish, arguing the S&P 500 will jump nearly 10% to 5,200 by the end of 2024. Lee told Fortune in a recent interview that he believes the economy will avoid a recession, mostly because consumers have been able to navigate rising interest rates better than previously expected. Lower debt-to-income levels and improved lending standards, particularly for mortgages, have led to fewer negative effects from rising rates compared to past rate hiking cycles, according to Lee. “Overall consumers are actually going to hold up well [in 2024],” he argued, adding that because “the Fed is going to be a little friendlier than they have been,” it should be a good year for stocks.
However, some of Wall Street’s biggest names are worried about 2024. JPMorgan’s chief market strategist and co-head of global research, Marko Kolanovic, believes that the S&P 500 will drop 12% to just 4,200 next year as global growth decelerates, U.S. household savings decline, and geopolitical risks rise.
The majority of the experts Fortune spoke with were also wary about 2024, if a bit more optimistic than Kolanovic. Fading inflation, interest rate cuts, and new tech themes like AI should help lift stocks, but it won’t be a banner year, according to these top investors.
Rich Steinberg, chief market strategist at the Colony Group, said that he expects “muted returns” and “volatility” in 2024 amid relatively weak economic growth and uncertainty surrounding the presidential election. Steinberg’s price target for the S&P 500: “If you were to hold a flame to my foot, I would say 4,800. And maybe if I’m really optimistic, 5,000 would be the high.”
Crit Thomas, Touchstone Investments’ global market strategist, said he’s also “somewhat cautious” about next year. “We do see slowing economic growth and we see a risk that inflation might not play as nicely as anticipated currently in the market,” he told Fortune.
Thomas explained that he will only be “adding risk”—meaning buying risk assets like growth-focused stocks—if he can find compelling valuations due to economic uncertainty and the recent surge in the market. “Otherwise, we'll hang out in fixed income where we get some decent income with less volatility,” he said.
Overall, the average S&P 500 target for the investment banks, research firms, and wealth managers that Fortune collected data from was 4,910, implying meager returns of just 3% for investors in 2024 after this year’s over 24% surge.
Two words of caution for stock market investors: Pulled forward
The thing is, just a few months ago, experts’ average S&P 500 target would have been quite optimistic. At the beginning of November, the blue chip index sat at just 4,200, meaning the 4910 target represented a potential 17% gain for next year. However, stocks’ recent surge may have “pulled forward” some gains previously anticipated for 2024. Essentially, investors have robbed Peter to pay Paul.
The S&P 500’s price to earnings ratio has steadily risen from roughly 18 last December to over 21 today. That means stock price appreciation next year may need to come from earnings growth—not rising valuations due to the prospect of falling interest rates like was seen in 2023.
“Do not expect returns to come from valuation expansion,” Dylan Kremer, Certuity's chief investment officer, told Fortune. “What you've done is you pulled forward that valuation expansion and stocks now need to grow into their valuation. So we're expecting a much more modest return environment in the first half of the year.”
Like many of his peers, Kremer is also expecting more volatility in 2024 as investors assess the Fed’s interest rate decisions and the presidential election cycle ramps up. He concluded with a warning for investors and forecasters about the economy:
“There’s just a lot of uncertainty,” he said. “We could have a call a month from now with the economy in a completely different environment.”
All S&P 500 price data and targets are as of 12/22/2023.
