The “Magnificent Seven” stocks have led the market this year: Alphabet (GOOGL) -), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
“I think they will remain leaders next year,” said David Kostin, chief U.S. equity strategist at Goldman Sachs. “They have much faster revenue and earnings growth, stronger balance sheets, much greater cash reinvestment and higher margins than others.”
Experts are turning more bullish on the economy and the stock market for next year amid a widespread belief that the Federal Reserve has finished raising interest rates.
Goldman is a case in point.
The economy has achieved “remarkable feats” this year, with a “very strong” labor market and a substantial decline in inflation, Jan Hatzius, Goldman’s chief economist, said in a webinar. That has enabled the economy to withstand the Fed tightening.
The unemployment rate was 3.9% in October. Consumer prices rose 3.2% in the 12 months through October, and the Fed has boosted interest rates by 5.25 percentage points since March 2022.
Temporary imbalances of supply and demand during the covid pandemic have “normalized, allowing inflation to come down, with GDP growth at an OK pace,” Hatzius said. He expects economic growth of 2.4% for 2023 as a whole.
Similar economic growth in '24: Goldman
And you can expect “more of the same” next year, with GDP growth of 2.1%, about 1 percentage point above the consensus forecast, Hatzius said.
Again unemployment won’t rise much, and inflation will slide to a range of 2% to 2.5% by year-end 2024, he predicted.
Hatzius says that Federal Reserve rate increases are over and that the central bank will shift to “gradual cuts in 2024, probably not until the second half of the year.” The Fed will begin the reductions in the fourth quarter, Hatzius forecast.
The next most likely scenario is earlier rate cuts, which could happen if inflation falls faster to the Fed’s 2% target, or if the economy drops into recession, he said. Hatzius puts the chance of recession at 15% in the next 12 months.
As for the stock market, it has “moderate upside potential” next year, said strategist Kostin. He predicted the S&P 500 will end next year at 4,700, up about 5% from current levels.
‘Modest’ corporate-earnings increase: Goldman
He anticipates a “modest increase” in earnings growth: 5% in 2024 and 2025. Profit margins have stabilized and won’t expand much during that period, Kostin said.
Looking at valuations, the strategist said the S&P 500 is now trading at 18 times earnings, but on an equal-weighted value it’s only 14 times. The S&P 500 weights companies according to the size of their market capitalizations.
Regarding stock-selection strategies, Kostin’s “highest-conviction” recommendation is quality stocks. “Quality will likely do well in this environment, where investors aren’t necessarily convinced that economic growth will continue,” he said. Quality stocks are those with strong fundamentals.
Growth stocks also are a possibility, Hatzius said. “When earnings growth is modest, the market has rewarded companies growing at a faster pace.”
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