The S&P 500 Index ($SPX) (SPY) is less than 0.5% away from posting a record high, although the Dow Jones Industrials ($DOWI) (DIA) and Nasdaq 100 ($IUXX) (QQQ) both posted record highs Wednesday. Stocks have rallied in recent months from growing speculation that the Federal Reserve will start lowering interest rates by mid-2024. However, the markets may have gotten ahead of themselves by pricing in earlier rate cuts than Fed projections, with swap markets fully pricing in a -25 bp Fed rate cut by the March 19-20 FOMC meeting.
Stocks rallied this year despite China’s struggling economy and a mid-year slump in regional U.S. bank stocks. Also, recession fears and a jump in T-note yields to a 16-year year high in October failed to keep the S&P 500 from rallying 24% this year. The key themes for the direction of stock prices next year will be Fed policy, the outlook for the economy, corporate earnings, Asia and Europe risks, and the November U.S. presidential election.
Strength in megacap technology stocks this year led the overall market higher. The seven largest U.S. technology stocks were responsible for 64% of the S&P 500’s rally this year through last week as the artificial intelligence craze took off. According to data compiled by Bloomberg Intelligence, the big seven megacap technology stocks are expected to post 22% earnings growth next year, twice the S&P 500’s advance. The key for next year will be how much of the stock gains are already factored into share prices, especially with mounting expectations for a soft landing.
Asian markets this year were mixed. China was a laggard this year as the Shanghai Composite ($CHSC) fell to a 1-1/2 year low last week as an expected economic rebound from the pandemic failed to materialize. Investors will watch the National People’s Congress meetings in early 2024 for clues on fiscal stimulus to revive China’s economy. On the other hand, Japan’s Nikkei Stock Index ($NKY) rallied to a 33-year high this year on the back of the BOJ’s ultra-loose policy and a weak yen. However, Japanese stocks in 2024 could face headwinds on expectations for the BOJ to exit its negative rate policy and begin raising interest rates.
The U.S. presidential election in November 2024 could also provide direction for stocks. An election year with a sitting president is historically a bullish scenario for U.S. stocks. According to the Stock Trader’s Almanac, the S&P 500 is averaging a gain of nearly 13% in those election years since 1949. When there’s an open field and no incumbent president, the S&P 500 averages a -1.5% loss for the year. One of the reasons stocks gain when incumbents run is that they typically implement new policies or push for lower taxes to boost the economy and sentiment ahead of the election.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
