As investors get ready to ring in the new year, they have to be excited about Wall Street's performance in 2023. The icon Dow Jones Industrial Average (^DJI -0.05%) recently climbed to a record high with the benchmark S&P 500 (^GSPC -0.28%) and innovation-driven Nasdaq Composite (^IXIC -0.56%) rose 25% and 44% year to date through the closing bell on December 28th.
But it's not about where Wall Street is, it's about where the stock market goes next. If there was such a thing as a perfect forecasting tool, everyone would use it. Unfortunately, this is not the case, which means the best we can do as investors is to use a combination of historical, macroeconomic and company-specific data, as well as our experience, to make predictions about the future.
What follows are 10 stock market predictions — including macro forecasts that can impact stock performance — for 2024.
Image source: Getty Images.
1. The US economy will slip into a recession
First of all, the most anticipated recession in U.S. history will finally take shape in the new year.
The Conference Board Leading Economic Index (LEI), which consists of 10 inputs and attempts to anticipate turning points in the business cycle, has fallen for 19 consecutive months. With the exception of a 22-month decline from 1973 to 1975 and a 24-month slump during the Great Depression, we have never seen a clearer sign that an economic slowdown is on the way.
The pursuit of money also presents a potentially frightening story for Wall Street, at least in the short term. Commercial bank lending has declined since mid-February, suggesting banks are deliberately tightening their lending standards.
Meanwhile, the M2 money supply is falling significantly for the first time since the Great Depression. Less money available for transactions has historically been a telltale sign that an economic downturn is imminent.
2. The bear market returns in 2024
Although the U.S. economy and the stock market are not closely related, a downturn in the economy tends to negatively impact corporate profits. History tells us that about two-thirds of the declines in the S&P 500 since the start of the Great Depression in September 1929 occurred after, rather than before, the declaration of a recession. In other words, if (keyword!) a recession were to occur, a bear market in stocks would likely follow.
S&P 500 Shiller CAPE Ratio data from YCharts.
It should also be remembered that stocks are not cheap. The S&P 500's Shiller price-to-earnings ratio (also known as the “cyclically adjusted price-to-earnings ratio” or “CAPE ratio”) ended December 28th at 32.36. That's about 90% more than the average value at the time of 17.07 – tested for 154 years.
Additionally, there have only been six instances since 1870 where the S&P 500's Shiller P/E ratio has been above 30. After the previous five occasions, the broader market lost between 20% and 89% of its value. While the Shiller P/E ratio is not a timing tool, it does suggest that extended periods of premium valuations are not well tolerated by Wall Street.
3. The second-longest yield curve inversion on record will end
The yield curve, a chart that plots the yields of various Treasury bonds relative to their maturity dates, has often been an indication of what's to come for the U.S. economy and the U.S. stock market.
The US yield curve (10 years minus 3 months) has now been inverted for 427 consecutive days, the second longest trend in history. The longest inversion ever will likely occur in February 2024. pic.twitter.com/l1q7cVMwSx
– Charlie Bilello (@charliebilello) December 27, 2023
For the last 428 calendar days (as of December 28), the yield curve comparing the 10-year Treasury bond to the three-month Treasury bond has been inverted. This means that shorter-dated debt securities (such as the three-month bill) have higher yields than longer-dated bonds. While a yield curve inversion is no guarantee that a U.S. recession is imminent, every recession since World War II has been preceded by an inversion.
Although the current inversion is likely to be the longest on record (currently 469 calendar days, set between November 1965 and March 1967), it is unlikely to last throughout the new year. With the country's central bank expected to begin a rate-cutting cycle, it would not be surprising to see the yield curve normalize by year-end.
4. One of Wall Street's most hated industries will thrive
When the U.S. Treasury yield curve inversion ends in 2024, companies with high interest rate sensitivity could benefit. This includes one of Wall Street's least popular industries: Mortgage Real Estate Investment Trusts (REITs).
Popular mortgage REITs like Annaly Capital Management (NLY -2.56%) and AGNC investment (AGNC -2.48%) make a living by borrowing money at low short-term lending rates and using that capital to purchase higher-yielding long-term assets like mortgage-backed securities (MBS). The greater the difference between the average return on assets minus the average borrowing rate (this difference is called the “net interest margin”), the more profitable a mortgage REIT can be.
Yield curve inversion has reduced the net interest margin for mortgage REITs and made short-term borrowing more expensive. But an end to this reversal, coupled with dovish monetary policy from the Fed, could absolutely make Annaly Capital Management and AGNC Investment shine in the eyes of income seekers.
Image source: Getty Images.
5. Core inflation will remain stubbornly high, if not rise again
Most investors will be excited to hear that the Federal Reserve is forecasting three interest rate cuts in 2024. When interest rates fall, companies are encouraged to borrow, which can accelerate hiring, spur acquisition activity, and encourage innovation.
But there is another side to this coin. More recently, the Fed has cut interest rates in response to slowing growth. The Bureau of Economic Analysis notes that U.S. gross domestic product rose a rapid 5.2% in the third quarter. With the country's central bank planning to cut interest rates in 2024, there is a risk that the inflation rate will accelerate again.
Core inflation, which removes volatile food and energy costs from the equation, could be particularly stubborn in 2024. A rapid rise in mortgage rates has virtually frozen the real estate market. Nothing short of a hard landing for the US economy is likely to bring core inflation down to the Fed's long-term target of 2%.
6. The artificial intelligence (AI) bubble is starting to burst
One of the key drivers driving the S&P 500 and Nasdaq Composite higher in 2023 is the rise of artificial intelligence (AI). AI, which involves using software and systems to handle tasks normally given to humans, could contribute nearly $16 trillion to the global economy by 2030, according to researchers at PwC.
However, history is not on the side of AI's continued success – at least in the short term. Every single investment trend of the last 30 years has gone through an initial bubble phase. While many of these trends have produced big winners in the long run, the Internet, business-to-business commerce, genomics, 3D printing, marijuana, blockchain technology and the metaverse are just a few of the much-hyped “newbies.” Trends” that were initially not given enough time to mature.
The potential bubble-bursting event for AI could come from Nvidia (NVDA), which has established itself as the infrastructure backbone of AI-accelerated data centers. The shortage of graphics processing units (GPUs) has caused Nvidia's pricing power to skyrocket on its A100 and H100 GPUs in 2023. However, as production expands in the new year and competition increases, Nvidia's pricing power and gross margin are likely to take a hit.
7. Microsoft will overtake Apple to become the most valuable publicly traded company
With a few exceptions in the last decade, tech stocks Apple (AAPL -0.54%) was the world's largest publicly traded company by market capitalization. Apple's innovation has been the driving force behind its success. It remains the leading smartphone company in the U.S. by market share and its subscription services segment is evolving rapidly.
But overall, Apple's growth engine has stalled. All of the company's physical products experienced declines in sales in fiscal year 2023 (ended September 30, 2023). Although a stock buyback program worth more than $600 billion since the start of 2013 has helped boost the company's earnings per share, it's no longer the growth story it once was.
Since Apple is failing in terms of growth, so be it Microsoft (MSFT 0.20%), which is poised to rise to the top of the pedestal. According to Canalys, Microsoft Azure accounted for 25% of global cloud infrastructure services spending in the third quarter. The company also benefits from ample cash flow from its legacy businesses (e.g. Windows and Office) and its steady stream of acquisitions. Microsoft has the catalysts necessary to become the most valuable publicly traded company in the world in 2024.
8. Tesla will fall below $100 per share
In keeping with the theme of Wall Street's most important and widely held companies, I fully expect the world's largest electric vehicle (EV) manufacturer by market capitalization Tesla (TSLA -1.86%), fall below $100 per share in the new year. For comparison, Tesla shares closed at about $253 with one day of trading left in 2023.
Tesla's pricing strategy may be a big red flag. During the company's annual shareholder meeting in May, CEO Elon Musk noted that Tesla's pricing strategy is based on demand. As the company priced the Model 3, S models more than half a dozen times in 2023, Tesla's once-superior operating margin is now on par with the automotive industry average.
In addition, Elon Musk continues to pose a tangible risk to Tesla shareholders. Although he is a visionary, he often overpromises and underdelivers when it comes to new innovations. Although Tesla is valued as a jack-of-all-trades in the energy and automotive sectors, the company generates the majority of its profits from selling and leasing electric vehicles (in the automotive industry, profits are typically in the single digits) and relies on unsustainable sources of income for a significant percentage of his profits.
^SPXUS data from YCharts.
9. Utilities will be among the top 3 sectors in 2024
Next up is the forecast that the worst-performing sector for the S&P 500 in 2023 will be one of the three best-performing sectors in the new year. I'm talking about utilities.
Most investors turn to utility stocks because of their low volatility, market-leading dividends, and predictable operating performance. But as Treasury yields soared in response to the Fed's aggressive rate-hiking cycle, investors turned away from utilities and opted to buy Treasuries instead. This resulted in a very bad year for a traditionally safe sector.
But with the central bank targeting a rate cut in 2024, utilities are back on the radar as potential outperformers. Utilities' dividend yields are likely to become more attractive as government bond yields fall. Additionally, access to cheaper lending rates can boost acquisitions and large-scale projects that ultimately increase the growth rates of the sector's key players – I'm looking at you, NextEra Energy.
10. A short-lived “crisis” will take shape
Last but not least, an unforeseen event is predicted to weigh on Wall Street, at least temporarily.
Almost every year there is an unexpected event that has devastating effects on the Dow, the S&P 500 and the Nasdaq Composite. In 2023, for example, the short-lived regional banking crisis threatened the fabric of the financial system. The collapse of three major banks sparked unrest across the financial sector, causing investors to question the solvency of rock-solid banking institutions.
In 2022, the Russian invasion of Ukraine was the turbulent event of the year. The geopolitical impact of the Russian invasion created a short-term malaise for stocks.
Although it is impossible to predict what short-term crisis might unfold in 2024, the best guess I can suggest is a collapse in housing prices or perhaps a wave of auto loan defaults.
Only time will tell whether this or any of these predictions will come true in the new year.