Investors were still licking their wounds from a brutal bear market that lasted nearly all of 2022, and there were few indications that suggested a strong stock market recovery was imminent.
"US economy remarkably resilient in the face of rapid Fed hike cycle. The plurality of equity investors expect an inevitable recession as Fed hikes until it breaks something. But if above assessment [falling inflation, end of rate hikes] is correct, a 'soft landing' is the highest probability," Lee said in his 2023 stock market outlook.
And that's just what happened, with calls for a soft landing in the economy increasing as the Federal Reserve ended its interest rate hiking cycle thanks to falling inflation.
The S&P 500 has soared 25% in 2023 to its current level at about 4,785, which is within 1% of Lee's initial 2023 price target. In fact, his forecast came the closest to predicting the S&P 500 among the strategists tracked by Bloomberg.
Lee, who was one of the few bulls on Wall Street last year, is once again expecting a solid year ahead for the stock market, with a S&P 500 price target of 5,200 for the end of 2024, representing potential upside of 9% from current levels.
Here's what Lee expects to happen next year, according to his 2024 outlook released earlier this month.
The key driver
The easing of financial conditions throughout 2024 will be the key driver to further stock market gains, he said. The Fed has signaled that its next interest rate decision is more likely a cut than a hike, and the market is currently pricing in at least five 25-basis-point cuts next year.
If interest rates continue to fall from their recent peak, that should lead to lower mortgage rates which should help revitalize the housing market. And if inflation continues to fall, enabling looser financial conditions, then consumers' real incomes should rise, giving them stronger purchasing power.
Corporate earnings
Lee expects the S&P 500 to deliver earnings-per-share growth of 11% in 2024 to $240 and 8% growth to $260 in 2025, mainly driven by a cyclical recovery in profits.
"Corporate capex fell past few years, but easing financial conditions mean capex recovers," he said, adding that GDP growth should recover in Europe and Asia, helping boost the global economy.
Also lifting corporate profits in 2024 should be a weaker US dollar and a rise in productivity.
Stock valuations
"We see price-to-earnings expanding in 2024 towards 20x. While many argue for valuation compression, since 1937, the higher price-to-earnings [ratio] realized when yields [are between] 3.5% to 5.5%. When between 4% to 5%, price-to-earnings is more than 18x 65% of the instances," Lee explained.
His 2024 S&P 500 price target of 5,200 is derived from applying a 20x earnings multiple to his 2025 guidance of $260 per share.
Lee's top idea for 2024 is small cap stocks, which he believes could play catch-up to the broader market next year and surge upwards of 50%. He also likes stocks in the financials, industrials, and technology sectors.
Fundstrat's Tom Lee had the most accurate stock market outlook for 2023, while almost everyone else was bearish. A year ago, he said the S&P 500 would end 2023 at 4,750, which is within 1% of its current level. Here's what he expects the stock market will do in 2024.
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Analysts expect S&P 500 profits to jump 8% in 2024 and 14% in 2025 after subdued growth last year. Robust global economic growth may offer equities enough support to resume a record-breaking rally, even if bets on Federal Reserve interest rate cuts this year are completely abandoned.
If Lee is correct, then the gains he expects are coming would catapult the S&P 500 to around 5,500, which is well ahead of Lee's already bullish call for the index to end 2024 at 5,200.
Economic growth actually accelerated above its 10-year average in 2023. That resilience, coupled with a fascination about artificial intelligence (AI), changed investors' collective mood. The S&P 500 soared throughout the year and finally reached a new high in January 2024, making the new bull market official.
The bank's analysts give a positive forecast for the Dow Jones exchange rate in 2024. In their opinion, index quotes will increase by 10% to $40,000 in 2024. If the US economy avoids recession, growth could reach up to 19%. This scenario is more likely due to cooling inflation and stable GDP growth.
How accurate are Wall Street analyst ratings? Some Wall Street analyst ratings are highly accurate, meaning their ratings lead to successful returns for investors. However, in the stock market, nothing is truly guaranteed. This means investors want to interpret analyst ratings with a healthy dose of skepticism.
It can be nerve-wracking to watch your portfolio consistently drop during bear market periods. After all, nobody likes losing money; that goes against the whole purpose of investing. However, pulling your money out of the stock market during down periods can often do more harm than good in the long term.
This heightened optimism is on par with the positive outlook in December 2021, when investors anticipated a 6% stock market return for 2022. Investor expectations for stock returns over the long run (defined as the next 10 years) rose slightly to 7.2%.
Analysts are projecting S&P 500 earnings growth will accelerate to 9.7% in the second quarter and S&P 500 companies will report an impressive 10.8% earnings growth for the full calendar year in 2024.
If you assume margins and P/E multiples will remain at their current high level, and expect sales and buybacks to grow at their historical rates, then you can anticipate making about 6% in returns per year over the next decade.
What is SPY's price target? The average price target for SPY is $575.20. This is based on 504 Wall Streets Analysts 12-month price targets, issued in the past 3 months. The highest analyst price target is $677.55 ,the lowest forecast is $472.45.
The S&P 500 generated an impressive 26.29% total return in 2023, rebounding from an 18.11% setback in 2022. Heading into 2024, investors are optimistic the same macroeconomic tailwinds that fueled the stock market's 2023 rally will propel the S&P 500 to new all-time highs in 2024.
While the Indian benchmark Nifty index has been experiencing a rise in the early months of 2024, it doesn't necessarily mean that the market will decline in May. Some investors believe in the adage and may choose to reduce their exposure to the market in May.
While there could be a growth slowdown in the first half of 2024, experts believe growth should resume in the second half of the year. Americans faced many financial challenges this year, from persistent inflation to increasingly expensive debt.
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