The S&P 500 has exhibited an impressive 9% surge in value since late October, propelled by signs of cooling inflation that have instilled optimism regarding the Federal Reserve’s potential pause in interest rate hikes.
Year-to-date, the index has achieved nearly 18%, positioning itself within 2% of its peak in July and cooling inflation helps the S&P 500 index to post a meaningful recovery.
Higher yields and the presidential election may pose a challenge to the uptrend and the 2024 forecast seems bearish, and the current gains are corrective.
In the imminent weeks, investor confidence will be pivotal in determining whether the market attains a fresh annual peak, a mere 6% above the S&P 500’s January 2022 closing.
This trajectory hinges on investor belief in the viability of a “soft landing,” where the Fed combats inflation without hindering economic expansion. Despite the economy’s resilience under tightened monetary policy, certain job creation and consumer demand indicators have displayed modest weakness.
Concerns about a potential “soft landing” leading to an economic recession persist, exacerbated by the Federal Reserve’s shift from Quantitative Easing to Quantitative Tightening, selling approximately $90 billion monthly.
Challenges persist, marked by elevated treasury yields and high valuations. However, the potential seasonal effects could complement these challenges, fostering upward market movement. Noteworthy companies like Apple, Microsoft, Alphabet, and Tesla have reported minor earnings revisions since mid-May. At the same time, Meta and Nvidia have experienced positive adjustments, particularly in earnings estimates for fiscal years 2024 and 2025.
As we approach the year-end closing of 2023 amidst high interest rates, energy sector volatility, and geopolitical complexities in Ukraine and the Middle East, along with the rapid evolution of artificial intelligence, projections suggest a positive S&P return of +9%, including dividends. This aligns with the historical performance of the Standard & Poor’s 500 Index.
Looking forward to the 2024 Presidential election year, fiscal restraint seems unlikely, potentially resulting in a budget close to $2 trillion. Valuation considerations, including a 2024 SPY Dividend of $7.15 and a long-term GDP growth rate of 4%, suggest a fair value of $246 according to the CAPE index or the Gordon Model.
Saqib Iqbal, a financial markets analyst at Trading.Biz, said, “Despite prevailing bullish sentiments anticipating accelerated growth and profitability, contrary to historical norms, certain positive indicators such as AI and lower inflation are offset by challenges like tighter credit markets and geopolitical uncertainties.
“Absent major events addressing conflicts in the Middle East and Ukraine, accelerating AI-driven productivity, successful inflation control, or increased U.S. oil production, the likelihood of the market ending 2024 above 2023 appears limited.”
While the precise impact is challenging to measure, the outcome of the 2024 presidential election will undoubtedly shape market dynamics.