RTX - The S&P 500: Single-Digit Returns For 2024

2023-12-18 14:17:30 ET

Summary

• Seeking Alpha is running a contest for contributors to guess where the S&P 500 Index will close at the end of 2024.
• The market is pricing in rate cuts, which is seen as bullish for the economy.
• We predict that the S&P 500 will hit a new all-time high and end 2024 around 5068, a 7.2% increase from current levels.
• Catalysts both positive and negative are discussed, and our EPS projection is for 10%+ growth in corporate earnings, but factors in a generous 19X+ valuation on FWD earnings.

Seeking Alpha is currently running a fun contest for contributors, and that is a guess where the S&P 500 Index (SP500) will close at the end of 2024. Of course, we cannot just give out a number and submit the column. Here is what we know. As of right now, 2024 earnings are expected to grow around 11-12% over 2023. Earnings do matter, as does valuation, which we think remains on the higher side historically through 2024. We also know that the market is pricing in rate cuts, which is being interpreted bullishly since we are a debt-driven economy. Lower rates translate to more borrowing power for consumers and businesses alike.

Those are the only "knowns," and even then, these "knowns" are really just strong consensus expectations. What we do not know is where the sentiment of traders will be next year, but we are anticipating normal seasonal patterns. We also do not know if the higher rate environment will really start to weigh on the economy and jobs. One would anticipate the Fed would trade a few basis points of unemployment to stamp out inflation. We do know that inflation has been tamed and is moving each month toward the Fed's 2% target. We will not account for any "black swan" macro events, but bullish items such as the resolution of international conflicts could be catalysts. Finally, we know it's an election year, and the market tends to historically rise in reelection years when a sitting President is up for reelection, but history does not always repeat itself.

Over at our full Investing Group service, each week our lead analyst has a weekend piece discussing where we see the market going near term and what the catalysts are in the coming week. Key economic reports, earnings releases, and possible catalysts are covered as we formulate a game plan. While we focus on individual stocks, these game plans often focus on the broader market average and are particularly helpful when planning to hedge, taking cues from sentiment, the chart, and possible catalysts.

This week (12/18-12/22) is the last full week of trading for 2023, with the Christmas holiday week of course wrapping things up for the year. Generally speaking, when the Holiday falls on a Monday, trading volume slips starting Thursday (12/21) and really will not pick back up until 1/2. Obviously, money never sleeps, but a lot of funds and professionals carve out a lot of time around this time of year. And you often see a dip in volume. Interestingly though, you can see the market move a bit on the lower volume, as the advance and declines on the bid/ask widen more in a retail-driven trading environment. After the major run we have just witnessed since bottoming out in October, we would expect a lot of choppiness until earnings season. We think the market starts with a spike this week, but we will not at all be surprised if we give back 100 points or so on the S&P 500 ( SPX ) with profit taking. And we think that happens as we hit the all-time high on the SPX.

Generally, we get a January effect, when money comes back into the market, but often when we come into the year on a strong note, that effect is muted. But our team, and just our reading of the tea leaves, is really thinking we have no clarity on directionality until we get more data in the way of earnings season and more economic data. The markets are pumped up on Fed euphoria of reduced rates. The market has basically priced in the benefit of the first cut already. As mentioned in the opening, a rate cut is seen as a good thing because it spurs borrowing and spending, just like hikes slow such activity. While the market is pricing in a cut as soon as March, at this moment, we stand by the call we made to start 2023, that rate cuts would come in H2 2024. It still seems appropriate, but the data will tell us more as we move into 2024.

In terms of where we go with the market from here, a year ago this week the Fed hiked interest rates another 50 basis points, indicating its restrictive policy would continue for some time. The market threw a fit. The market got in a tizzy and handicapped that the Fed was going to tip the economy into a recession. In fact, one place we got a prediction wrong was our call for a recession to start in Q2 2023. So far, no recession, and it is now the end of Q4.

Anyway, last December was a tough month. The S&P ended last December down almost 6% and ended all of 2022 down almost 20%. But one year later, the recession still has not arrived, and the S&P 500 has recovered almost all its losses. In fact, it's only about 2% below its all-time high. Make no mistake, last year was an outlier, at least in terms of rate hikes. But the market action was not really an outlier.

What do we mean? Folks, market declines of 20% don't happen very often, but they are more common than you may think. There have been only 15 annual declines of 20% in the last century. That was actually more than we thought when we went to look back. 8 times since 1925 we have been down 20% to 30%, and 5 times we have been down 30-50%. And there were, of course, two very real crashes in 1929 and 2008 of down more than 50%.

Now, here is the thing. We are over halfway through December, and we are already up about 2.5%, well outpacing the average December gain of 1.4%. After falling almost 20% last year. we are up more than 20% in 2023, excluding any dividends of the SPX constituents. That seems like a lot, right? Well, these kinds of rebounds are not unusual. Looking back at past data, after big market drops of 20% or more, nearly 2 out of every 3 times the market recovered all of its losses within one year of the bottom. The SPX fell from the 2022 closing high of 4,793 to the bottom of 3,577 in October 2022.

We are less than 100 points away from the old historic high. Now, 20% in one year is an amazing run, but it's actually common. Looking back over time, one out of every three years we see a 20% gain or more. That is eye-popping. And more than half of the time, we see gains of more than 10%. Three-quarters of the time, the S&P 500 goes up from one year to the next. This is why as traders, our goal is to convert our trading gains into long-term investments. Because over the long term, the markets only go up, but when they drop, they fall hard.

So, where are we going from here? 2024 is going to be a tough year to handicap. If earnings grow 10% or so, should the market also grow 10%? Hardly. We do not know what will drive sentiment. Right now, sentiment is positive, recession has been held at bay, data has largely been strong, the economy remains positive, and corporate earnings have held up. The view of cuts to rates gets investors excited.

But a word of caution. Rate cuts may be made because we are overtightened, and the economic data drops off hard. This Fed, in our opinion, does not want to cut too soon only to have to retighten. We think the Fed will trade a few basis points of unemployment to stamp out inflation, despite the dual mandate.

We believe we will hit a new all-time high on the S&P500, and if it does not happen before year-end, it will happen in early 2024. Then, we think we chop range bound around mid-year, selloff seasonally in late summer into the fall, and end 2024 around 5068, regardless of the election outcome. That is about 340 points higher from here or about a 7.2% increase. This factors in weakening data, 2-3 rate cuts, and corporate earnings rising about 10% from 2023. We also have to watch the government and its budget, the ever-growing debt, and while the election year is generally positive, a too-close-to-call election or one that is delayed in court could be a negative.

As we move into this week, we see that the Fed's preferred inflation gauge will be on deck, and that readout could be used to justify a dovish pivot from the Fed this past week. The November PCE is set for release on Friday. We expect core PCE to rise 0.1% and rise 3.2% on a yearly basis. Can this help keep the party going? Yields dropped like a rock, surprising many. A massive drop-off like this was not something we saw in the cards this soon, but we were not factoring in such a dovish pivot this quickly. But keep in mind, the Fed last Wednesday held rates steady, but indicated several rate cuts could come next year.

There really are no major catalysts ahead near term. After 7 straight weeks of gains for the S&P 500, we are looking at the best winning streak since 2017. For the Dow Jones Industrial Average Index (DJI), it's the best going back to 2019. It makes sense to think about how much the rally has left. We think that the market is setting up to challenge the all-time highs, but profit-taking is the main pressure here near term, whereas the next real catalysts are jobs data for December and then earnings season, barring any macro unforeseen issues.

Factoring in 10% earnings growth, seasonal trends, rate cuts, and a valuation that is still on the high end historically, we set 5068 as our 2024 target for the competition. This year-end 2024 target reflects a P/E greater than 19x, historically high, but where we have traded optimistically in late 2021 and early 2022, as well as mid- and year-end 2023. Risks to the target include an economy that drops off much harder than expected, high unemployment hurting consumer confidence, a surprise resurgence in inflation, unforeseen macro catalysts (including positive ones), or an election that is contested in the U.S.

Editor's Note : This article was submitted as part of Seeking Alpha's 2024 Market Prediction competition , which runs through December 20. With cash prizes, this competition -- open to all contributors -- is one you don't want to miss. If you are interested in becoming a contributor and taking part in the competition, click here to find out more and submit your article today!

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