Market Views: Will the S&P 500 extend its bull run in H1?

The S&P 500 has sustained a bullish momentum, reaching consecutive record highs with tech stocks leading the charge. What will the first half of 2024 hold for the index?
Market Views: Will the S&P 500 extend its bull run in H1?

The S&P 500, a globally tracked benchmark for US stocks, achieved a second consecutive record year-end this week, driven by tech sector gains and anticipation of corporate earnings reports that could indicate profit trends for the year.

The index has been in a bull market since October 12, 2022.

Key companies like Netflix, Tesla, Intel, and Johnson & Johnson release their earnings this week, while tech giants Microsoft and Apple follow next week.

Investors are closely monitoring corporate earnings reports to gauge this year's profit outlook.

Overall, market sentiment appears cautiously optimistic, with hopes that earnings guidance will maintain the momentum for mega-cap tech stocks. Meanwhile, expectations for a Federal Reserve rate cut have been pushed from March to May.

AsianInvestor asked asset managers and analysts how they expect the S&P 500 to perform in the first half of 2024, and what will drive the direction of US equities.

The following responses have been edited for brevity and clarity.

Saira Malik, chief investment officer

Saira Malik

Amid some signs of economic slowing, resilient inflation and geopolitical uncertainty, we maintain our overall neutral stance on US equities.

In our view, moving from cautious to the higher conviction optimism reflected in the market today will depend on potential catalysts that include earnings growth and positive earnings revisions, rather than multiple expansion, as the driver of market gains, increasing market breadth, continued disinflation, and easing financial conditions, including a pivot to rate cuts in the first half of 2024 and lower cost of capital.

In the interim, we are emphasising defensive positioning in the US by reducing broad cyclical exposure and focusing on companies with healthy fundamentals and strong free cash flows that could enable them to outperform in a period of slowing growth and falling interest rates.

In particular, we favor dividend growers and high-quality growth names that meet these desirable criteria, as well as being attractively valued.

Grant Bowers, senior vice president, portfolio manager
Franklin Equity Group

Grant Bowers

The United States is one of the largest and most diverse economies globally, driven by technological innovation, entrepreneurship, and a robust consumer market. 

We think continued US economic growth, moderating inflation and the potential end of Federal Reserve rate increases create a strong backdrop for the US equity market in 2024. 

Our positive outlook is additionally underpinned by a healthy consumer, strong corporate earnings, and productivity tailwinds from generative AI (artificial intelligence).

In 2024, we expect to see early AI applications enter the market for consumer and enterprise use.

Longer term, generative AI has the potential to accelerate productivity growth, drive margin expansion for many companies, and be a tailwind for economic growth.

We continue to see the US equity market as a growth-centered economy that is positioned well to outperform other global equity markets.

We believe 2024 looks particularly attractive for active managers where idiosyncratic factors drive returns outside of macro factors. In this environment, we believe investors should be focused on quality and earnings visibility and on areas of secular growth in the economy.

Ray Sharma-Ong, investment director of multi-asset

Ray Sharma-Ong

Following the strong 2023 year-end rally in US equities, a moderate pullback in January 2024 was expected as markets consolidated.

The US equity rally resulted from soft landing expectations and disinflation, paving the way for potential Fed rate cuts in 2024. Although the Fed may push back on market's pricing of rate cuts this year resulting in market pullbacks. We view pullbacks as opportunities.

The Fed has paused and we expect the Fed to pivot and deliver on policy easing later this year due to a slowing US economy, moderating inflation, and an exit from quantitative tightening (QT).

With the Fed on pause, US Treasury yields are likely to moderate given contraction in US growth.

Bad news is good news at present, and moderating US economic data benefits equities, as this removes Fed pushbacks, supporting eventual rate cuts.

With the Fed incorporating both rate cuts and QT tapering into its forecast, an earlier exit to QT will be a catalyst for US equities, as this will moderate US treasury yields.

Historically, US equities perform well during Fed pauses before the first rate cut, with average returns nearing 10%.

Garrett Melson, portfolio strategist
Natixis Investment Managers Solutions

Garrett Melson

The Magnificent 7 [seven tech stocks] may be in the spotlight given its role in market’s run to new highs, but don’t sleep on the rest of the market.

Consensus may have embraced the soft landing narrative, but expectations for economic growth remain muted, in stark contrast to the data which continues to suggest robust momentum underlying disinflationary growth which should continue to support corporate fundamentals and earnings.

Technicals also remain supportive as investor sentiment has improved, though remains tepid and flows have not matched the stunning advance seen in equity markets as money markets continue to rake in assets.

But with the Fed shifting to an easing bias, those money market yields will continue to pale in comparison to the returns in risk assets. Our old friend FOMO (Fear of Missing Out) is likely to play a meaningful role as the risk cycle continues to expand.

Given the narrative oscillations of the past year, there is certainly scope for a growth scare to emerge in the first half of the year, which would drive narrowing breadth into large quality names like mega-cap tech.

But that correction is likely to be short lived as the soft landing continues to come to fruition, risk appetite grows, and equity inflows finally drive an expansion in market breadth through year end. Just as the typical seasonal pattern suggest in an election year.

Ben Bennett, investment strategist, APAC
Legal & General Investment Management

Ben Bennett

Our outlook for the S&P 500 has improved, but we’re still underweight. On the positive side, the Fed’s signal of a dovish pivot reduces downside risk for US growth, even if we have to wait until the summer for the first cut.

More importantly, it looks like the US government will continue increasing expenditure domestically.

We think the US avoided a recession last year largely due to a huge government deficit, and we could see more of the same in 2024.

However, on the negative side, we think earnings forecasts are overly optimistic. If the Fed does orchestrate a soft landing, that still implies lower nominal GDP growth.

And this really matters for earnings. Even if you adjust for the usual decay in earnings forecasts through the year, we think 7-10% growth expectations for 2024 will be wide of the mark.

We suspect growth will be closer to zero. Plus, sentiment and valuations seem stretched after last year’s tremendous performance.

This could drag on performance in the coming months and we are overweight European stocks comparatively than the US on that basis.

Christian Mariani, US equity investment specialist
JP Morgan Asset Management

Christian Mariani

The US equity rally last year was largely driven by the big tech (and tech at large), as those companies refocused and retrenched to return to profitability over the last couple of years.

After going through an earnings correction, now the Magnificent 7 are producing healthy growth, cash flows, and improving profit margins.

As the year marches on, we expect more sectors to join this rally. Most sectors within S&P 500 are expected to see earnings growth throughout 2024.

Our research analysts predict a 12% increase in earnings for S&P 500 Index compared to a 1% decline in 2023.

In terms of earnings per share (EPS) growth, our research analysts expect the Magnificent 7 to see 27% growth in 2024, while the rest of the S&P 500 companies are projected to see 8% growth.

But it is important to note that, although the remaining 493 companies in the S&P 500 Index might not experience the same growth rates of the Magnificent 7, they are transitioning from negative EPS growth in 2023 to positive in 2024. This serves as a tailwind for the market and contributes to the improvement of market breadth. 

Being more active in managing mega cap stocks is going to be crucial in 2024, especially in a soft landing scenario. The anticipated broadening of the rally will lead to a more balanced growth across sectors – a common theme across many of our key strategies.

Tim Murray, CFA, capital markets strategist, multi-asset division,
T. Rowe Price

Tim Murray

In 2023, we witnessed one of the most top-heavy equity markets ever. The “Magnificent 7” posted massive returns while the other 493 stocks in the S&P 500 returned 13.6% on a market cap-weighted basis.

It is tempting to look at the valuations of US stocks and conclude that they are too expensive and should therefore be avoided in favor of stocks in other regions of the world. But we think that US stocks are not broadly expensive. Rather, the aggregate valuation of US stocks is distorted by the high valuations of these seven “mega-caps” companies that make up nearly 30% of the index.

It is also tempting to assume that valuations of the Magnificent 7 are unreasonably high. One simple way to provide a sanity check is to compare a P/E ratio to return on equity—a measure of how profitable and efficient a company has been over the past year.

For the Magnificent 7, their high valuations were accompanied by similarly high returns on equity as of December 18, 2023.

The bottom line is that the elevated valuations of the Magnificent 7 collectively, and US stocks in aggregate, are not unreasonable when taken in context. The real question is whether or not the level of profitability and efficiency that these seven companies have exhibited can be sustained moving forward.

Wei Li, multi asset quant solutions fund manager,
BNP Paribas Asset Management

Wei Li

Recent rally bringing the S&P to a record high were once again driven by large tech groups with heavy weightings in the index, with Meta, Microsoft and Nvidia all closing at new highs.

The SPX average stock three-month implied volatility is only in its fifth percentile relative to the past year.

However, on the other side, the equal-weighted version of the S&P 500 has fallen back 1% so far this year. This lack of breadth has added to expectations that the outlook could be bumpy.

US economic growth in 2023 has been stronger and more resilient than expected, despite increases of 525 basis points in policy rates from the Fed.

Households in the US have been willing to spend down the excess savings, accrued thanks to the fiscal stimulus provided by the government and the following Inflation Reduction Act infrastructure package.

We are expecting US growth to slow in the quarters ahead but to remain positive in each quarter of 2024.

We do not expect the US to go into a recession, and growth should pick up by Q2 2024 after a weak first quarter. The breadth of easing in inflation pressures globally and gradual rebalancing of the US labour market suggests downside risk to the inflation profile.

In such macro environment, equities likely to suffer from margin compression.

Earnings expectations are also too optimistic, forecasting growth when declines seem more likely. Valuations look unappealing in this context.

Within a cautious stance overall on equities, we are cautiously optimistic on the US equities.

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