It’s the last trading day of 2023, and it’s fair to say that the year has turned out better than most experts predicted. Now, of course, the experts are busy with their predictions for the coming year, including specific calls for U.S. stocks and other asset classes that will likely reach their sell-by date well before December 2024. While it’s still wise not to invest a lot of stocks in a single prediction (you might as well go from (before and try to guess who will win) the World Series next year), it can be useful to see the range of scenarios considered by market professionals. After all, at least one of them is probably close to reality, thanks to a combination of disciplined analytical reasoning and pure luck.
So what do the experts see? as they gaze into their crystal balls? Well, JPMorgan Chase isn’t expecting to drink champagne. Their call for the S&P 500 (SP500, SPX) at the end of 2024 is 4,200, a drop of about 12% – yes, a drop – from the December 28 close of 4,783. At the other end of the spectrum, Goldman Sachs (GS) predicts a market close of 5,100 within a year, which represents a net but not huge gain of 6.7 percent from yesterday’s close. According to the FactSet (MSDS) from the compilation of data from which these estimates come, the median estimate among pros is that the benchmark index of U.S. blue-chip stocks will post a gain of 6.0 percent next year. It’s a pretty safe call. Of course, a year ago these same pundits were predicting a tough 2023 for US stocks and look what we got instead: a nice little 25% gain thanks to a combination of no recession, AI madness and Jay Powell’s Christmas present from a Fed kingpin. on December 13.
We generally refrain from publishing precise numbers ourselves because, in our experience, even getting the fundamentals right (the economy, earnings, monetary policy) does not guarantee a predictable market outcome . And getting fundamentals right is notoriously difficult, as most experts have discovered in 2023 (see: The 2023 Recession, Inverted Yield Curve, etc.). However, what we think will matter a lot next year is company sales and profits. It may seem easy to say that “earnings will matter” – but most of the time, they don’t matter much from a stock price performance perspective; or they matter, but other things matter more to the collective mind of the market.
Next year, however, businesses will likely face two distinct challenges regarding their financial outlook. First, the economy is expected to grow at a considerably slower pace than the roughly 3% real GDP growth forecast for 2023. Slower end-user demand means lower sales volumes. Second, continued good news on slowing inflation means weaker pricing power for companies. When volume and price are lower, the logical result is… well, lower sales. Already, during the third quarter earnings season, we have seen consumer-oriented companies lower their forecasts in light of expected “macro uncertainty” – corporate profits reflect weaker consumer demand .
Sell-side analysts took note of the pessimistic forecasts. The consensus outlook for fourth-quarter earnings per share growth, according to FactSet, is 1.38 percent. This is down from the consensus forecast of 8.08% as of September 30, a considerable decline. Much will depend on the ability of companies to use productivity measures to improve their profit margins. Improving operating profit levels can offset weak revenue – but efficiency gains will have to come from somewhere. Maybe all of this year’s hype about AI can translate into tangible productivity – but that’s still more guesswork than clearly demonstrated use cases.
Income will therefore count. We leave you with this as a final observation.
In the meantime, we wish you all a very Happy New Year and a happy and healthy start to the year.
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Editor’s note: The summary bullet points in this article were chosen by the Seeking Alpha editors.