From policy and earnings to geopolitics, here’s what could move markets in the year ahead.
The S&P 500 has hit five new all-time highs in the last five trading days. That’s only happened 10 other times since the turn of the millennium.
Many worry if they’ve “missed” their chances 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 economy is strong—how much will the Federal Reserve really move?
What recession? Yesterday’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.
Growth has remained resilient, with big thanks to the consumer
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 in the cards if the Fed manages to softly land the economy. Initial enthusiasm for the pivot party prompted investors to price in as many as 170 basis points (bps) worth of 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.
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.
Markets have pared back expectations for cuts this year
The chart shows the market-implied Federal Reserve rate cuts today at -141 bps versus two weeks ago at -168 bps.
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 index—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.
Earnings are a big driver of stock returns in the long term
On January 16, 2004, the price level was 1,141.55 and the earnings expectations were 64.5. On January 23, 2004, the price level was 1,131.13 and the earnings expectations were 64.8. On January 30, 2004, the price level was 1,142.76 and the earnings expectations were 65.1. On February 6, 2004, the price level was 1,145.81 and the earnings expectations were 65.3. On February 13, 2004, the price level was 1,144.11 and the earnings expectations were 65.5. On February 20, 2004, the price level was 1,144.94 and the earnings expectations were 65.8. On February 27, 2004, the price level was 1,156.86 and the earnings expectations were 66.1. On March 5, 2004, the price level was 1,120.57 and the earnings expectations were 66.4. On August 6, 2004, the price level was 1,064.8 and the earnings expectations were 72.4. On May 9, 2008, the price level was 1,425.35 and the earnings expectations were 102.5. On May 16, 2008, the price level was 1,375.93 and the earnings expectations were 102.7. On May 23, 2008, the price level was 1,400.38 and the earnings expectations were 103.0. On January 11, 2013, the price level was 1,485.98 and the earnings expectations were 115.7. On January 18, 2013, the price level was 1,502.96 and the earnings expectations were 115.4. On January 25, 2013, the price level was 1,513.17 and the earnings expectations were 115.4. On February 1, 2013, the price level was 1,517.93 and the earnings expectations were 115.6. On February 8, 2013, the price level was 1,519.79 and the earnings expectations were 115.8. On February 15, 2013, the price level was 1,515.6 and the earnings expectations were 116.0. On February 22, 2013, the price level was 1,518.2 and the earnings expectations were 116.2. On March 1, 2013, the price level was 1,551.18 and the earnings expectations were 116.4. On March 8, 2013, the price level was 1,560.7 and the earnings expectations were 116.6. On March 15, 2013, the price level was 1,556.89 and the earnings expectations were 116.8. On March 22, 2013, the price level was 1,569.19 and the earnings expectations were 117.0. On March 28, 2013, the price level was 1,553.28 and the earnings expectations were 117.1. On April 5, 2013, the price level was 1,588.85 and the earnings expectations were 117.4. On April 12, 2013, the price level was 1,555.25 and the earnings expectations were 117.4. On April 19, 2013, the price level was 1,582.24 and the earnings expectations were 117.1. On May 15, 2015, the price level was 2,126.06 and the earnings expectations were 127.5. On June 15, 2018, the price level was 2,754.88 and the earnings expectations were 168.6. On June 22, 2018, the price level was 2,718.37 and the earnings expectations were 169.0. On June 29, 2018, the price level was 2,759.82 and the earnings expectations were 169.3. On July 6, 2018, the price level was 2,801.31 and the earnings expectations were 169.7. On July 13, 2018, the price level was 2,801.83 and the earnings expectations were 170.4. On July 20, 2018, the price level was 2,818.82 and the earnings expectations were 171.0. On July 27, 2018, the price level was 2,840.35 and the earnings expectations were 171.7. On August 3, 2018, the price level was 2,833.28 and the earnings expectations were 172.0. On August 10, 2018, the price level was 2,850.13 and the earnings expectations were 172.3. On August 17, 2018, the price level was 2,874.69 and the earnings expectations were 172.6. On August 24, 2018, the price level was 2,901.52 and the earnings expectations were 172.9. On August 31, 2018, the price level was 2,871.68 and the earnings expectations were 173.4. On September 7, 2018, the price level was 2,904.98 and the earnings expectations were 173.7. On September 14, 2018, the price level was 2,929.67 and the earnings expectations were 173.9. On September 21, 2018, the price level was 2,913.98 and the earnings expectations were 173.9. On September 28, 2018, the price level was 2,885.57 and the earnings expectations were 174.4. On October 5, 2018, the price level was 2,767.13 and the earnings expectations were 174.6. On October 12, 2018, the price level was 2,767.78 and the earnings expectations were 175.0. On October 19, 2018, the price level was 2,658.69 and the earnings expectations were 175.4. On October 26, 2018, the price level was 2,723.06 and the earnings expectations were 175.1. On November 4, 2022, the price level was 3,992.93 and the earnings expectations were 230.8. On November 11, 2022, the price level was 3,965.34 and the earnings expectations were 231.0. On November 18, 2022, the price level was 4,026.12 and the earnings expectations were 231.4. On November 25, 2022, the price level was 4,071.7 and the earnings expectations were 231.4. On December 2, 2022, the price level was 3,934.38 and the earnings expectations were 231.1. On December 9, 2022, the price level was 3,852.36 and the earnings expectations were 231.0. On December 16, 2022, the price level was 3,844.82 and the earnings expectations were 230.6. On October 27, 2023, the price level was 4,358.34 and the earnings expectations were 242.0. On November 3, 2023, the price level was 4,415.24 and the earnings expectations were 242.2. On November 10, 2023, the price level was 4,514.02 and the earnings expectations were 242.5. On November 17, 2023, the price level was 4,559.34 and the earnings expectations were 243.6. On November 24, 2023, the price level was 4,594.63 and the earnings expectations were 244.2. On December 1, 2023, the price level was 4,604.37 and the earnings expectations were 244.6. On December 8, 2023, the price level was 4,719.19 and the earnings expectations were 244.3. On December 15, 2023, the price level was 4,754.63 and the earnings expectations were 244.0. On December 22, 2023, the price level was 4,769.83 and the earnings expectations were 244.3. On December 29, 2023, the price level was 4,697.24 and the earnings expectations were 244.6. On January 5, 2024, the price level was 4,783.83 and the earnings expectations were 244.7. On January 12, 2024, the price level was 4,839.81 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?
In the last few days, China has 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 fell negative for the first time in decades last year.
Global investors have been steering away from China
On December 31, 2000, the quarterly net direct investments in China in billions of dollars was 13,163. On December 31, 2005, the quarterly net direct investments in China in billions of dollars was 32,545. On December 31, 2008, the quarterly net direct investments in China in billions of dollars was 44,495. On December 31, 2010, the quarterly net direct investments in China in billions of dollars was 74,954. On December 31, 2012, the quarterly net direct investments in China in billions of dollars was 79,233. On December 31, 2014, the quarterly net direct investments in China in billions of dollars was 88,866. On December 31, 2018, the quarterly net direct investments in China in billions of dollars was 57,482. On December 31, 2021, the quarterly net direct investments in China in billions of dollars was 92,988. On September 30, 2023, the quarterly net direct investments in China in billions of dollars was -11,753.
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 v. 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.
Shipping costs have spiked, but are well off pandemic-era highs
On December 29, 2011, the World Container Index level was 1,215. On December 27, 2012, the World Container Index level was 2,055. On December 19, 2013, the World Container Index level was 2,124. On January 8, 2015, the World Container Index level was 2,013. On January 7, 2016, the World Container Index level was 1,556. On January 5, 2017, the World Container Index level was 1,820. On January 4, 2018, the World Container Index level was 1,410. On December 27, 2018, the World Container Index level was 1,571. On January 9, 2020, the World Container Index level was 1,781. On December 31, 2020, the World Container Index level was 4,359. On December 23, 2021, the World Container Index level was 9,304. On December 22, 2022, the World Container Index level was 2,120. On January 26, 2023, the World Container Index level was 2,047.
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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