Anthony Saglimbene, Chief Market Strategist – Ameriprise Financial
After several years of extremes due to the pandemic, global uncertainty and other events of scale, U.S. financial conditions will likely continue to normalize in 2024, meaning new opportunities for investors.
However, investors will want to maintain a pragmatic and flexible investment approach at the start of 2024 and lean into diversification strategies.
Here’s our market outlook for 2024:
1. Slowing economic conditions may bring long-term opportunities
While odds of a recession continue to be low, the delayed effects of prior aggressive rate hikes, elevated core inflation and higher borrowing costs leave the investment landscape fragile and susceptible to risk if the U.S. is not able to avoid a shallow downturn. That said, we believe interest rate pressures should moderate, U.S. consumer and business balance sheets should remain firm and several areas of the stock market look attractive.
What does this scenario mean for the markets and investors? In our view, investors should maintain a high-quality bias within their portfolios. Avoid aggressively tilting portfolios into an overly offensive or defensive position at the start of the year. Assuming the U.S. economy avoids a recession, areas like U.S. small caps, cyclicals, dividend growth strategies and other laggards of 2023 may outperform. International stocks may also benefit from a stable growth environment. However, if the U.S. economy does slip into a brief downturn, defensive sectors that underperformed in 2023 may outperform for a period.
2. Election year anxiety may spur noise in the market
2024 is a U.S. presidential election year, which will come with outsized noise later in the year. Investors should know that a continuation of divided government may be a welcomed outcome, at least over the short term, in our view. Regardless of the upcoming election result, fiscal policy in 2024 should remain status quo — which could be market-friendly.
What does this scenario mean for the markets and investors? If you have any concerns about how the markets may react to the upcoming election, reach out to your Ameriprise financial advisor. They can show you how your portfolio was built to weather different market cycles and political cycles.
3. Improving interest rates and easing monetary policy could be tailwind for stocks
In our view, the largest opportunities and risks for asset prices in 2024 are how interest rates will settle out throughout the year and the environment that ultimately drives changes in monetary policy. Most expect global central banks to ease restrictive policies as the year progresses. However, the reasons behind potential interest rate cuts and the economic environment driving those cuts are what will most likely influence how asset prices respond as the year evolves.
What does this scenario mean for the markets and investors? Less restrictive monetary policy that is gradual and supported by stable economic conditions could see stock prices melt higher in 2024, helping participation broaden. But an elevated rate environment that causes growth to suddenly slow more than expected, prompting policymakers to aggressively ease, could see stock prices suffer for a brief period. Sudden and aggressive cuts in the Fed funds rate are usually accompanied by an event trigger, like in the early 2000s, the Financial Crisis and the pandemic. Hence, how rates ease (assuming inflation is no longer a problem in 2024) may carry outsized weight in determining if stock prices can continue to rally or if unexpected air pockets create some turbulence along the way. Our base case scenario assumes gradual Fed rate cuts in 2024, with stock prices moving higher as earnings conditions improve for a broader set of industries.
Sources: FactSet and American Enterprise Investment Services, Inc. Data as of Dec. 8, 2023.
These figures are shown for illustrative purposes only and are not guaranteed. Past performance is not a guarantee of future results.
4. Higher corporate profits could support higher stock prices
After several quarters of declining year-over-year profit growth, analysts currently expect corporate profits to march higher over the coming quarters. In our view, stable economic conditions warrant a more positive outlook on corporate earnings in 2024 should a U.S. recession be avoided.
What does this scenario mean for the markets and investors? Corporate profit trends will likely play a critical influence on the direction of stock prices in 2024. We see corporate profits growing by +8% to +10% over 2023 levels, driven by slowing (but positive) global growth, strong expense management and a normalized supply/demand environment.
Sources: FactSet and American Enterprise Investment Services, Inc. Data as of Dec. 7, 2023.
This illustration is shown for illustrative purposes only and is not guaranteed.
Bottom line: What’s next for 2024?
In a world where growth remains positive, inflation is moderating back to normalized levels and interest rates are stabilizing and possibly even heading lower, stock and bond prices have an opportunity to perform well in 2024.
While risks of a shallow downturn remain present, the pressures of inflation and rapidly rising interest rates have run their course, in our view. Just as the sharp upswing in interest rates was a strong headwind for economic activity and financial market results in the last two years, we believe falling rates should offer solid support to business activity and financial market performance in the quarters ahead.
Start planning your 2024
As you formulate your own personal financial outlook for the coming year, consider reaching out to your Ameriprise financial advisor. They can help review your progress to your financial goals, plan for the unexpected and review your investment portfolio.