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Markets think the Federal Reserve is about done with its rate-hiking cycle, and stocks have been enjoying a run of gains spurred by optimism around looser monetary policy.
The major indexes are up in 2023, with the S&P 500 notching a healthy gain of more than 17% year-to-date.
Goldman Sachs, which expects the S&P 500 to climb 8% next year, highlighted in a recent note that pre-2008 conditions are returning, with markets and the economy departing from a decade of low inflation, near-zero interest rates, and negative real yields.
David Russell, global head of market strategy at TradeStation, said he agreed with the pre-2008 view, and that "the headwinds from the financial crisis and the great recession are over."
"This moment bears striking similarities to 1995 as the historic bull market took shape," Russell said. "That rally occurred as inflation cooled and the Fed stopped hiking rates. Baby boomers were then in their late-30s and saving for retirement. Millennials are now at the same stage in their lives. Internet stocks were taking off back then. This time, we have the boom in AI."
Gone are the days of ultra-low rates, and higher-for-longer is now the mantra. The Fed will likely keep policy restrictive until the economy meaningfully weakens, which will pressure corporate margins and profitability in 2024 and could lead to mixed returns for investors.
Steve Wyett, chief investment strategist at BOK Financial, told Business Insider that the increased cost of capital will begin to separate the well-managed companies from the rest — and any mistakes in allocating capital will be amplified.
Unlike 2008, downside risks will be driven by fiscal positioning, he noted, rather than a housing crisis.
"We have been in a long period of ultra-low rates, so the risk of pretty significant levels of poor capital allocation exist and these will become known as we move through 2024," Wyett said. "It is true that many companies, particularly large cap companies, extended debt maturities when rates were low, which is delaying the impact of higher cost capital, but for those with debt coming due, the differences in capital cost will be material and negatively impact margins."
BOK Financial remains cautious on equities in the year ahead, though in its outlook it expects the presidential election to provide a modest boost.
Mark Hackett, chief of investment research at Nationwide, echoed that view. He said the warning signs are there — such as credit card transactions, commercial loan growth, and an inverted yield curve — but equity markets seem to have priced in the bad news already.
However, if an economic slowdown doesn't end up being quite so steep, equities could jump.
"While the S&P 500's P/E ratio is modestly higher than the average from the past decade, small caps, value, and international are substantially less expensive than large-cap growth and at multi-decade highs," Hackett said in emailed comments. "In other words, this makes the risk/reward profile more attractive and is likely to deliver outperformance in 2024 and beyond."
Risks of a recession, geopolitical turmoil, and a US debt crisis are concerns, but strategists speaking with Business Insider remain largely upbeat on stocks for the coming 12 months.
Gene Goldman, chief investment officer at Cetera Investment Management, said he expects about a 10% gain for the S&P 500 in 2024.
And Commonwealth Financial Network's Brian Price, head of investment management, said the firm expects "mid-single digit returns" for the S&P 500, and he said a traditional 60/40 portfolio has become more attractive than it has been in some time.
Meanwhile, Jeff Buchbinder, chief equity strategist for LPL Financial, expects "high single-digit returns" in 2024.
"It will not be a straight line as the markets will see turbulence as the Fed tries to engineer an economic soft landing," Goldman said. "Expect a ton of market volatility, but for long-term investors, there will be opportunities."
