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2024 Investment Outlook
Capitalizing on today’s market opportunities to meet your financial goals.
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Key takeaways
Stocks bounced back in May’s first half after suffering its first negative month of the year in April.
Investors are keeping a close eye on the timing of potential Federal Reserve interest rate cuts.
While rate cut expectations have been pushed farther out, investors seem encouraged by steady economic growth and solid corporate profits.
Stocks regained momentum in May’s first half, rebounding from brief April setback, when investors seemed to focus on Federal Reserve interest rate policy over other fundamental factors. The S&P 500 lost more than 4% in April, but more than offset those losses by generating returns exceeding 5% month-to-date through May 17, 2024. As markets recovered, both the S&P 500 and Dow Jones Industrial Average reached new all-time highs. Similar to 2023, communication services and information technology stocks are among the leading sectors. However, this year’s market rally includes participation by several sectors that lagged 2023’s strong market performance.1
“In April, investors embedded emerging concerns that the Federal Reserve was not prepared to begin cutting interest rates as soon as markets initially expected,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “As positive first quarter earnings reports began to flow in, investors quickly reversed course in May and Fed concerns suddenly took a backseat to market fundamentals.”
“In April, investors embedded emerging concerns that the Federal Reserve was not prepared to begin cutting interest rates as soon as markets initially expected,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “As positive first quarter earnings reports began to flow in, investors quickly reversed course in May and Fed concerns took a backseat.”
The Fed opened the door to rate cuts beginning late last year, but more recent economic data, including stubbornly persistent inflation, tempered expectations. However, April’s Consumer Price Index reading of 3.4% inflation for the previous 12 months, down from 3.5% in March, was considered an encouraging sign.2
In 2022 and 2023, the Fed raised the fed funds rate eleven times, to a range of 5.25% to 5.50%, but held the line on rates since July 2023. The Fed initially projected three rate cuts in 2024, but investors are watching to see if Fed policymakers alter those projections.3 “Some of the market’s concerns that Fed rate cuts may be pushed far out on the calendar were alleviated by April’s encouraging CPI report,” says Haworth. Nevertheless, the Fed continues to struggle bringing inflation down to its 2% target range.
What factors are likely to affect the stock market today and for the remainder of 2024?
A shift in market leadership
In 2023, communications services, information technology and consumer discretionary stocks vastly outpaced the rest of the S&P 500.1 “What kept driving the markets to new highs were companies that are insensitive to persistently higher interest rates,” says Haworth. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.”
2024 started much the same way, but a slow transformation may be underway. Based on year-to-date performance through late April, the utilities, energy, financials, consumer staples and industrials sectors are all up more than 10% for the year.1
The impact of higher interest rates is reflected at the bottom end of the scale for S&P 500 sector performance. The interest-rate sensitive real estate sector is the only S&P 500 sector in negative territory year-to-date.
Large-cap stocks continue to dominate
The S&P 500 index of large-cap stocks topped 5,000 for the first time in February and continued to reach new highs through the end of March, before retreating in April. The S&P 500 quickly recovered and set new all-time highs in May. The Dow Jones Industrial Average topped 40,000 for the first time ever.
The environment has been less beneficial for smaller stocks. “The Fed’s interest rate policy matters meaningfully to smaller companies that likely must borrow more to fund operations and business growth,” says Haworth. “As a result, small-cap stocks are under more pressure in the current environment.”
Investors appeared to recognize this based on stock market results in 2023 and 2024, comparing the S&P 500 to the Russell MidCap Index and the Russell 2000 small-cap stock index.4
Key stock market drivers in 2024
What are the keys to a sustained bull market? Three primary considerations deserve attention:
- Inflation trends and future Fed policy moves. With headline inflation stubbornly hovering above 3%,3 “There’s some longevity to the inflation story,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “It’s not going away as fast as people might like.” In addition, a key measure monitored by the Fed, the core personal consumption expenditures (PCE), stands at 2.8%, little changed since December 2023.5 Freedman says “the current fed funds target rate over 5% is not sustainable, but until the Fed sees more clear evidence of inflation moving down, it’s in a tough spot.” As a result, Freedman believes the first fed funds rate cut may continue to be delayed.
- Consumer spending. “Consumers’ willingness to maintain reasonable spending growth has been the linchpin for the economy,” says Haworth. This is likely due in part to the strength of the labor market and more significant wage growth. While the initial read of first quarter 2024 economic growth showed an expansion rate slowdown,4 consumer spending still proved to be the main growth driver. Haworth notes that “how strong and resilient consumers prove to be remains an open question,” and a critical one for the economy and markets.
- Corporate earnings and stock valuations. First quarter earnings reports mostly met or exceeded expectations, and Haworth says the outlook for the rest of 2024 is trending favorably. “At this point, the earnings story remains a positive one.” This may be critical for the direction of stocks, says Haworth, as stock valuations can be considered elevated at current levels. “Valuations levels today imply a positive attitude about the future,” says Haworth.
External risks can always be a concern. Current issues include the impact of global tensions highlighted by the Israel-Hamas conflict and the Russia-Ukraine war. The heated lead-up to what appears likely to be a closely contested presidential election may ultimately draw more investor attention.
Equities still offer opportunity
“It remains a constructive stock market,” says Haworth. “Earnings are still moving in a positive direction, consumer spending has held up, and it still seems clear that at some point, a rate cut will be the Fed’s next interest rate move.”
The biggest potential concern in the current environment is valuation. “Stocks that have dominated the market in the past one year-plus may be reaching challenging valuation levels,” says Haworth. “Investors may consider diversifying with an equal-weighted S&P 500 exchange-traded fund.” Such a fund puts less emphasis on the largest stocks in the Index compared to a traditional S&P 500 fund.
Freedman encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman. “Markets will do things at the exact opposite time you expect them to.” Freedman says investors can follow a more productive path. “Our best advice is having a plan, a programmatic approach to investing. That takes the emotion out of it.”
In the near term, says Haworth, “expect continued choppiness in the markets, and not necessarily a straight upward path for stocks in the coming months.” He says for those who still have a sense of caution about the stock market, “consider putting a portion of your portfolio to work in equities in a systematic way, such as dollar-cost averaging available cash over a series of months.”
Check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.
The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
Frequently asked questions
Stocks are shares of publicly traded companies can be bought and sold. These transactions occur on exchanges and over-the-counter (OTC) marketplaces. The activity of pricing, buying and selling stocks is all activity that occurs in what is generally called “the stock market.”
Stocks frequently move up and down. Between November 2023 and mid-May 2024, the stock market moved higher (following a generally downward trend between August and October 2023), except for a modest setback in April 2024.1 The market’s strength over the bulk of that period reflected, in part, expectations of a major change in Federal Reserve (Fed) monetary policy. The Fed indicated that it may begin cutting its short-term, federal funds target rate in 2024.3 That’s a major shift from Fed policy that saw 11 consecutive rate hikes between March 2022 and July 2023, a move designed to slow what had been a surging inflation rate. “The Fed’s interest rate stance is a prime consideration for equity investors in today’s market,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Yet it appears that investors may have to wait until later in 2024 to see any Fed rate cuts.”
These three indices are frequently quoted on daily news reports reflecting daily performance of the stock market. The Dow Jones Industrial Average, perhaps the most quoted index, reflects the performance of 30 prominent stocks listed on U.S. exchanges. The Standard & Poor’s 500 tracks a broader universe of 500 large U.S. stocks. The NASDAQ Composite Index provides a measure of performance of 2,500 stocks listed on the National Association of Securities Dealers (NASD) Automated Quotations exchange. These represent small-, mid- and large-cap stocks. Investors often track these indices, particularly over time, to measure broader stock market performance.
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