The end of 2021 will be remembered as fueled by the wave of federal stimulus and the momentum from the early post-pandemic reopening which worked as a boom for companies at the time. In other words, interest rates at the current level are not the end of the world. Despite an uncertain economic outlook, the S&P 500 has rallied to new all-time highs in 2024 driven by remarkably strong underlying economic fundamentals. S&P 500 companies have reported their second consecutive quarter of year-over-year earnings growth in the fourth quarter. By capitalization, small-cap stocks remain the most attractive at a 16% discount, followed by mid-caps at a 6% discount, while large caps are a little above fair value. In terms of valuation, it can be said that the S&P 500 is trading at an 18.5x 2023 consensus earnings or 16.5x looking out towards 2024.

  1. The Labor Department reported the U.S. economy added 353,000 jobs in January, far exceeding economist estimates of 185,000 new jobs.
  2. The bond market is pricing in just a 3.0% chance the FOMC will cut rates at its March meeting.
  3. Our interpretation is that significantly higher rates from here may not be necessary for the inflation rate to continue trending lower.
  4. Companies emerging stronger and returning to their path of long-term growth potential highlight the bullish case for stocks.
  5. The other side to that discussion is the potential negative consequences to the economy of the higher interest rate environment we’re now in.

If there was room to be very bullish on stocks going higher at the lows last year, it’s fair to say the job is now more difficult considering what has already been a strong rally. Our message today is that we see more upside, but it’s not going to be a straight line higher, and the market will need some cards to land right to really drive a true breakout. As part of the bullish case, a scenario where economic conditions continue to outperform should be positive with companies benefiting from stronger underlying demand, and we could even see some revisions to estimates higher.

Not even losses in a pair of megacaps — Apple Inc. and Alphabet Inc. — curbed the market momentum. The Nasdaq 100 also hit an all-time high, buoyed by Micron Technology Inc.’s outlook. RBA says energy and utility infrastructure, transportation, and real estate are top sectors within the theme of US reindustrialization.

Related Stocks

Both headline and core Consumer Price Index readings have remained on a downward trend in 2023. We continue to forecast that inflation will moderate over the course of 2024 and into 2025. According to our projections, the major drivers of high inflation, such as supply chain bottlenecks, shortages, and other disruptions, will further unwind over the next few years, providing prolonged deflationary pressure. In fact, our below-consensus forecast https://www.day-trading.info/the-different-currency-groups/ calls for inflation to fall below the Fed’s 2% inflation target in 2025 before beginning to slightly rise back up. Below is a table of blue-chip stocks that are reporting earnings per share (EPS) in March, with the dates and analyst estimates for their upcoming earnings reports, and the results of their previous earnings reports. The fact that sector rotation ETFs underperform the S&P 500 is not the only mark against sector rotation strategies.

For value investors, the market sector that currently has the lowest forward price to earnings ratio is the energy sector at 11.8. This monetary tightening cycle has been the steepest and fastest over the past 40 years, yet far less restrictive than the policy during the 1970s and ‘80s. While the economy has held up better than expected in the face of this tightening cycle, we still expect that the rate of economic growth will slow throughout most of 2024. After four years, 2024 is lining up to be the year that the economy and individual behavior have finally recovered and normalized.

Forecasted U.S. Inflation Rate

One possibility is that core-consumer prices reflecting goods and services beyond food and energy can surprise lower through components like shelter and transportation prices stabilizing going forward. After starting the year as the most overvalued sector, energy is now one of the more undervalued sectors, following its underperformance for the year to date as oil prices have fallen. After dropping precipitously as interest rates rose, the utility sector is now undervalued.

As of late February, FedWatch is showing a probability of less than 3% that the Fed will cut rates in March. “The AI hype is not sustainable because much of the stock gains seen due to AI are about the marketing of AI and the hype, and only one or two companies have actually experienced strategies for tax planning a specific revenue bump from AI,” Bahnsen says. Investors can also gain diversified exposure to the high-growth tech sector via technology ETFs such as the Vanguard Information Technology ETF (VGT), the Technology Select Sector SPDR Fund (XLK) and the VanEck Semiconductor ETF (SMH).

strategies for investors through year-end as rate cuts start and the AI trade broadens, according to UBS

In addition, we forecast interest rates across the curve will subside in 2024 and 2025, thus mitigating much of the refinancing risk. As we expected, the Federal Reserve held the federal-funds rate steady at its December meeting. We had previously noted that we had expected the July hike would be the final interest-rate increase of this monetary policy tightening cycle. While we don’t have a crystal ball, we do believe that a “pause” by the Fed can and will occur in the next six months, with the implied easing of policy conditions working as a tailwind for stock market sentiment. We expect two more 25 basis point hikes in the Fed funds rate between the March and May meeting to hold the rates steady from there. Utility stocks, consumer staples stocks and healthcare stocks are typically considered defensive investments and may be relatively insulated if economic growth slows to a crawl.

By this measure, it’s fair to maintain an expectation that stocks will continue to climb which is supported by a combination of both economic fundamentals and market technicals. Meanwhile, fourth-quarter earnings numbers have been better than expected as companies are effectively managing rising costs and interest rates that are at 22-year highs. Sector rotation is an investment strategy that tries to find out — and profit from that information. However, this moment — the likely peak of interest rates for the time being — may be a good time to check whether your investment portfolio is diversified across both stocks and bonds. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

For this year, the consensus is for 2% EPS growth towards $224.07, a modest number but at least still positive. Some of the themes at play include efforts by companies to cut costs and focus on efficiencies in support of margins. Into 2024, the expectation is for a stronger recovery with EPS climbing by 11% to $249.56. Value stocks have historically outperformed growth stocks when interest rates are high, but that trend has reversed since the beginning of 2020.

The SPDR SSGA US Sector Rotation ETF (XLSR) and the Main Sector Rotation ETF (SECT) are examples. After the March meeting, the Fed will announce its next interest rate decisions at the conclusion of its May 1 and June 12 meetings. In terms of inflation, https://www.topforexnews.org/investing/invest-in-the-united-states/ this was the biggest headache for the market in 2022 when the annual CPI reached a 30-year high of 9.1% in Q2. The just-released January update shows the annual headline figure printing at 6.4%, taking important steps in the right direction.

Wall Street analysts project about 8% upside for the S&P 500 in the next 12 months. Analysts see 17.8% upside for the energy sector in the next year, more than any other market sector. For now at least, analysts are anticipating S&P 500 earnings growth will continue to accelerate in the first half of 2024. Analysts project S&P 500 earnings will grow 3.9% year-over-year in the first quarter and another 9% in the second quarter. While investors have cheered impressive earnings and all-time highs for the market, the S&P 500’s forward price-to-earnings ratio has crept up to 20.4, about 15% above its 10-year average of 17.7.