3 Key Things to Watch for in the Stock Market

3 Key Things to Watch for in the Stock Market in 2024, According to Pros

A record-breaking stock market driven by hopes of multiple interest rate cuts in 2024 and momentum surrounding “Magnificent Seven” stocks like Nvidia (NVDA) and Apple (AAPL) is raising growing concerns among some on Wall Street Sustainability of the rally.

“This is what it looks like when 65% of fund managers underperform their benchmark. We have this huge year-end push,” Thomas Hayes, chairman of Great Hill Capital, said on Yahoo Finance Live (video above). “We have come a long way in a short period of time and now we agree that we need to make corrections in January and February. I think a lot of people are positioning for a 5% or 10% correction – that wouldn't be a surprise. “We're seeing some consolidation in January and February.”

Concern about the near-term market outlook is justified for several reasons.

On the one hand, history is on the side of those seeking a stock correction.

According to Trading.biz analyst Cory Mitchell, the S&P 500 has risen in January only 50% of the time in the last 20 years. This is the lowest value of all months.

Additionally, the S&P 500's average gain over the past two decades is just 0.1%. Mitchell points out that the increase reflects a strong January 2023, in which the S&P 500 rose nearly 7%.

Excluding this year, from 2003 to 2022, January returned an average of -0.4% and only saw an increase in 9 out of 20 years (45%).

And second, investors need to deal with early government-related risks.

HSBC strategist Jose Rasco tells Yahoo Finance Live that there are two potential headwinds coming out of Washington as the year begins: the start of the 2024 election process and another fight to avert a government shutdown.

Of course, there are a variety of elements that market experts will continue to keep an eye on beyond January in 2024.

Here are three in particular shared with Yahoo Finance.

Be complacent at your own risk, professionals generally warn.

Steve Sosnick quote cardSteve Sosnick quote card

Steve Sosnick quote card

1. Watch the earnings and the resulting economic news

Tom Essaye, founder of Sevens Report Research: “I agree with the timing [rate] Cuts are a big issue that people are focused on, but there are two others that I think are just as important.

The story goes on

Firstly, it's about income. The reports haven't been good lately, and if disinflation becomes a headwind for corporate earnings, that could be a surprise in early 2024 as markets have priced in solid earnings growth in 2024.

Second, what happens if the downturn is worse than feared? For anyone who has experienced previous Fed rate cutting cycles, they typically don't end well for stocks. Yes, it is possible that this time will be different, and I agree that the pandemic presents unique circumstances, but complacency over a gradual slowdown is something we need to keep in mind as we enter the new year.”

2. Will the Magnificent Seven continue to lead the market?

Keith LernerTruist Co-Chief Investment Officer: “Markets continue the unfolding rally story versus the Magnificent 7 theme. Market capitalization relative to equal-weight and small-cap stocks (the latter has been improving) is worth keeping an eye on.”

That has implications for the success of active managers, who have had a difficult year… but over the last three months, more than 50% of stocks in the S&P 500 have now outperformed the index.

The dominance or lack of technology dominance has implications for investments in general. Technology is a much larger allocation in large caps compared to small caps, and there is much more technology in the US than in Europe…so the fate of technology has far-reaching implications.”

3. Decide who is right in the markets

Steve SosnickChief Strategist at Interactive Brokers: “For me, the most important question we need to address is who is right: equity investors expecting a soft landing that will enable solid earnings growth, or bond markets that imply something worse?

Let's assume that the Fed has indeed announced a policy change and that the battle against inflation, if not completely won, is all but over. So if the economy is doing well, two to four rate cuts seem appropriate. Then why do Fed Funds futures expect six rate cuts? If the Fed has to cut interest rates six times – in an election year, mind you – the reason for doing so would not be good. Also keep in mind that there is still about a 40 to 50 basis point inversion between two-year and 10-year bond yields. This is a screaming hard landing. It doesn't help that the leading economic indicators have been below zero for over a year.

So the markets will have to sort this out in the next few months. If the landing is actually very soft, interest rate expectations will have to rise, which would counteract valuations. If the landing is hard, it will be difficult to justify the priced-in earnings growth of around 10%. If a Goldilocks scenario does indeed play out, the current rally may continue unabated. When we are either too hot or too cold, the current “everything rally” needs to take a breather (or more).”

Brian Sozzi is Editor-in-Chief of Yahoo Finance. Follow Sozzi on Twitter/X @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email [email protected].

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