Will the SP 500 trade 5000 this year?
I firmly believe that the S&P 500 will reach the $5000.00 mark by the end of 2024, marking a significant 10% increase from current levels. My conviction stems from a notable decline in the equity risk premium, particularly outside the Technology sector. We have already navigated through the peak of macroeconomic uncertainty, and the market has successfully absorbed substantial geopolitical upheavals.
A crucial aspect is that we’re actively discussing these challenges, which is a positive indicator. Although macroeconomic signals are somewhat ambiguous, there has been a noticeable increase in idiosyncratic alpha this year. My bullish stance is not predicated on expectations of Federal Reserve policy easing; rather, it’s based on how effectively companies have adapted to higher interest rates and inflation.
Here are my key reasons for this outlook:
- Undervalued Sentiment in the Market: Despite a recent uptick in market sentiment, there remains a pervasive lack of conviction among equity bears, excluding the Technology and AI sectors. Pension equity weights are at a 25-year low, sell-side market targets are generally not being met, and the consensus for long-term earnings growth for the S&P 500 is at a nadir, barring the COVID period. Furthermore, active funds are closely aligning with their benchmarks. Typically, bull markets culminate in high conviction and euphoria, but we are far from that stage currently.
- Optimistic Bottom-Up Analyst Views: A 2024 survey of Bank of America analysts suggests a ‘goldilocks’ scenario, anticipating moderately slowing but still positive price trends, improved margins, and wage inflation counterbalanced by efficiency gains and reduced costs elsewhere. The Bank of America Analyst Tone, which utilizes AI to analyze research sentiment, shows increasing positivity regarding cyclicals.
- Robust Earnings Despite Slowing GDP: I forecast a $235 increase in earnings per share (EPS) for the S&P 500 in 2024, a 6% year-over-year growth, even amidst a slowing GDP. Historical precedents from the 1950s show that EPS can continue to grow during recessions. The shift from goods to services also supports this earnings optimism.
- Election Year Dynamics: Historically, election years have been favorable for equities. Bipartisan agreement on defense spending and a focus on near-shoring and U.S. manufacturing are likely to benefit cyclical sectors. However, healthcare might face risks due to fiscal austerity.
- US Strategic Advantages: The United States retains its exceptionalism, especially in the context of de-globalization, oil independence, a strong dollar, and demographic advantages like the baby boomer generation. The U.S.’s gradual disengagement from China since 2018 and the ensuing trend of re-shoring are significant tailwinds.
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The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Monday, November 27: The week commences with a focus on Personal Income & Outlays and the PCE. These indicators are essential for understanding consumer behavior and inflation trends, vital factors for economic analysis and forecasting.
Tuesday, November 28: The spotlight shifts to housing data with the release of the S&P CoreLogic Case-Shiller Home Price Index for September at 9:00 AM. This is followed by the Conference Board’s Consumer Confidence report for November at 10:00 AM, providing insights into consumer sentiment, a key driver of economic activity.
Wednesday, November 29: A packed day with multiple releases. The day begins early at 7:00 AM with MBA Mortgage Applications, followed by the second estimate of GDP for the third quarter at 8:30 AM. This data offers a revised view of the economy’s performance, potentially impacting market expectations.
Thursday, November 30: The day is marked by a series of important announcements, starting at 8:30 AM with the release of Personal Income & Outlays data and the Advance Goods Trade Balance for October. At 9:45 AM, we have the Chicago PMI for November, and at 10:00 AM, the ISM Manufacturing data for November, providing insights into the industrial sector’s health.
Friday, December 1: Concluding the week, December 1st features the S&P Global US Manufacturing PMI at 9:45 AM, followed by Construction Spending data for October and the ISM Manufacturing index, both at 10:00 AM. Additionally, Total Vehicle Sales data will be available throughout the day, offering a glimpse into the automotive industry’s performance
Macro Market
Growth Outlook: Soft Landing Anticipated
I anticipate a soft landing for the US economy, where growth is expected to be below trend in 2024 but remains in positive territory. In response to the increase in long-end rates, I have revised down the growth forecast for the first quarter of 2024 from 1.0% to 0.5%. Consequently, the growth estimate for 2024 has been adjusted down by a tenth to 0.6% on a 4Q/4Q basis, with a recovery to 1.7% expected in 2025.
Inflation Trajectory: A Gradual Decline
I now see PCE inflation decreasing to 2.0% year-over-year by the fourth quarter of 2025. Core PCE is likely to fall below 3% year-over-year by the second quarter of 2024. However, the path to reaching the 2% target will likely be slower due to persistently high core services inflation, excluding housing. I expect core PCE to descend to a slightly above-target rate of 2.2% year-over-year by the fourth quarter of 2025.
Federal Reserve Strategy: Rate Cuts on the Horizon
I do not foresee any additional hikes from the Federal Reserve. My expectation is for the first rate cut to occur in June 2024, followed by quarterly reductions of 25 basis points in the policy rate, amounting to a total of 75 basis points in rate cuts for 2024 and 100 basis points in 2025.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Aggregate Estimates and Revisions
- 23Q3 Y/Y earnings are expected to be 7.1%. Excluding the energy sector, the Y/Y earnings estimate is 12.6%.
- Of the 481 companies in the S&P 500 that have reported earnings to date for 23Q3, 81.9% have reported earnings above analyst estimates. This compares to a long-term average of 66.5% and prior four quarter average of 73.6%.
- During the week of November. 27, nine S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Global Spotlight
COP28: Pursuit of Climate Consensus
The United Arab Emirates is set to host the 28th U.N. Climate Change Conference (COP28) starting November 30, with high-stakes negotiations anticipated. Key discussions will center on the “Global Stocktake,” a crucial assessment of progress towards international climate targets. A contentious issue will be the implementation of the loss and damage fund, established in 2022 to aid developing nations affected by climate change. Debates are also expected over the reduction or elimination of fossil fuel use, with the European Union advocating for stringent global commitments, facing resistance from major oil producers and consumers.
OPEC+ Strategy Amid Oil Market Fluctuations
In the wake of significant oil price reductions, OPEC+ convenes on November 26 to deliberate on further production cuts. This meeting, spearheaded by Saudi Arabia and Russia, follows oil prices dropping to four-month lows due to persistent demand concerns and diminished regional conflict fears in the Middle East. Reports suggest a potential additional cut of 1 million barrels per day, aimed at maintaining oil prices around Saudi Arabia’s preferred $80 per barrel threshold.
Fragile Peace: The Gaza Cease-fire
The Israel-Hamas cease-fire, initiated on November 24, faces uncertainty as it approaches its November 28 deadline. Challenges to extending the truce include the involvement of other militant groups, such as the Palestinian Islamic Jihad, which demands complete prisoner releases by Israel. Additionally, the potential for renewed attacks during the cease-fire may prompt Israeli military action. Israel’s ongoing objective to displace Hamas from power in Gaza further complicates the situation, raising the likelihood of continued conflict despite diplomatic efforts for peace.
Kenya’s Political Stalemate: Bomas Talks End
The Bomas negotiations in Kenya, involving the ruling Kenya Kwanza Alliance and the opposition Azimio One Coalition, are expected to conclude on November 26. These talks, aimed at addressing post-election disputes, have not yielded significant progress. Key opposition demands, including tax reduction, fuel subsidy restoration, and election commission reform, have been met with resistance. The potential failure to reach an agreement may trigger further opposition protests, complicating the Ruto administration’s compliance with International Monetary Fund financing requirements.
Stratfor.com
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