5 key stock market themes to keep an eye on in 2024

© sergey p - stock.adobe.com

The year 2023 will be remembered as the year in which the Fed vanquished inflation and a resilient consumer buoyed the economy during a time period of heightened recessionary fears. The world was introduced to ChatGPT and, with it, the Magnificent Seven, a fun, new name for the most dominant technology companies whose businesses benefit from AI, was born. When all was said and done, the S&P 500 closed out the year with a gain of roughly 24%.

As we begin 2024, the wealth management team at Wall Street Alliance Group has our top 5 themes to share on the stock market.

Strong Momentum to Continue

Over the next twelve months, we do expect the overall market to rise. Given that each of the three major indices closed out 2023 trading at or near all-time highs, we view a pullback as likely. This is a welcome opportunity, however, to pick up stocks at a discounted valuation.

The Magnificent Seven will continue to dazzle, bolstered by the recent advancements in artificial intelligence and the continued migration of large enterprises to the cloud. Technology companies are benefiting from a year of efficiency, whereby they reined in spending and saw earnings bottom out and recover. Despite significant gains in the stock prices of companies benefiting from AI, the valuations are not egregious, as earnings growth has generally kept pace with share price gains. While we don’t expect technology stocks to repeat the spectacular gains of this past year, we continue to be opportunistic in the event of a potential pullback in these stocks to add greater exposure to these cash-flow-generating behemoths.

Rotation from Cash into Equities

One huge trend that was present in 2023 was the rush of investor funds into money market mutual funds and savings accounts. Currently, there is nearly $6 trillion sitting out of the equity markets and in money market funds which are now, for the first time in over a decade, offering an attractive yield of around 5%. As these rates come down, however, this cash sitting on the sidelines will be looking for a home and will likely settle in the more value-oriented, dividend-paying stocks. Big picture, companies with solid business models that generate healthy, growing free cash flow and have strong track records of dividend increases will garner attention again.

Breadth in the Market to Improve

Beyond large-cap tech, which was the clear winner in 2023, we see broad-based opportunities in the other major sectors of the market supported by rate cuts. Sectors such as energy, healthcare, and financials, save for a few companies, have not quite fully participated in last year’s rally yet present more compelling opportunities than tech stocks from a valuation perspective.

After leading the market in 2022, the energy sector took a breather in 2023. The price of crude oil fell from its 52-week highs in late September before settling markedly lower at the end of 2023. While oil prices, and the respective stocks that benefit from those prices, have clearly come down in recent months, we continue to view the sector favorably for a myriad of factors. The Organization of the Petroleum Exporting Countries, OPEC, can cut energy production at any time, keeping prices balanced between demand and profitability. While we do see electric vehicles as the future of the automotive industry, we also believe the migration away from fossil fuels will take longer than initially expected. Currently, with two ongoing wars that could threaten production as well as the growth of developed market economies such as India and China which are heavily reliant on oil for their growth, the backdrop for the sector in 2024 is incredibly attractive.

Healthcare significantly trailed the broader market in 2023 as a result of the waning benefits of COVID-19 vaccination sales compared to the prior year. Longer-term, however, we are excited about the developments in the sector as people are living longer, increasing the demand for therapies and pharmaceuticals. We also believe that AI could play a huge part in making these companies more efficient with reduced R&D costs as a result. In addition, there is a lot of investor enthusiasm around the weight-loss drugs that exploded onto the scene in 2023.

In the banking sector, 2023 will be remembered for the collapse of three prominent U.S. regional banks. In light of this regional banking crisis, the importance of FDIC insurance and significantly important financial institutions, often referred to as “too big to fail,” returned to a top-of-mind position. Fortunately, this liquidity crunch that affected some of these smaller, more niche banks was contained, and we feel the big four banks came out of this turmoil in a much stronger position. Due to the safety of holding money at one of these top banks, amid the fallout of the smaller banks, customer loyalty in our view has not only increased, but will also precipitate a flight of funds from regional banks into the big four. In addition, while capital raising was very slow in 2023, the banks whose businesses are levered to M&A should fare well as an improving economy and lower interest rates are supportive of deal flow.

Small Caps Back in Vogue

If history is any guide, small-cap stocks tend to outperform their large-cap peers over long time horizons. Both 2022 and 2023 were outliers, as investors that were concerned about companies whose growth was heavily financed with debt exited smaller, riskier companies in droves. Since smaller companies typically borrow more money to grow, they tend to be more susceptible to rate increases than larger companies with cash on the balance sheet. With rate cuts in the rearview mirror, these smaller companies should start to get a boost as they have greater future growth potential compared to declining or mature businesses. Finally, given the poor relative performance, small-caps trade at a significant discount to the broader market.

End of the Bear Market in Bonds

Finally, we see 2024 as the end of a challenging bear market in bonds which transpired over the last 18 months, in which it hurt to hold longer-dated fixed income such as treasury notes. Ahead of the Fed cutting rates, there is a window of opportunity for income-oriented investors to lock in high yields on longer-term bonds present in the marketplace, which can provide a nice balance of both current income and price appreciation. As always, we recommend fixed income as a diversifier in a well-balanced portfolio that provides stability in the portfolio and firepower to be more aggressive should the equity markets present a short-term buying opportunity.

While there is no way to predict with pinpoint accuracy what the economy will do over the next year, five years, or even decade, we believe that certain trends, which we have identified can provide a good guide of how to position and reallocate your portfolio in the coming year.

Sam Cohen, CFA is a Financial Analyst at Wall Street Alliance Group.

Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Wall Street Alliance Group and Securities America are separate companies. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.

The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.