Tis the season for stock market predictions for the upcoming year.
Yes, it’s the holiday season. It’s a happy time of year, and consumers are in a better mood, generally, and this sentiment is not detached from the market. Santa Claus Rallies are real phenomena.
But lurking behind positive sentiment is apprehension, and optimism too about what next year brings. Of course, markets are markets, and what they will do next can never be certain. However, a few developments seem clear to me, and they are offered below.
Perhaps mid-year, or this time next year, I’ll revisit these stock market predictions and see what I got right and what I got wrong. Being right is nice, but revisiting why you were wrong is helpful in the long run because it can keep you from repeating the same mistakes.
Energy prices will increase in 2024. The convergence of several events will push most forms of energy higher. Primary among these is a colder winter in the Northern Hemisphere due to the effects of El Niño.
Further, however, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) will extend their production cuts.
A wildcard is that given colder Northern Hemisphere temperatures, Russia could experience a pipeline freeze that will destabilize oil markets and crimp production. A disruption in Russian production will spike oil prices to over $100 per barrel.
GDP growth will exceed Federal Reserve projections. Currently, the Fed is forecasting growth of 1.2% to 1.7%. This is low. Gross domestic product (GDP) growth is likely to exceed 2%. Some of this growth will come on the heels of artificial intelligence (AI).
I find all of the talk about AI sometimes obscures its real-world effects. Chief among these are productivity gains across all sectors of the economy, from industrial products to services to agriculture. AI is helping to generate goods and services more efficiently with lower costs, and this will have a material impact on gross domestic product.
Another push on GDP will be cuts in the federal funds rate which will increase borrowing and business investment.
The Fed will cut the federal funds rate to 3% in 2024. Currently, the rate is over 5.25%, but continued, favorable inflation trends combined with tepid GDP growth during the first half of 2024 will lead to rate cuts by the Fed. Further, these rate cuts will chiefly occur during the first half of the year.
The November election will crimp the Fed’s motivation to cut rates as a reduction in the fall during the countdown to November 5 will be viewed as partisan and undermine the Fed’s perceived independence.
Earnings momentum will continue in 2024. Earnings for the companies in the S&P 500 are estimated to grow about 2.3% in 2023, and forecasts for 2024 are about 11%. This forecast may be light.
As a side benefit, easier year-over-year comparisons will lift sentiment for equities and add to an expansion of price-to-earnings (P/E) ratios, often a green light for higher stock prices.
The Magnificent 7 will be driven by only six of its constituents. Apple (AAPL) will spend 2024 on the sidelines. Of course, Apple will remain one of the most important companies in the world, but I expect the stock will be range-bound in 2024. The reason is simple: There is no catalyst to jumpstart growth for the foreseeable future. Even the rumor mill is perilously thin with nothing firm on a time frame for a foldable phone, much less an Apple car.
Sales and earnings at Apple are off from last year, and flattish over 2021. Without a game-changing product to give a jolt to earnings, I expect little from the stock in 2024.
Tesla will rise, again. Tesla (TSLA) is on pace to roughly double in 2023 which begs the question about whether or not there’s any gas left in the tank, or more accurately, spark left in the battery.
The conflicting tides in the electric vehicle (EV) market – global imperatives versus EVs piling up on dealer lots – make the outlook for TSLA confusing. Still, I think Tesla shares will rise further in 2024.
Part of the argument rests with an expanding market, despite some choppiness right now. Not only is the market growing, but Tesla is well-positioned to take share from other EV manufacturers based on its design and technology leadership. Analyst estimates for full-year sales and earnings project growth of 21% and 22%, respectively.
Another catalyst is the Cybertruck. To be clear, Cybertruck sales will not make a material contribution to Tesla’s income statement in 2024. But 2025 estimates, which could include more material Cybertruck sales, will work their way into the 2024 outlook and could also act as a catalyst for the stock.
And the truck market isn’t much ado about nothing. It’s a large and highly profitable segment for vehicle manufacturers. In 2022, three of the five largest-selling vehicles in the United States were trucks. If the Cybertruck provides a meaningful entre to the truck market, Tesla may prove to be ascendant in the EV market.
America, trucks and Elon Musk, admittedly, make for a hearty brew of emotion, but for better or worse, emotion can drive stock prices, even if they are detached from fundamentals.
Inflation will fall further in 2024. Happily, prices will be coming down, and I suspect they will fall below the Fed’s 2% target. One of the primary reasons for this is that we import a lot of goods from China, and along with that, we are importing the deflation that is occurring in China right now.
Commodities, finished durable goods and consumer products from China are all falling in price putting downward pressure on prices in the U.S. Also, rents, which were an influential driver of recent inflation are cooling off.
Overall, as inflation slows, the greater the likelihood of the Fed reducing the federal funds rate. When that happens, there will likely be a huge relief rally. But whether or not that translates into positive market gains for 2024, I’m not ready to predict that. Markets are, after all, markets.
