Amada Agati:  

Happy New Year, friends.

In this first edition of "Adding Alpha" for 2024, we highlight what's at the top of our wish list -- spoiler alert, it's an ex-Magnificent Seven earnings reacceleration that will be the key to forward progress for the markets this year.

This has become an annual tradition for us, challenging ourselves to determine what could be the single most important catalyst to drive markets higher in the new year and putting that at the top of our wish list.

Despite the headlines, most stocks did not have strong performance in 2023, even though the NASDAQ was up 45% and the S&P 500 was up 26%.

Driving the bulk of returns were of course the Magnificent Seven -- Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla, and Meta, all up a collective 90-plus percent.

The equally weighted S&P 500 was only up 13.8%, posting the biggest relative underperformance versus the S&P 500 since 1998. The median stock return was up only 9.7% and more than 150 large-cap stocks actually had negative returns last year.

While headline results indicate the S&P 500's earnings recession technically ended in the third quarter, after three straight quarters of negative growth, the overreliance on just the Magnificent Seven to deliver plus 4.8% growth in Q3 suggests there may actually be a decent amount of fundamental weakness lurking under the hood.

Removing the Magnificent Seven, the growth rate falls back into negative territory to the tune of about minus 2%.

We've also experienced an extended period of negative revisions heading into year-end, with the S&P 500 growth rate for Q4 expected to be just 1.6% now. Back in September, it was over 600 basis points higher.

So that's a huge decline and, ex-Magnificent Seven, the growth rate falls back to minus 6.7%. This is very narrow market leadership on full display.

Consensus still expects an impressive 11.5% growth for 2024, which just seems way too high and optimistic to us without support from a broader-based earnings reacceleration and participation from the remaining 493 stocks in the index. 75% of the return in the markets last year was driven by multiple expansion.

With the S&P 500 starting 2024 trading at 19 1/2 times the forward PE -- it's 18.8 times ex-Magnificent Seven for those keeping score at home -- there's a lot of pressure to deliver results against a backdrop of already very high expectations.

The good news as we ring in the new year is that for the first time since the pandemic began we expect monetary policy to play a smaller role in shaping markets in the months ahead and more of a return to the fundamentals mattering again.

The bad news is, well, the fundamentals mattering again, because we aren't seeing enough broad-based fundamental strength to keep this rally moving in literally the straight-up fashion we saw to close out 2023 -- well, not yet anyway.

It's why we put the earnings reacceleration at the top of our wish list. With this somewhat fragile dynamic in mind, it helps frame what we think the shape of the returns profile for the year might ultimately look like.

Every year we get asked the same question: Is it going to be a V? Is it going to be a U? Is it going to be an I? Straight up? Or straight down? Is it a square root? Or even a bathtub shape? We actually think this year it's likely to be more of a chevron pattern kind of a year.

Any Missoni fashion fans out there? It's likely to be a zigzaggy kind of year, eking out modest positive returns by year-end as the Fed finally gets out of the way and we gain clarity on a number of long-standing issues for investors: inflation, recession, interest rates, consumer spending and consumer health, politics, among others. But it's going to be an awful lot of zigzags along the way.

Buckle up.