A tough few days this week notwithstanding, the outlook for U.S. equities remains positive. The S&P 500 index is likely to move higher over the course of 2024.
Momentum is positive. The S&P 500 has closed at increasingly higher levels for the past 12 weeks. The trend is your friend. Economic fundamentals also support additional appreciation. The economy is reasonably strong. The Atlanta Federal Reserve Bank sees first-quarter GDP expanding at a rate of 3%. The investment firm Goldman Sachs just projected economic growth in 2024 at 2.3%
Personal consumption accounts for almost 70% of the U.S. economy. Consumer confidence is rising. The employment market remains resilient. Households are enjoying real wage gains. Excess savings from COVID stimulus programs should help economic growth throughout 2024.
The Federal Reserve is preparing to cut interest rates. On a six-month basis, core personal consumption inflation is running at 1.9%. The employment cost index for the fourth quarter of 2023 increased by just 0.9%. That increase is largely consistent with 2% inflation. The Federal Reserve views the government’s employment cost index as the highest quality measure of wage growth. Lower interest rates and a strong economy should generate higher earnings for the constituents of the S&P 500.
With the index today at about 4,900 and expected composite earnings for 2024 in the region of $240-$250, the price-earnings multiple of the index is currently at about 20 times. That is slightly expensive relative to historic averages, but the earnings multiple is high because of the outside effects of the largest technology companies: Alphabet, Amazon, Apple, Meta, Microsoft, and Nvidia.
The S&P 500 is market capitalization weighted. The larger companies carry greater weight in terms of valuation. The named companies are growing much faster than the broad market; consequently, their price earnings multiples are higher, all above 20 times. That is justified. They have superior fundamentals. If the largest technology companies are excluded from the valuation parameters of the S&P 500, the index is selling at about 17 times projected 2024 earnings. Seventeen times is a typical price-earnings multiple for the market over the last several decades.
As interest rates fall, equity valuations typically rise. Many market forecasters see the yield on the 10-year Treasury falling from the current level of 3.95% to 3.50%. There is a strong argument to be made that over the next 18 to 24 months, the yield on the 10-year Treasury will fall to 3%. Treasury yields of that level support a broad market valuation of 20 times earnings, from the current 17 times.
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Over the balance of the year, the largest technology names should continue to outperform the broad market slightly. But with falling Treasury yields and rising earnings, the vast majority of stocks should move higher. The performance of the market will broaden out. Over the past 100 years, a diversified portfolio of high quality U.S. equities has delivered returns of about 10%, 7% after adjusting for inflation.
U.S. equities are the preeminent global asset class.
The writer owns shares in Alphabet, Meta, Microsoft, and Nvidia.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note.
