By John Lau
January 2, 2024 – What a difference a year makes.
At this time last year, the S&P 500 had just logged its worst annual performance since the financial crisis, the Fed was in the midst of the most aggressive rate hike campaign in decades, inflation was above 6% and concerns about an imminent recession were pervasive across Wall Street.
2023’s markets were driven primarily by the dual influences of (1) Artificial Intelligence (AI) enthusiasm and (2) rate cut expectations. The Nasdaq 100 massively outperformed the other major stock indices, while the S&P 500 also logged a substantial gain thanks mostly to the large weighting of technology stocks in the index. The less tech-stock-sensitive Dow Industrials and Russell 2000 relatively underperformed the Nasdaq and S&P 500. Notably, the index performance for the full year 2023 was the opposite of 2022, where we saw the Nasdaq and small caps decline substantially more than the S&P 500 and Down Jones Industrial Average.
As we begin 2024, the market outlook couldn’t be much more positive. The Fed is done with rate hikes and cuts are on the way, likely in early 2024. Economic growth has proven more resilient than most could have expected and fears of a recession are all but dead. Inflation dropped substantially in 2023 and is not far from the Fed’s target while corporate earnings growth is expected to resume in the coming year.
Undoubtedly, that’s a more positive environment for investors compared to the start of 2023, but just like overly pessimistic forecasts for 2023 proved incorrect, as we look ahead to 2024, we must guard against complacency because at current levels both stocks and bonds have priced in a lot of positives in the new year.
The S&P 500 is starting 2024 trading at a very lofty 19.5X valuation which, in my view, is based on several key, positive assumptions about critical market influences in the coming year. And how reality matches up with those assumptions will determine whether stocks extend the rally (and the S&P 500 hits new highs and makes a run at 5,000) or gives back much of the Q4 Santa Claus rally. As such, I want to start 2024 clearly defining what I see to be the five most important assumptions investors are making right now, because it’s how these events occur vs. these assumptions, and not absolute values, that will determine if stocks and other assets rise or fall in Q1 and 2024.
Assumption 1: Fed cuts rate six times for 150 basis points of easing and a year-end fed funds rate below 4.0%. A key factor behind the S&P 500’s big Q4 rally was the assumption that the Fed was done with rate hikes and would be cutting rates early and aggressively in 2024. Why do I see this as a market assumption? Fed Funds futures. According to Fed Funds futures, there’s a 70%-ish probability the federal funds rate ends 2024 between 3.50% – 4.00%.
Assumption 2: No Economic Slowdown. Markets haven’t just priced in a soft landing, they’ve priced in effectively no economic slowdown as investors expect growth to remain resilient and inflation to decline — the often mentioned “immaculate disinflation,” a concept that’s possible, but to my knowledge has never actually happened. So why do I see this as a market assumption? The market multiple. The S&P 500 is trading at 19.5X the $245 expected S&P 500 earnings expectation. A 19.5X multiple is one that assumes zero economic slowdown (if markets were expecting a mild slowdown, a 17X-18X multiple would be more appropriate).
Assumption 3: Solid earnings growth. Markets are expecting above average earnings growth for the S&P 500 to help power further gains in stocks. Why do I see this as a market assumption? The consensus expectations for 2024 S&P 500 earnings per share are mostly between $245-$250. That’s nearly 10% higher than the expected $225 per share earnings for last year (2023), which points to very strong annual corporate earnings growth.
Assumption 4: No additional geopolitical turmoil. Despite the ongoing wars in Europe and the Middle East, the market is assuming no material increase in geopolitical turmoil. Why do I see this as a market assumption? Oil prices. If markets were nervous about geopolitics, Brent Crude prices would be solidly higher than the current $77/bbl. Oil prices in the high $80s to low $90s reflect elevated geopolitical concern while prices above $100/bbl reflect real worry. And finally…
Assumption 5: No domestic political chaos. 2024 is an election year in the U.S. The Republican front runner, Donald Trump, is facing a long list of various civil and criminal charges along with challenges to whether his name will be on the ballot in certain states. Meanwhile, there has been no long-term compromise on funding the government, so shutdown scares remain a real possibility. And that’s before we get into the heart of election season later this year. Why do I see this as a market assumption? Treasury yields. In my view, a 3.80%-ish yield on the 10-year Treasury does not reflect much domestic political angst. If markets become nervous about the U.S. political situation and/or fiscal situation in the U.S., the 10-year yield would be sharply higher than it is now (well above 4.00%, like we saw in the late summer/early fall).
Bottom line, these market assumptions aren’t necessarily wrong. Events could unfold the way the market currently expects. But these assumptions are aggressively optimistic, and it is how events unfold versus these expectations that will determine how stocks and bonds trade to start the year.
While undoubtedly the outlook for markets is more positive this year than it was last year, we should not allow that to breed a sense of complacency because as the past several years have shown, markets and the economy rarely behave according to Wall Street’s expectations.
As such, while we are prepared for the positive outcome currently expected by investors, we are also focused on managing both risks and return potential. At Robertson Stephens, we understand the opportunities and risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even intense volatility is unlikely to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
We thank you for your ongoing confidence and trust and please rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
Sincerely,
John Lau, CPA, CFP®
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
AI Enthusiasm and Rate Cut Expectations Power Stocks Higher in 2023
By John Lau
January 2, 2024 – What a difference a year makes.
At this time last year, the S&P 500 had just logged its worst annual performance since the financial crisis, the Fed was in the midst of the most aggressive rate hike campaign in decades, inflation was above 6% and concerns about an imminent recession were pervasive across Wall Street.
2023’s markets were driven primarily by the dual influences of (1) Artificial Intelligence (AI) enthusiasm and (2) rate cut expectations. The Nasdaq 100 massively outperformed the other major stock indices, while the S&P 500 also logged a substantial gain thanks mostly to the large weighting of technology stocks in the index. The less tech-stock-sensitive Dow Industrials and Russell 2000 relatively underperformed the Nasdaq and S&P 500. Notably, the index performance for the full year 2023 was the opposite of 2022, where we saw the Nasdaq and small caps decline substantially more than the S&P 500 and Down Jones Industrial Average.
As we begin 2024, the market outlook couldn’t be much more positive. The Fed is done with rate hikes and cuts are on the way, likely in early 2024. Economic growth has proven more resilient than most could have expected and fears of a recession are all but dead. Inflation dropped substantially in 2023 and is not far from the Fed’s target while corporate earnings growth is expected to resume in the coming year.
Undoubtedly, that’s a more positive environment for investors compared to the start of 2023, but just like overly pessimistic forecasts for 2023 proved incorrect, as we look ahead to 2024, we must guard against complacency because at current levels both stocks and bonds have priced in a lot of positives in the new year.
The S&P 500 is starting 2024 trading at a very lofty 19.5X valuation which, in my view, is based on several key, positive assumptions about critical market influences in the coming year. And how reality matches up with those assumptions will determine whether stocks extend the rally (and the S&P 500 hits new highs and makes a run at 5,000) or gives back much of the Q4 Santa Claus rally. As such, I want to start 2024 clearly defining what I see to be the five most important assumptions investors are making right now, because it’s how these events occur vs. these assumptions, and not absolute values, that will determine if stocks and other assets rise or fall in Q1 and 2024.
Assumption 1: Fed cuts rate six times for 150 basis points of easing and a year-end fed funds rate below 4.0%. A key factor behind the S&P 500’s big Q4 rally was the assumption that the Fed was done with rate hikes and would be cutting rates early and aggressively in 2024. Why do I see this as a market assumption? Fed Funds futures. According to Fed Funds futures, there’s a 70%-ish probability the federal funds rate ends 2024 between 3.50% – 4.00%.
Assumption 2: No Economic Slowdown. Markets haven’t just priced in a soft landing, they’ve priced in effectively no economic slowdown as investors expect growth to remain resilient and inflation to decline — the often mentioned “immaculate disinflation,” a concept that’s possible, but to my knowledge has never actually happened. So why do I see this as a market assumption? The market multiple. The S&P 500 is trading at 19.5X the $245 expected S&P 500 earnings expectation. A 19.5X multiple is one that assumes zero economic slowdown (if markets were expecting a mild slowdown, a 17X-18X multiple would be more appropriate).
Assumption 3: Solid earnings growth. Markets are expecting above average earnings growth for the S&P 500 to help power further gains in stocks. Why do I see this as a market assumption? The consensus expectations for 2024 S&P 500 earnings per share are mostly between $245-$250. That’s nearly 10% higher than the expected $225 per share earnings for last year (2023), which points to very strong annual corporate earnings growth.
Assumption 4: No additional geopolitical turmoil. Despite the ongoing wars in Europe and the Middle East, the market is assuming no material increase in geopolitical turmoil. Why do I see this as a market assumption? Oil prices. If markets were nervous about geopolitics, Brent Crude prices would be solidly higher than the current $77/bbl. Oil prices in the high $80s to low $90s reflect elevated geopolitical concern while prices above $100/bbl reflect real worry. And finally…
Assumption 5: No domestic political chaos. 2024 is an election year in the U.S. The Republican front runner, Donald Trump, is facing a long list of various civil and criminal charges along with challenges to whether his name will be on the ballot in certain states. Meanwhile, there has been no long-term compromise on funding the government, so shutdown scares remain a real possibility. And that’s before we get into the heart of election season later this year. Why do I see this as a market assumption? Treasury yields. In my view, a 3.80%-ish yield on the 10-year Treasury does not reflect much domestic political angst. If markets become nervous about the U.S. political situation and/or fiscal situation in the U.S., the 10-year yield would be sharply higher than it is now (well above 4.00%, like we saw in the late summer/early fall).
Bottom line, these market assumptions aren’t necessarily wrong. Events could unfold the way the market currently expects. But these assumptions are aggressively optimistic, and it is how events unfold versus these expectations that will determine how stocks and bonds trade to start the year.
While undoubtedly the outlook for markets is more positive this year than it was last year, we should not allow that to breed a sense of complacency because as the past several years have shown, markets and the economy rarely behave according to Wall Street’s expectations.
As such, while we are prepared for the positive outcome currently expected by investors, we are also focused on managing both risks and return potential. At Robertson Stephens, we understand the opportunities and risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even intense volatility is unlikely to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
We thank you for your ongoing confidence and trust and please rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
Sincerely,
John Lau, CPA, CFP®
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
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