Investors face many unanswered questions about what will drive markets in the year ahead. Our annual Top 10 Investor Themes is intended to help investors focus on the key forces we expect to shape the path forward for markets in the new year.
10. China’s continued recovery
China’s GDP growth, retail sales and real household income are healthy, while the property sector is undergoing a painful deleveraging, causing consumer demand and confidence to weaken. Fiscal and monetary policies are increasingly accommodative to address these issues, leading us to believe China’s economy is cyclically weak, but not in a structural crisis.
9. Fiscal deficit pressure
Financing higher levels of U.S. debt at a higher cost will necessitate additional budgetary constraints by the federal government. The U.S. fiscal deficit and its debt sustainability might not be addressed in 2024 given it is an election year, but these issues are becoming a more pressing endeavor.
8. The AI growth story
The speed of artificial intelligence (AI) innovation and adoption is accelerating. We expect to see productivity enhancements for the users, and earnings growth and profit margin expansion for firms adapting to this technological paradigm throughout the year.
7. Global election cycle outcomes
Over 35% of the world’s GDP and nearly 80% of the world’s market cap will face major election cycles in 2024, including the United States. Financial markets around the globe will be paying close attention to these election outcomes while navigating possible political volatility. Despite election noise, the S&P 500® has generally posted good results during U.S. election years.
6. Yield curve normalization
The question is not if but when the Federal Reserve (Fed) begins to cut rates. We expect longer yields to be pressured higher in 2024 based on continued economic growth, investor expectations for higher yields and drivers of supply and demand. Although volatility is likely to continue, we expect to see a dis-inversion of the yield curve in 2024.
5. Inflation fading from the foreground
Although inflation has moderated from peak levels in 2022, driven by falling goods, food and energy prices, it continues to be offset by “stickier” services inflation. Given consumers’ resilience in 2023, we expect inflation to continue to moderate at a slow pace toward the Fed’s 2% target in the coming year.
4. Testing the “unbreakable” U.S. consumer and labor market
The ongoing strength of the U.S. labor market has kept consumers resilient and the economy powering ahead. With the U.S. consumer driving nearly 70% of GDP, the outcome for the economy and earnings relies heavily on consumers’ ability to withstand the cumulative effects of inflation, tighter lending standards, dwindling savings rates and rising credit balances.
3. Diverging global central bank policies
Divergence is a key theme for major central banks in 2024. The Fed is turning dovish; the European Central Bank and the Bank of England are maintaining their tightening bias; the Bank of Japan is keeping everyone guessing about if or when it will pivot away from ultra-loose policy; and China remains accommodative. Against this backdrop, the direction of the U.S. dollar will be largely dependent on the path of short-term interest rate differentials.
2. Earnings expectations return to reality
With leading economic indicators still pointing toward a contraction this year, we believe the 2024 S&P 500 earnings growth estimate of 11.7% remains overly optimistic and does not account for additional risks. Rather, it is priced for the elusive “soft landing,” in which the Fed successfully brings inflation down without causing a major disruption to the economy and allows corporate earnings to reaccelerate significantly.
1. “Slower-for-longer” economic growth
We expect 2024 to be a year of “slower-for-longer” economic growth as the global business cycle continues to decelerate. Following aggressive central bank tightening in recent years, we believe the effects are finally catching up to business and consumer activity.
2024 Song of the Year
“(I Can’t Get No) Satisfaction” by the Rolling Stones
As fans gear up for the Rolling Stones’ 2024 North American tour, our song of the year is none other than the 1965 rock anthem “(I Can’t Get No) Satisfaction.” Lately it seems investors can’t get no satisfaction either, as it’s difficult to recall a time when we started a new year with so many unanswered questions that have a direct bearing on the path forward for markets, particularly on the heels of such an impressive rally in 2023. As we outlined in our recent 2024 Investment Strategy Outlook publication, Coming into Focus, the near-term fate of many asset classes hinges on resolving key questions, including:
- Has the Fed effectively won the inflation battle?
- Will earnings growth reaccelerate?
- Will consumer strength continue?
Is time on our side?! We expect investors will begin to get the satisfaction they so badly desire in 2024. Consider giving “(I Can’t Get No) Satisfaction” a listen, as we believe the song perfectly captures the #animalspirits of the times kicking off 2024.
