Why We Expect Equity Performance to Broaden Out in ‘24
What happened last week?
- The S&P climbed 1.00%
- The Dow Jones gained 1.27%
- The Nasdaq advanced 0.89%
It was a short week marked by the Thanksgiving holiday and a four-day cease-fire and hostage exchange in Gaza. Shoppers spent 2.5% more this Black Friday than a year ago, according to Mastercard SpendingPulse.
Jewelry and health & beauty showed in-store strength. Adobe Analytics reported record on-line shopping of $9.8 billion, up 7.5% y/y, led by electronics such as smartwatches, TV, and audio equipment. Cyber Monday is poised to be the year’s biggest online shopping day.
3 Things to Know
Equity Performance Likely to Broaden Next Year
Two of the most cyclical industries, semiconductors and chemicals, tell the story for 2023. While hype around AI has drove the price of a handful of semiconductor stocks higher, profits for the broad semi group are actually on track to fall nearly 7%.
Chemicals stocks within the Materials sector also saw earnings decline over 20% this year. As we look to 2024, both segments should experience recovery as electronics, industrial, and automotive manufacturing improves globally.
In the world of travel and trade, 2023 was a story of significant divergence. Passenger airline profits rose 135% this year amid a surge in travel demand while a glut of goods saw earnings for air freight & logistics firms drop by 26%.
As both travel and goods trade normalize in the absence of recession next year, Transportation profits are expected to rise by 8%. 2024 Mega-cap tech outperformance is understandable. Earnings growth for big tech has been far superior to the broad market for much of the past five years.
While we don’t expect the S&P 500 in aggregate to deliver an earnings recovery as strong as 2021, we believe that index-level profit growth for 2024 will power a catch-up across several sectors that underperformed in 2023.
US corporate earnings are more reliant on global production than is obvious. Nearly 40% of S&P 500 revenues are earned abroad. Therefore, drivers of international growth, like global consumption and trade, will matter nearly as much as American economic activity to determine their profitability.
This also explains 2023 performance, where manufacturing and trade experienced the most challenging backdrop relative to soaring tech and consumer activity.
Fed Easing Could Benefit Catch-Up Trade
While not a necessary precondition for our market broadening view, modest Fed easing could be the icing on the cake for the 2024 catch-up trade.
Inflation normalization could create room for the Fed to move rates from moderately restrictive to neutral, taking some pressure off of financing costs for highly levered projects.
Falling rates in the absence of recession would also be supportive for a pick-up in M&A and IPO deal flow, as value created over the past two years is ripe to get scooped up by public and private firms sitting on significant deployable capital.
Two Standouts: Healthcare & AI Tech Firms
Not all of the 2024 catch-up opportunities are cyclical. The health care sector is a notoriously defensive sector that has for decades delivered consistent, positive earnings and sales growth.
That was until the distortions of COVID and some other factors that hit 2023. Yet we also expect health care earnings to return to growth next year.
Much like the release of Chat-GPT initially impacted the shares of education companies, call centers, and other staff-heavy services firms, excitement around GLP-1s, a grouping of anti-obesity drugs, has driven declines in companies with exposures to heart medication and sleep apnea equipment.
While the use cases for deployment of GLP-1s continue to grow and manufacturing is ramping up, we also see an opportunity to invest in other forms of health care innovation which have meaningfully lagged for the past two years.
Life sciences tools companies which help administer and facilitate drug trials remain well off their highs. An easing of rate pressures and a recovery in venture financing would be especially supportive for early-stage biotech firms.
In our upcoming Outlook 2024, we also highlight the opportunity to invest in the buildout of AI capacity next year.
See our weekly CIO Strategy Bulletin for more details