S&P 500: 2024 Investment Strategy – Continuing To Buy At Market Peaks

Introduction

Again in October, we put a Purchase ranking on the S&P 500. The index has risen round 10% since then. On this article, we wish to go over some key financial information – jobs, inflation, company earnings – to have a look at how the S&P 500 may carry out in 2024.

Employment Knowledge Evaluation

After we take a look at employment information just lately, we see that whereas the share of job openings in comparison with total employment is decrease in 2023 than in 2022, it stays increased than again in 2019. This implies corporations nonetheless have a number of open jobs and vacancies they’re making an attempt to fill relative to the variety of individuals working.

What does this inform us? Properly, it means that within the ongoing dynamics between employers and employees, corporations proceed to have bargaining energy.

Although it might be getting just a bit more durable for some people in search of jobs in comparison with early 2022 or 2021, the job market proper now continues to be stronger total than we have seen within the final 15 years or so. There simply aren’t almost as many unemployed individuals competing for every out there job as traditionally regular. Even when circumstances have softened some currently, with fewer new openings or extra layoffs right here and there, the massive image is it is nonetheless significantly better searching than throughout or after the final recession.

Shifts in Main Employment Classes

job openings divided up throughout completely different industries, we proceed to see actually sturdy hiring demand in skilled providers like legislation, accounting, engineering, and so on. in addition to transportation, warehousing, and utilities. This implies that growing applied sciences like AI and automation, together with increased rates of interest, are nonetheless fueling progress in these sectors even in comparison with pre-pandemic ranges.

Alternatively, job openings have declined in 4 massive employment classes: healthcare, eating places/inns, retail, and wholesale commerce. Healthcare and hospitality expanded so quickly throughout COVID that even at increased openings than traditionally regular now, they might nonetheless have some cooling off forward in a post-pandemic financial system.

Retail and wholesale openings are additionally down however extra consistent with pre-2020 ranges. This seemingly displays each the continuing shift towards spending extra on providers than items, in addition to the regular progress of e-commerce consuming into conventional brick-and-mortar gross sales. Retail particularly is seeing sluggish progress, with shares buying and selling at traditionally low-cost valuations in 2023. Nonetheless, there are some indicators of stabilization, just like the latest $5.8 billion potential buyout provide of Macy’s (M) by personal fairness agency Brigade Capital on December eleventh.

Inflation Knowledge Evaluation

Some traders appear involved that the continued energy of the job market will give the Fed room to both elevate charges additional or hold charges pinned at excessive ranges for longer. market projections, there’s solely a few 2.2% probability priced in of one other fee hike on the December Fed assembly.

Nonetheless, the market additionally now sees a 40% likelihood, down 2% over the previous week, of the Fed beginning to reduce charges once more by June 2024. This shift seemingly displays the most recent constructive jobs reviews shifting expectations.

In our view although, whereas the Fed will in all probability hold charges comparatively excessive for some time, additional hikes are unlikely given the inflation outlook. Wage progress has been outpacing inflation in 2023 and accelerated in October.

With the Atlanta Fed additionally downgrading This autumn GDP forecasts to 1.2% progress, there appears to be minimal threat of renewed worth spikes.

The underside line is that jobs and inflation each stay comparatively wholesome by historic requirements. So we do not anticipate Fed coverage to pose a lot of an upside threat or headwind for inventory market efficiency within the S&P 500 heading into 2024.

S&P 500 Valuation and Expectations

valuation, the ahead P/E ratio for the S&P 500 is eighteen.8x. That is equal to the 5-year common P/E, and reasonably above the 10-year common of 17.6x. So based mostly on this, shares seem fairly valued relative to historical past.

When it comes to progress expectations, analysts have revised This autumn earnings and income progress estimates downward a bit in comparison with late September, in step with the Atlanta Fed additionally lowering This autumn GDP outlooks.

However waiting for 2024, projections nonetheless name for strong S&P 500 earnings progress of 11.9% and income progress of 5.5%. That retains the ahead PEG ratio beneath 2x, a really cheap degree traditionally.

When it comes to revenue margins, 2024 web revenue margin forecasts for the S&P 500 stand at 12.3% – increased than the 11.7% anticipated in 2023 and the ten.6% 10-year common. Hitting 12.3% can be the second-highest annual revenue margin since FactSet’s monitoring started in 2008.

Dangers for Small and Mid-Sized Firms

Some traders fear that if charges keep comparatively excessive, it may prohibit the expansion of small and mid-sized corporations in 2024, doubtlessly inflicting occasions like widespread defaults or bankruptcies.

Certainly, the mega-cap tech shares like Apple (AAPL) and Microsoft (MSFT) – the “Magnificent Seven” – have carried the general US market increased in 2023 at the same time as many smaller companies hit struggles. Nonetheless, we have additionally seen many previously money-losing corporations like Carvana (CVNA) and Affirm (AFRM) steadily enhance currently regardless of financing prices remaining elevated.

This implies to me that after feeling important inflation ache in 2022, many smaller gamers have now tailored their enterprise fashions to function sustainably in a higher-rate setting. And with inflation trending down and the job market nonetheless sturdy, more healthy financial circumstances in 2024 ought to assist these extra susceptible corporations rebound.

So whereas dangers actually stay, we do not anticipate mass defaults or excessive fallout for small-caps. The challenges of the final 18 months have compelled the mandatory evolution for such companies to outlive and finally thrive once more when the financial system finds post-pandemic stability.

Conclusion

Placing all of it collectively, the S&P 500 valuation appears cheap per the PEG ratio, the financial backdrop of inflation and employment stays wholesome, and analysts anticipate continued earnings progress in 2024. So we preserve our purchase ranking on US large-cap shares for the approaching yr.