Challenges Ahead for Stock Market: In a year marked by record-breaking stock performances, the S&P 500 (^GSPC) has surged over 17%, signaling a bullish trend that Goldman Sachs believes may temper in the coming year. According to the renowned financial institution, the ascent of S&P 500 might face constraints in 2024, potentially closing at 4,700—a modest 5% increase from current levels. This projection falls below the average 8% return typically witnessed in election years, as outlined in Goldman Sachs’ comprehensive outlook for the upcoming year, unveiled on Wednesday.
David Kostin, Chief US Equity Strategist at Goldman Sachs, explained, “Our macro forecasts imply a benign outcome for equities, but the current starting point will limit the potential appreciation for the benchmark US equity index in 2024.”
Despite Goldman’s economic team maintaining a bullish stance on the economy, with only a 15% chance of a recession in 2024, the equity strategy team raises concerns about the already factored-in 2.1% GDP growth expected next year. While recent earnings reports showcase improved profit margins, Kostin’s team contends that further expansion from current levels might not materialize in 2024, suggesting that the market has adequately priced stocks at present.
Challenges Ahead for Stock Market: Goldman Sachs anticipates the majority of the gains of S&P 500 in 2024 to be concentrated in the latter half of the year. This aligns with their prediction of Federal Reserve rate cuts in the fourth quarter, diverging from the market’s current expectation of earlier cuts in the second quarter. Kostin elaborated, “Resilient economic growth in the beginning of the year will force the market to push back its current pricing that Fed cuts will begin in 2Q, and US election uncertainty will suppress risk appetite.”
The investment research division at Goldman Sachs forecasts that the Magnificent 7, comprising top-performing stocks, will once again outshine the remaining 493 stocks in the S&P 500 in 2024. However, concerns arise regarding whether the success of tech giants like Nvidia, nearing all-time highs, is already priced into the market.
Kostin’s team emphasizes that the risk/reward profile of this trade is not particularly attractive given the heightened expectations. Drawing parallels with the tech bubble burst in 2000, they caution that the Magnificent 7 could underperform if mega-cap tech companies fail to meet lofty growth expectations, especially if enthusiasm around artificial intelligence wanes.
Goldman Sachs suggests that 2024 will favor “high-quality” stocks, encompassing growth stocks with high returns on capital and downtrodden cyclical plays. Alphabet (GOOGL), O’Reilly Automotive (ORLY), Tractor Supply (TSCO), and Sherwin-Williams (SHW) are among the stocks highlighted in Goldman’s quality basket. In the cyclical sector, the firm points to Russell 3000 (^RUA) cyclicals, excluding energy.
Broadly encapsulating their outlook for 2024, Goldman Sachs has aptly named it after Taylor Swift’s song “All you had to do was stay.” Kostin elucidates, “The title of the song from Taylor Swift’s 1989 album reflects our baseline forecast that despite intermittent volatility, fund managers will ultimately be rewarded for staying invested through the end of next year.”
Source: Yahoo Finance
