March 2024: Client Note

The US stock market came out of the gate in 2024 with the technology heavy S&P 500 Index “S&P” up 6.8% and the Dow Jones Industrial Average “DOW” up 3.5%.

This follows the same relative performance dynamics in 2023; the S&P was up 24% and the DOW was up 14%.  2023 stock outperformance was concentrated among only three sectors: technology, consumer discretionary, and industrial stocks.  We are beginning to observe performance participation beginning to spread to other sectors.  Specifically, financial services and health care stocks are joining two of last year’s winners- technology and communication services.  I expect other segments of the market will participate more fully in 2024 due to relative valuation and the Federal Reserve reducing interest rates in the second half of 2024.

Stock Valuation- a bit rich?

The S&P price-to-earnings “P/E” ratio is 21x 2024 earnings and 19x 2025 earnings, both well above the 16x historical average. Once again, the rapidly growing top ten S&P stocks, which represent 33% of the S&P, are growing rapidly and have extraordinarily high valuations. However, the broad stock market’s P/E is 17x and consistent with its historical average. While many analysts and strategists expect 10-12% earnings growth in 2024 and 2025, I am less sanguine and believe 8-10% earnings growth in 2024 and 2025 is more realistic.  Above average earnings growth and declining interest rates in 2024 should bode well for the stock market.

The economy and inflation – trending favorably for the FED to reduce interest rates in 2024.

Gross Domestic product “GDP” in 2023 was 2.5%, well greater than the – 0 – estimate in January 2023.  The economy’s strength in 2023 was a significant surprise in 2023 as was the FED’s pivot in December 2023 when it communicated its intention to reduce interest rates in 2024.  The US GDP is expected to increase 1.5-2.0% in 2024, a modest slowdown from GDP growth in 2023.  The primary financial variables for markets in 2024 are inflation and interest rates, both of which are on a downward trajectory and positive for financial markets.

Rich Lawrence, CFA March 4, 2024

DISCLOSURE:
Opinions about the future are not predictions, guarantees or forecasts. Investing in stock and bond markets have risks that could lead to investors losing money.
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