Weekly Preview: Preparing for the Market’s Next Move in 2024
"The years ahead will occasionally deliver major market declines, even panics, that will affect virtually all stocks. No one can tell you when these traumas will occur.”
The quote above attributed to billionaire investor Warren Buffet, who in an annual letter to shareholders, talked about market volatility, suggesting that not only is volatility normal, but it should be welcomed. The premise is that volatility, while sometimes feared, can present great buying opportunities. Just as important, the Berkshire Hathaway (BRK-A) (BRK-B) CEO wanted to highlight the folly in those who believe they have a magic crystal ball and can predict what’s going to happen at any particular point in time.
In 2023, when looking back on the resurgence that occurred in the market, particularly in the last quarter of the year, there were many bearish crystal balls that seemingly malfunctioned. Some investors spent most of 2023 fretting about inflation, interest rates and the “looming recession” that was always around the corner. Yet, the Dow Jones Industrial Average ended 2023 at $37,689.54, after gaining 13.7% and notched a new record for the year.
Rising for nine straight weeks to end the year with a 24% gain was the S&P 500 index at 4,769.83. And posting its best year since 2020, the tech-heavy Nasdaq Composite Index enjoyed a resurgence, rising 43% to end the year at 15,011.35. Wondering why the Nasdaq was able to outperform both the S&P 500 and Dow by such a wide margin? This is due to the Nasdaq's tech-heavy composition where AI-related themes propelled the broader index almost 20% higher from its Oct. 26 low.
Investors don't need to look too far to find the source of the recent rally. With the Fed announcing its pivot from its hawkish stance to a dovish policy, growth stocks, particularly the "Magnificent Seven" mega-cap stocks surged higher. These mega-cap tech giants consisting of Alphabet (GOOG , GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) were money-makers for investors who owned them since the summer.
With the seemingly insatiable appetite surrounding the Magnificent Seven stocks, there are now questions as to whether there will be room for more gains in 2024. Looking ahead, it is highly unlikely that bullish market sentiment will reverse, especially for technology stocks. While asset allocation and diversification are often sound strategies, the concentration of the tech, particularly those that invest heavily in AI solutions, will continue to move higher.
Valuations concern is another popular argument against Magnificent Seven stocks or those heavily involved in AI. But here’s the thing: even as valuations might appear unfavorable, their collective fundamentals are also improving. In the case for Nvidia, for example, the chip giant has raised its profit forecast in each earnings release for fiscal 2024. The company continues to enjoy robust demand, particularly from cloud service providers which account for roughly 50% of the company’s datacenter revenue. And that’s not likely to end anytime soon.
What’s more, the Fed pivot has finally arrived, and the Fed now envisions a reduction of 75 basis points in 2024. This means there may be rate reductions on three separate occasions. In that vein, the Fed has done a solid job managing inflation which has dropped to 3.7% year-over-year in November, after hitting the highest levels in decades at over 9% in mid-2022. While the inflation is not yet at the Fed’s 2% target, the Fed is also projecting that U.S. GDP growth will remain positive in 2024.
What’s more, a consensus on Wall Street analysts expects an almost 12% earnings growth for S&P 500 stock 2024, while the S&P 500 price target of 5,029 suggests a 10% rise for the index. As such, investors should position their portfolios to be on the right side of the pivot in 2024, especially amid clearer signs of dampening inflation risk, coupled with positive U.S. economic and labor trends.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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