Stock Market Outlook In 2024 (2024)

Despite flat GDP growth throughout the year, the impact of slowing inflation and a view that interest rates have peaked saw Australia’s stock market rally in late 2023. The S&P/ASX 200 gained 7.8% throughout 2023, with top-performing stocks including Neuren Pharmaceuticals, Emerald Resources, and James Hardie.

Global markets performed better, delivering a return of 21.3% in 2023 (over 26% for the US market) according to a January update from Lazard Asset Management, with a strong resurgence in equity buying and a broadening of participating stocks in the last two months of the year. US stocks finished strongly, largely thanks to speculation that the Federal Reserve could begin cutting rates in early 2024.

Concentrated investing in leading tech stocks was one of the biggest stories. Goldman Sachs found the Magnificent Seven (Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia) added 71% of the gains experienced by the S&P 500 index, while the remaining stocks contributed gains of just 6%.

Morningstar’s chief market strategist, Dave Sekera, said headwinds that drove the US market lower in 2022 started to subside and reverse course in 2023, with stronger-than-expected economic growth (as evidenced by the US’ GDP surging to 5.2% in the third quarter) and downward trending inflation.

“Initially, the markets fought their way through bank failures in March 2023 and then advanced higher from the rise of the ‘Magnificent Seven’ and artificial intelligence in spring and Summer,” Sekera said.

“However, in October, in a final spurt higher, the yield on the 10-year Treasury rapidly approached 5% and stock markets sold off in sympathy.

“Yet, that final surge in long-term interest rates was short lived and stocks quickly rebounded in November from an early Santa Claus rally and continued to rise as the Fed began to shift its messaging towards a more accommodative monetary policy in 2024.”

Australian economists have predicted a rate-cutting cycle will kick-off from late 2024, provided inflation continues to recede. The monthly inflation indicator for November puts inflation at 4.3%, down from 4.9% in October—but the quarterly CPI figure set to be released by the ABS at the end of January will reveal more about Christmas spending.

Head of Australian equities at Tyndall AM (Asset Management), Brad Potter, predicted the anticipated normalisation of Australian interest rates—albeit at still-elevated levels—would swing ASX investors’ focus back to company-specific pros and cons, and value investing.

“Following years of negative real interest rates resulting in macro assumptions overwhelming company-specific factors, we are now in a new period where fundamental analysis will dominate,” he noted.

He said Tyndall AM’s portfolio remained overweight in the general insurance sector as claims inflation softens, and was constructive on the outlook for oil and gas given resilient demand for these resources despite growth in renewable energy and electric vehicle uptake.

Potter highlighted the telecommunications sector as a core defensive exposure for the year ahead due to price increases in line with inflation and expanding margins.

Favourable inflation prints across the US, UK and Europe bode well, despite modest forecast economic growth. Concerns remain about China’s debt and precarious real estate industry, as well as the impact on commodity prices and supply chains due to ongoing geopolitical conflicts, such as the Israeli-Palestinian war.

Morningstar’s Dave Sekera said the world’s largest economy—the US—would continue to feel the toll of relatively high rates and reduced credit availability, but would probably avoid recession.

“We currently forecast that the rate of economic growth in the US will slow sequentially each quarter until bottoming out in the third quarter of 2024. We expect economic growth will begin to rebound in (fourth quarter 2024) at 1.0% and continue to expand into 2025,” Sekera said.

Sekera said investors had begun to shift away from overvalued and overextended areas, and would continue to reallocate into areas that have lagged the market and remain undervalued. This includes value stocks and small-caps.

He said the outsized returns from the Magnificent Seven were behind us, with only one stock (Alphabet) remaining undervalued in Morningstar’s books.

“In order for the rally to continue into 2024, we expect further gains will broaden out across the market.”

Sekera said the next test for the US equities markets would come in February and March, as companies report fourth-quarter earnings—which brings a concern that management teams might provide conservative guidance to “lower the bar for 2024”.

“This lowered guidance could lead to a short-term pullback, however, if this occurs, we would view such a pullback as an opportune time to move to an overweight position in equities from a market weight,” he said.

In order for the rally to continue into 2024, we expect further gains will broaden out across the market

In terms of a stocks portfolio allocation in 2024, Sekera is taking:

• An overweight position in value stocks, “as they are trading at a 12% discount to fair value”.
• A market weight position in growth stocks, which are trading in line with the broad market discount.
• Underweight position in core stocks (in favour of value stocks), given they’re trading at a 4% premium to fair value.

By sector, Sekera said:

• Communications was the most undervalued. For instance, Alphabet (GOOGL) was trading at a 16% discount to fair value. “However, we also see a significant amount of value in traditional communications providers such as AT&T (T) and Verizon (VZ) which are rated 5-stars and offer high dividend yields near 7%.”
• Real Estate offers significant value and should benefit from declining rates. Two stocks noted by Sekera were Realty Income (O) and Healthpeak Properties (PEAK). “Realty Income trades at about a 25% discount to fair value and offers an attractive 5.4% dividend yield,” he said. “At an approximate 40% discount to our fair value estimate, we also view HealthPeak as an attractive opportunity.”
• The Utility sector would benefit from the transition to renewable energy as well as investments in strengthening infrastructure. Sekera said two undervalued stocks in the sector were Entergy (ETR)—which was trading at a 15% discount to fair value and yielding 4.4%—and NextEra Energy (NEE), which was trading at a 17% discount to fair value and yielding 3.1%.

In its 2024 US Equity Outlook report, Goldman Sachs said “fading enthusiasm in AI” could lead the Magnificent Seven stocks to underperform in 2024, particularly if other stocks “catch-up” in an economy more conducive to growth.

Morningstar thinks the tech sector is overvalued, according to Sekera, with big names like Apple (AAPL) and IBM (IBM) trading well above their fair values—yet he said some AI-adjacent stocks offer opportunities.

“For example, many companies do not have the expertise and financial wherewithal to develop and train their own artificial intelligence and will need to hire consultants,” he said.

“AI requires a significant amount of data warehousing as well as the tools to train AI models.”

Companies poised to take advantage and trading at good value, according to Sekera, include Cognizant Technology (Nasdaq: CTSH) and data lake provider, Snowflake (NYSE: SNOW).