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Louis Krauskopf
NEW YORK (Reuters) – Investor expectations are rising for the start of 2024, and U.S. stocks could be rocky if some expectations are not met.
Despite a rocky start to the year, the S&P 500 index is only about 2% below its all-time high. Most investors remain optimistic about everything from the U.S. economy and corporate earnings to the trajectory of the Federal Reserve’s monetary policy.
For example, the story of strong growth and moderately slowing inflation that helped lift the S&P 500 index to 24% last year has become the consensus view among investors.
The latest survey from BofA Global Research, released last month, showed that 66% of fund managers believe the economy will have a soft landing in 2024. Only 15% of fund managers expect a recession to occur within the next 12 months, BofA data shows. This compares to last year, when 68% of investors expected a recession.
Bets on monetary easing are closely tied to the prospect of a soft landing. Futures linked to the Fed’s policy rate show investors are pricing in about 140 basis points (bp) of rate cuts this year, nearly double the Fed’s own expectations.
Unsurprisingly, many investors have a positive outlook on the stock. Bullish sentiment rose to 48.6% in the latest week, according to a survey by the American Association of Individual Investors, down slightly from its recent peak in December but well above the historical average of 37.5%.
That view was shaped largely by concrete evidence of subdued inflation, a relatively strong economy and the Fed’s own guidance after policymakers surprised markets with a dovish turn last month. . But with stocks near historic highs and valuations rising, some investors believe the market’s positive outlook leaves even more room for disappointment if either of these scenarios doesn’t materialize. I am concerned that this may be the case.
“Anything that upsets current economic and market conditions increases the risk that that disappointment will spill over into stock prices,” said Yunyou Ma, chief investment officer at BMO Wealth Management.
One test of investor optimism will be next week’s consumer price data, which could show whether recent bets on lower inflation were premature. Friday’s jobs report showed employers hired more workers than expected in December, while wage increases remained steady, paving the way for economic cooling that could trigger Fed interest rate cuts. ‘s hopes have taken a hit.
The S&P 500 fell 1.54% this week, its biggest weekly decline since late October.
Big banks such as JPMorgan Chase & Co. and Citigroup Inc. begin their earnings season next week, testing rising expectations for corporate earnings. Analysts expect S&P 500 earnings to rise 11% in 2024, after rising just 3% in 2023, according to LSEG data.
With valuations rising across the market, the pressure to hit higher profit targets may be stronger than a year ago. The S&P 500 index has a forward price-earnings ratio of 19.5 times, compared to about 17 times as of early 2023, according to data from LSEG Datastream.
“We don’t expect multiples to widen significantly from here because valuations have stretched a bit, so it depends on where the returns come from,” said James Regan, director of wealth management research at DA Davidson. Deaf,” he said. Mr. Ragan estimates the fair value of the S&P 500 at 4,700, about the level at which it is currently trading.
Looking further ahead, investors will likely be parsing messages from the Fed at the end of its Jan. 30-31 policy meeting. Markets expect the central bank to keep interest rates on hold this month, easing bets it will cut rates at its March meeting. Futures markets on Friday priced in about a 62% chance that the Fed would cut interest rates by 25 basis points in March, up from about 73% a week ago, according to CME’s FedWatch tool. Still, stocks have historically responded well to interest rate cuts. Over the past 12 easing cycles since 1970, the S&P 500 index has tended to rise in the six to seven months after the first rate cut, gaining an average of about 12%, according to Ned Davis Research.
Keith Lerner, co-chief investment officer at Trust Advisory Services, said in a recent note that the bar for positive surprises has been raised, and he expects there will be a “digging period” after a strong market. He said there was. But he still believes the stock is likely to rise in 2024.
“We hold firm to the underlying positive market trends and be prepared to use pullbacks as opportunities,” Lerner said.
(Reporting by Louis Krauskopf; Editing by Ira Iosebashvili, David Gregorio and Leslie Adler)
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