Stocks experienced a strong rebound in May after suffering steep market drops in April, and could see further gains as inflation eases and the Federal Reserve adapts their policy stance to reduce some of the headwinds that have plagued stocks in recent years.
investors expecting a soft landing for the economy and aggressive rate cuts should lean in favor of growth and technology sector stocks, but must also keep an eye on risks such as recession and an election-year.
Economic Growth
Market participants have made 2023 an auspicious end, as the S&P 500 inches closer and closer towards reaching an all-time high since December 2021. Since November, a broad-based rally has lifted stocks as investors gain faith that the Federal Reserve may have reached its limit of increasing interest rates for now.
The Federal Reserve’s latest projections predict core PCE inflation below 2% and GDP growth just above 1% in the near term, suggesting it might slow its rate increases and even cut interest rates if necessary to increase economic growth and earnings for companies, providing good news for stocks.
Investors looking for opportunities should focus their search in the technology and growth stock sectors, which have seen strong performance as expectations of a Federal rate cut have grown. Meanwhile, those concerned with inflationary pressure and recession risk should opt for defensive market sectors with consistent earnings like utilities, consumer staples and healthcare.
Interest Rates
Even as falling interest rates should bring stock investments some success, they may face challenges as we progress into 2024. Rising tech stocks could lead to over-valuations for certain firms while presidential election uncertainty could cause some volatility for investors.
However, recent data suggests that inflation may be trending lower and that the Federal Reserve could cut rates without precipitating another recession – something which would be great news for value and growth stocks alike.
Investors should diversify their portfolios by increasing exposure to value stocks while decreasing defensive sectors like utilities, consumer staples and healthcare, which historically underperform during an uptrend in the market. Artificial Intelligence as an industry trend should also provide a boost for technology stocks; which in turn may benefit the overall market; this chart displays how S&P 500 performed during election years with first-term presidents in terms of second half performance.
Earnings
Investors closely track earnings to assess whether companies are producing enough revenue and profits. When earnings fall short of expectations, stocks typically experience significant drops.
Analysts anticipate strong earnings growth in 2024, which should keep stocks buoyant. Tech firms such as Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL) and Microsoft (MSFT) could experience mid-teen earnings growth while biotech and health care companies, driven by GLP-1 weight loss drugs or other innovative treatments may drive further gains within this sector.
Willie Delwiche sees another positive indicator in that all 11 sectors of the S&P 500 have currently exceeded their 200-day moving averages, historically signifying gains over three to six months for markets as a whole.
Market Volatility
Market volatility measures the frequency and magnitude of price swings up or down in an investment market. The higher its volatility is, the riskier it is for an investor. Volatility can be calculated as the standard deviation between stock prices over specified time frames versus their average.
Investors must remember that market turbulence is temporary and normal. Investors should resist any temptation to react on impulse by making hasty decisions which could compromise long-term returns.
Investors looking to invest in growth stocks like communication services and technology sector companies in 2024 should focus on investing in growth stocks such as communication services and technology companies, while leaning more heavily into value stocks while anticipating Federal Reserve’s potential shift to aggressive rate cuts; historically value stocks outperformed growth stocks during Fed rate-hiking periods; however defensive markets like consumer staples and healthcare should underperform; additionally they should maintain adequate cash reserves in case unexpected economic or geopolitical events occur.
