From policy and earnings to geopolitics, here’s what could move markets in the year ahead.
The rally has been real. The S&P 500 hit five new all-time highs in five consecutive trading days. That’s only happened 10 other times since the turn of the millennium.
Many worry if they’ve “missed” their chance to get invested. Bears worry about what feels like a long list of risks—from geopolitics to elections. Bulls question how much more valuations can expand and how strong earnings can be.
Below, we contemplate five catalysts for the year ahead and telegraph why we’re still constructive.
1. The U.S. economy is strong—how much will the Federal Reserve really move?
What recession? Last week’s Q4 GDP print showed the U.S. economy grew at a 3.3% annualized pace, more than every economist across the Street expected. Consumers brought the power, despite many fearing cracks would deepen under the weight of higher interest rates, higher costs and student debt payments. More notable is that the strength came as inflation continued its dramatic decline. The Fed’s preferred inflation gauge—core PCE—printed at a 2.9% year-over-year pace in December, not too far off its 2% target for price stability.
In 1Q 2021 the quarter-over-quarter GDP growth annualized was 5.24% made up by 5.70% from Consumption, -0.46% from Investment, 1.04% from government spending and -1.04% from net exports. In 2Q 2021 the quarter-over-quarter GDP growth annualized was 6.22% made up by 8.73% from Consumption, -0.84% from Investment, -0.80% from government spending and -0.87% from net exports. In 3Q 2021 the quarter-over-quarter GDP growth annualized was 3.31% made up by 1.89% from Consumption, 2.71% from Investment, -0.26% from government spending and -1.03% from net exports. In 4Q 2021 the quarter-over-quarter GDP growth annualized was 6.96% made up by 2.71% from Consumption, 4.63% from Investment, -0.04% from government spending and -0.34% from net exports. In 1Q 2022 the quarter-over-quarter GDP growth annualized was -1.98% made up by -0.03% from Consumption, 1.16% from Investment, -0.52% from government spending and -2.59% from net exports. In 2Q 2022 the quarter-over-quarter GDP growth annualized was -0.56% made up by 1.32% from Consumption, -2.10% from Investment, -0.34% from government spending and 0.56% from net exports. In 3Q 2022 the quarter-over-quarter GDP growth annualized was 2.67% made up by 1.05% from Consumption, -1.45% from Investment, 0.49% from government spending and 2.58% from net exports. In 4Q 2022 the quarter-over-quarter GDP growth annualized was 2.57% made up by 0.79% from Consumption, 0.62% from Investment, 0.90% from government spending and 0.26% from net exports. In 1Q 2023 the quarter-over-quarter GDP growth annualized was 2.25% made up by 2.54% from Consumption, -1.69% from Investment, 0.82% from government spending and 0.58% from net exports. In 2Q 2023 the quarter-over-quarter GDP growth annualized was 2.06% made up by 0.55% from Consumption, 0.90% from Investment, 0.57% from government spending and 0.04% from net exports. In 3Q 2023 the quarter-over-quarter GDP growth annualized was 4.87% made up by 2.11% from Consumption, 1.74% from Investment, 0.99% from government spending and 0.03% from net exports. In 4Q 2023 the quarter-over-quarter GDP growth annualized was 3.28% made up by 1.91% from Consumption, 0.38% from Investment, 0.56% from government spending and 0.43% from net exports.
Over the last few weeks, the market has fervently debated how many cuts should be on the cards for central banks this year. For instance, initial enthusiasm for the pivot party prompted investors to price in as many as 170 basis points (bps) worth of Fed cuts for 2024 at one point. This would have implied a cut of 25 bps at seven out of the Fed’s eight policy meetings this year—moves that would have been more consistent with a meaningful economic slowdown. As the first data reads of the year have trickled in, investors have pared back their expectations to a more reasonable 140 bps. Expectations for ECB and BoE rate cuts have seen a similar repricing.
Over the year, we expect markets and the Fed’s own forecasts (which only pencil in about 75 bps worth of cuts) to keep growing closer together. How that tension evolves, and how the data responds to cuts once they happen, will be crucial to watch.
The chart shows the market implied policy rate cuts in 2024 for the Federal Reserve, European Central Bank and Bank of England at the start of 2024 and today. For the Federal Reserve, market pricing at the start of this year implied 158bps cuts vs. 137bps today. For the Federal Reserve, market pricing at the start of this year implied 163bps cuts vs. 149bps today. For the Bank of England, market pricing at the start of this year implied 172bps cuts vs. 110bps today.
2. Corporates are back in action—but how big is the turnaround?
The last couple of years have been pretty weak for corporate activity—whether you look at earnings, M&A activity or new IPOs coming to market. Now, with less economic uncertainty and (potentially) lower interest rates, the tides seem to be turning. The Q4 2023 earnings season is still in early days, but as the reports ramp up, we think we’ll end up seeing profit growth for the quarter.
For instance, while financials were the first to report and marked a well-telegraphed slowdown last quarter, consumer and tech names are showing strength. The latter’s return to profitability especially underpins our conviction that earnings will deliver this year. The sector accounts for ~30% of the S&P 500—and that’s not even including tech-enabled names that sit within communication services and consumer discretionary. If AI turns into real revenue growth sooner rather than later, the boost could be even bigger.
We also expect more sectors to join in as the year marches on, with 10 out of 11 S&P 500 sectors seeing earnings growth for all of 2024. Why it matters: while changing sentiment can send stocks swinging in the short term, earnings tend to drive returns in the long term. When you buy a stock, you’re ultimately paying for access to that company’s future profits.
On January 16, 2004 the price level was 1141.55 and the earnings expectations were 64.5. On January 23, 2004 the price level was 1131.13 and the earnings expectations were 64.8. On January 30, 2004 the price level was 1142.76 and the earnings expectations were 65.1. On February 06, 2004 the price level was 1145.81 and the earnings expectations were 65.3. On February 13, 2004 the price level was 1144.11 and the earnings expectations were 65.5. On February 20, 2004 the price level was 1144.94 and the earnings expectations were 65.8. On February 27, 2004 the price level was 1156.86 and the earnings expectations were 66.1. On March 05, 2004 the price level was 1120.57 and the earnings expectations were 66.4. On August 06, 2004 the price level was 1064.8 and the earnings expectations were 72.4. On May 09, 2008 the price level was 1425.35 and the earnings expectations were 102.5. On May 16, 2008 the price level was 1375.93 and the earnings expectations were 102.7. On May 23, 2008 the price level was 1400.38 and the earnings expectations were 103.0. On January 11, 2013 the price level was 1485.98 and the earnings expectations were 115.7. On January 18, 2013 the price level was 1502.96 and the earnings expectations were 115.4. On January 25, 2013 the price level was 1513.17 and the earnings expectations were 115.4. On February 01, 2013 the price level was 1517.93 and the earnings expectations were 115.6. On February 08, 2013 the price level was 1519.79 and the earnings expectations were 115.8. On February 15, 2013 the price level was 1515.6 and the earnings expectations were 116.0. On February 22, 2013 the price level was 1518.2 and the earnings expectations were 116.2. On March 01, 2013 the price level was 1551.18 and the earnings expectations were 116.4. On March 08, 2013 the price level was 1560.7 and the earnings expectations were 116.6. On March 15, 2013 the price level was 1556.89 and the earnings expectations were 116.8. On March 22, 2013 the price level was 1569.19 and the earnings expectations were 117.0. On March 28, 2013 the price level was 1553.28 and the earnings expectations were 117.1. On April 05, 2013 the price level was 1588.85 and the earnings expectations were 117.4. On April 12, 2013 the price level was 1555.25 and the earnings expectations were 117.4. On April 19, 2013 the price level was 1582.24 and the earnings expectations were 117.1. On May 15, 2015 the price level was 2126.06 and the earnings expectations were 127.5. On June 15, 2018 the price level was 2754.88 and the earnings expectations were 168.6. On June 22, 2018 the price level was 2718.37 and the earnings expectations were 169.0. On June 29, 2018 the price level was 2759.82 and the earnings expectations were 169.3. On July 06, 2018 the price level was 2801.31 and the earnings expectations were 169.7. On July 13, 2018 the price level was 2801.83 and the earnings expectations were 170.4. On July 20, 2018 the price level was 2818.82 and the earnings expectations were 171.0. On July 27, 2018 the price level was 2840.35 and the earnings expectations were 171.7. On August 03, 2018 the price level was 2833.28 and the earnings expectations were 172.0. On August 10, 2018 the price level was 2850.13 and the earnings expectations were 172.3. On August 17, 2018 the price level was 2874.69 and the earnings expectations were 172.6. On August 24, 2018 the price level was 2901.52 and the earnings expectations were 172.9. On August 31, 2018 the price level was 2871.68 and the earnings expectations were 173.4. On September 07, 2018 the price level was 2904.98 and the earnings expectations were 173.7. On September 14, 2018 the price level was 2929.67 and the earnings expectations were 173.9. On September 21, 2018 the price level was 2913.98 and the earnings expectations were 173.9. On September 28, 2018 the price level was 2885.57 and the earnings expectations were 174.4. On October 05, 2018 the price level was 2767.13 and the earnings expectations were 174.6. On October 12, 2018 the price level was 2767.78 and the earnings expectations were 175.0. On October 19, 2018 the price level was 2658.69 and the earnings expectations were 175.4. On October 26, 2018 the price level was 2723.06 and the earnings expectations were 175.1. On November 04, 2022 the price level was 3992.93 and the earnings expectations were 230.8. On November 11, 2022 the price level was 3965.34 and the earnings expectations were 231.0. On November 18, 2022 the price level was 4026.12 and the earnings expectations were 231.4. On November 25, 2022 the price level was 4071.7 and the earnings expectations were 231.4. On December 02, 2022 the price level was 3934.38 and the earnings expectations were 231.1. On December 09, 2022 the price level was 3852.36 and the earnings expectations were 231.0. On December 16, 2022 the price level was 3844.82 and the earnings expectations were 230.6. On October 27, 2023 the price level was 4358.34 and the earnings expectations were 242.0. On November 03, 2023 the price level was 4415.24 and the earnings expectations were 242.2. On November 10, 2023 the price level was 4514.02 and the earnings expectations were 242.5. On November 17, 2023 the price level was 4559.34 and the earnings expectations were 243.6. On November 24, 2023 the price level was 4594.63 and the earnings expectations were 244.2. On December 01, 2023 the price level was 4604.37 and the earnings expectations were 244.6. On December 08, 2023 the price level was 4719.19 and the earnings expectations were 244.3. On December 15, 2023 the price level was 4754.63 and the earnings expectations were 244.0. On December 22, 2023 the price level was 4769.83 and the earnings expectations were 244.3. On December 29, 2023 the price level was 4697.24 and the earnings expectations were 244.6. On January 05, 2024 the price level was 4783.83 and the earnings expectations were 244.7. On January 12, 2024 the price level was 4839.81 and the earnings expectations were 245.1.
3. While U.S. stocks notch highs, China’s are at decade lows—is there a turning point ahead?
Last week, China announced a number of measures to support its economy and markets—ranging from a stabilization fund that would invest in its slumping stock market to a surprise cut to its reserve requirement ratio. Some now wonder if there could be an inflection point, given all the bad news priced in: Hong Kong’s Hang Seng Index has been hovering around GFC-era levels as of late, and India also just topped Hong Kong as the world’s fourth-largest stock market.
This hasn’t been without reason: economic weakness (led by the property sector), geopolitical tension, regulatory hurdles and questions around market-friendly policies have all contributed to the weakness. Foreign direct investment in China turned negative for the first time in decades last year.
On December 31, 2000 the quarterly net direct investments in China, in billions of dollars was 13163. On December 31, 2005 the quarterly net direct investments in China, in billions of dollars was 32545. On December 31, 2008 the quarterly net direct investments in China, in billions of dollars was 44495. On December 31, 2010 the quarterly net direct investments in China, in billions of dollars was 74954. On December 31, 2012 the quarterly net direct investments in China, in billions of dollars was 79233. On December 31, 2014 the quarterly net direct investments in China, in billions of dollars was 88866. On December 31, 2018 the quarterly net direct investments in China, in billions of dollars was 57482. On December 31, 2021 the quarterly net direct investments in China, in billions of dollars was 92988. On September 30, 2023 the quarterly net direct investments in China, in billions of dollars was -11753.
We’re cautious on calling for a turnaround just yet. Taking cues from similar actions in the past, these kinds of state interventions have only tended to offer brief reprieves. We think more forceful stimulus measures, or a comprehensive plan to rescue the property sector, is needed to get more optimistic.
4. 2024 is the year of elections—what does a Trump vs. Biden rematch mean?
Former President Trump has now claimed victory in both the Iowa caucus and the New Hampshire primary—by a wide margin. According to the Associate Press, that makes him the first Republican presidential candidate to win open races in both states since they started leading the election calendar in 1976. All’s to say, it looks like we’re racing towards a Biden vs. Trump rematch.
We await more details on what both candidates’ policy platforms will look like as the campaign trail heats up: will they hold onto proposals of the past, and if so, how will they evolve? These are fair questions for the outlook, but it is also worth stressing the uniqueness of having this much information this early in the election cycle. This means there may be less possible outcomes for markets to make sense of and calibrate for. That’s potentially good news for uncertainty and valuations.
5. Geopolitical flashpoints—what’s the spillover?
After most gauges of supply chains normalized from unprecedented COVID-era disruption, the situation in the Red Sea has complicated the picture. Some question if that brings renewed inflation risks, as hundreds of giant container ships are forced to take a lengthier detour—by about a week—going around the Cape of Good Hope in Africa instead. Shipping costs for a 40-foot container have now risen for seven straight weeks, nearly tripling from the lows.
Such geopolitical tensions are concerning and warrant monitoring, but so far it looks like the disruptions in the Red Sea just make trade more difficult—far from a complete stop as during the pandemic. So while it’s true that shipping costs have ballooned, they’re still more than 60% below their COVID-era highs. Escalation could change this, but so far the disruption seems manageable for global trade.
On December 29, 2011 the World Container Index level was 1215. On December 27, 2012 the World Container Index level was 2055. On December 19, 2013 the World Container Index level was 2124. On January 08, 2015 the World Container Index level was 2013. On January 07, 2016 the World Container Index level was 1556. On January 05, 2017 the World Container Index level was 1820. On January 04, 2018 the World Container Index level was 1410. On December 27, 2018 the World Container Index level was 1571. On January 09, 2020 the World Container Index level was 1781. On December 31, 2020 the World Container Index level was 4359. On December 23, 2021 the World Container Index level was 9304. On December 22, 2022 the World Container Index level was 2120. On January 26, 2023 the World Container Index level was 2047. It then fell over the next year to 1381 by the end of November 2023 before jumping to today’s level of 3964 by January 25, 2024.
Where we stand
In any given year, there are good things and bad things that can impact the economy and markets. Volatility around each of these catalysts as we move through 2024 is likely.
Even so, we tend to see the glass half full when we examine the current slate of opportunities and risks. Disinflation has more room to run. Soft landings tend to signal pretty strong returns for both stocks and bonds. Earnings growth is just getting going. And, so far, geopolitical and election risks seem like things investors can prepare for.
For long-term investors, time in the market and diversification can help reduce uncertainty. Your J.P. Morgan team is here to discuss what this means for you and your portfolio.
All market and economic data as of January 2024 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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