3 strategies for stock selection in 2024

Although we anticipate a more “normal” backdrop for stocks in 2024, markets are unlikely to take a linear path higher due to macro challenges such as slower economic growth, a presidential election year and inflation.

As you evaluate your approach to equities for the year ahead, here are three investing strategies to consider in consultation with your Ameriprise financial advisor:

1. A more panoramic 2024 

One of the key market themes for 2023 was the seemingly relentless investor enthusiasm for anything related to artificial intelligence (AI) in large-cap technology stocks. The result was an extremely narrow — and eye-popping — leadership for the S&P 500 Index in 2023. As we enter 2024, we anticipate the market’s headwinds to recede (with lower interest rates and a soft economic landing), potentially benefiting a broader set of companies and sectors, resulting in a more panoramic market leadership theme.

Broadening stock participation in 2024 could include areas of the market that were overshadowed by the AI tech rally last year, including bond proxy sectors (consumer staples, utilities and real estate) and small-cap stocks.

Bottom line: In a more “normal” economic environment, consider last year’s laggards, such as bond proxy sectors with solid valuations and attractive dividend yields, as well as the small-cap space for potential outperformance in 2024.

2. Dividend growth means more in 2024

Dividend strategies struggled in 2023 as cash investments offered an attractive, risk-free opportunity. However, we believe the prospects of a Fed rate cut and lingering inflationary pressures could reinforce the benefits of dividend-paying stocks in 2024. Historically, when equity market returns are modest, dividends are a more meaningful contributor to full-year total returns.

But remember, not all dividend-paying stocks are the same. We recommend focusing on dividend growth stocks rather than searching for higher yields. Focus on dividend growth companies with resilient business models supported by recurring revenues, significant economies of scale and solid free cash flow generation.

Bottom line: As the economy heads toward a “soft landing” and the equity market is potentially poised for a modest return, falling rates and rising dividend income streams could bode well for 2024 total returns.

3. Quality…with a twist

Given our expectations for lower interest rates and a slower-growth economy in 2024, focus on quality stocks (companies with high profitability, stable earnings and low debt) with the added ‘twist’ of recurring revenue or expected earnings rebound.

    • Recurring revenue: Companies with subscription-based or recurring revenue business models can generate relatively predictable growth and financial stability even during a slower economic expansion. Moreover, when volatility spikes, companies with recurring revenue can outperform their peers as more reliable cash flows offer stability amid market turbulence.

  • Earnings rebound: The unprecedented economic and market shocks of the past few years caused significant, albeit temporary, earnings instability across the entire economy, even among many high-quality companies. With consistency a cornerstone of quality, some companies fell out of favor despite maintaining leadership in other areas like competitive positioning and profitability. However, as the economic backdrop is expected to normalize after multiple years of significant distortion, we believe many of these firms are primed to display a resurgence in earnings power.

Bottom line: Two themes could drive outperformance in quality stocks in 2024: Recurring revenue and rebounding earnings. In a more “normal” economic environment, stocks with high recurring revenue may provide greater earnings predictability, while stocks that deliver above-market earnings per share (EPS) growth (in an environment where growth is scarce) could also provide solid returns.

Put these insights into action

Reach out to your Ameriprise financial advisor for guidance on how these themes for stock selection can help inform your investment strategy for 2024.