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Calling the remarkable past few weeks on Wall Street a Santa Claus rally or an end-of-year winning streak would be an understatement.
The Dow has been soaring to record highs for multiple days in a row. The S&P 500, meanwhile, is flirting with its own record. Stocks could notch their eighth consecutive week of gains.
But a Santa rally only lasts until the presents under the tree are opened, and it's hard to say if this momentum can extend the surge beyond holiday vacations and into the new year.
So are markets in for a letdown next year?
Every December, economists from banks, asset management companies, research firms, hedge funds and everything in between release their outlooks for the year ahead. This time around, predictions have been all over the place.
JPMorgan analysts think the S&P 500 will end next year 11% lower — at 4,200. Others, like the analysts at Capital Economics, think it's going to ride upward 17% to 5,500. The benchmark index currently sits at about 4,740 –- so those are very different outcomes.
Still, when it comes to the broader landscape, some common themes emerge. We parsed through this year-end literature so that you don't have to. Here's what else some of the most prominent analysts think will guide next year.
Rate cut hopes
A lot of the good cheer on Wall Street is coming from last week's Federal Reserve policy decision to keep interest rates the same and indications that there could be rate cuts next year. But celebrations may be a bit presumptuous.
While the Fed signaled the possibility of three rate cuts in 2024, markets are currently expecting a lot more. According to the CME FedWatch tool, investors now see 6 to 7 rate cuts next year.
Chicago Fed President Austan Goolsbee even told CNBC on Monday that he was "confused" about the jubilant market reaction to the central bank decision last Wednesday.
"It's not what you say, or what the chair says. It's what did they hear, and what did they want to hear," Goolsbee said on CNBC's Squawk Box. "I was confused a bit — was the market just imputing, here's what we want them to be saying?"
The market, he said, is expecting a greater number of rate cuts than the Fed.
It's all about active management
A common theme across 2024 outlooks is that investors will do well to actively manage their portfolios next year. That's a bit different than the 'set it and forget it' long-run investment advice that typically prevails among portfolio managers.
Stocks and bonds have been unusually volatile this year, behaving in ways that aren't consistent with economic expectations, wrote Jack Manley, global market strategist at JPMorgan. Given those "significant dislocations," he said "simply owning the indices will not suffice."
That means an investment strategy that relies on broad market movements to generate returns, rather than on specific stock selection or other active management strategies, may fall short.
"Investors need to take a more active approach to their portfolios. This is not a time to switch on the investing autopilot; it's a time to take the controls," wrote analysts at BlackRock. "It's important to be deliberate in taking portfolio risk, in our view, and we expect to deploy more risk over the next year."
The Magnificent Seven could step aside
Mega-cap tech companies are largely responsible for gains in the stock market this year. That makes sense: The top tech companies — Apple, Amazon, Nvidia, Microsoft and Alphabet — combine to make up a quarter of the S&P 500's value, giving them an outsized impact on investors' portfolios.
Meta (formally Facebook) and Tesla round out the largest companies in the S&P 500, collectively known as the 'Magnificent Seven'
But analysts at Goldman Sachs say those tech companies may step out of the spotlight next year. "Looking forward, the new regime of both improving growth and falling rates should support stocks with weaker balance sheets, particularly those that are sensitive to economic growth," they wrote in a note on Friday.
They expect cyclical sectors — the parts of the economy that are significantly affected by changes in the overall economic cycle, such as consumer discretionary, industrials, and materials — to be good bets. They also like small-cap stocks, or companies with a relatively small market capitalization ranging from about $300 million to $2 billion.
Economists at Morningstar agree. "With US index returns having been driven predominantly by large-cap growth companies that dominate index weightings—aka the 'Magnificent Seven'—we're finding valuation opportunities elsewhere," wrote analysts Tyler Dann and David Sekera.
"Among the basket of undervalued and unloved assets, smaller-capitalization value stocks stand out," they said. They're also looking at sectors like banks and communication services.
Choppy water for Treasuries
It's been a volatile year for US Treasuries.
Analysts at the Wells Fargo Investment Institute don't see that changing anytime soon.
"We expect US Treasury yields to remain volatile in 2024, declining early on as the economic slowdown gathers momentum, but rising as the recovery evolves in the latter months of the year," they wrote in their year-end outlook.
Still, they say that long-term bond yields look attractive. The 10-year US Treasury yield minus core inflation turned positive in September 2023, they said, "and we believe investors currently have an opportunity to lock in the highest [real] yields in decades. As long as the bond is from a high-quality issuer, an investor can lock in a known yield out to the maturity date with limited default risk."
Economists at Commonwealth also see long-term US Treasuries as a buy – so long as inflation doesn't surprisingly accelerate next year.
"If the Fed can rein in inflation in the next few years, we believe Treasuries at current yields may be an attractive long-term option for investors seeking high-quality income," they wrote.
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