SUMMARY
The “Magnificent Seven” big tech equities drove the US equity market higher in 2023. We look for many others to participate in the gains we anticipate in 2024.
The Fed surprised markets last week by acknowledging a path of rate cuts for the coming year without forecasting an economic collapse. Much of the Fed’s views and actions are consistent with our Outlook 2024: Slow Then Grow, Investing in the Markets’ Big Reset.
The Fed sees a strong possibility that a recession can be avoided. Fed Chairman Powell noted that policy easing could be more aggressive if the economy surprised to the downside.
After a year in which most S&P 500 firms saw EPS declines while employment and wages grew solidly, we see a reversal in favor of corporate profits beginning in 2024. While we don’t expect another 20% surge for the S&P 500, we expect returns to broaden, with larger gains for the “average” stock. We express this view with an overweight to the S&P 500 Equal Weight Index and exposures to profitable small and mid-cap growth shares.
Why would we want to add shares that have fallen behind the “Magnificent 7”1 US large cap tech shares? Because the historical pattern for earnings gains and performance suggests “catch up potential” for many others.
Beating expectations after a very strong growth year is more difficult for shares trading at twice the average of the market’s valuation. While we aren’t bearish, investors should remember that in 2022, the Magnificent 7 reported an aggregate EPS decline of 22%. Their EPS gain in 2024 is estimated at 44%. In half of the years during the past decade, Magnificent 7 EPS grew by less than 10%.2
The S&P 500 Equal Weight Index has beaten the return of the market cap-weighted index in half of all years during the past three decades. If EPS rebound from a 2023 downturn, we wouldn’t be surprised to see equities in such as growth SMID (small and medium growth companies) and the equal weight index return +15% in 2024.
In our final bulletin of the year, we would like to thank all of you for engaging with us, whether it was attending our in-person events, reading this bulletin or participating in our weekly webcasts. We hope everyone can take the time to relax, disconnect and spend time with your loved ones over the next couple of weeks. We wish you and your families a very happy holiday and cheers to a healthy new year. See you all in 2024!
