S&P 500 2024 Outlook: Clash Of The Titans (SP500)

My friends, family, and followers often ask me “what’s a good buy right now?” “What should I do with my money?” “What will the S&P 500 Index (SP500) be on the last trading day of 2024?” Okay, the latter isn’t actually asked very often, but it’s an interesting thought experiment. Although the year isn’t over, who would have thought 2023 would post such significant gains in the S&P 500? Will 2024 be another year of 20%+ gains? It’s not unheard of, but given the complex economic and political landscape we are entering into, I think not. Balancing both quantitative and qualitative factors in my predictive modeling, I believe the S&P 500 will see modest growth in 2024 as the market navigates corporate, governmental, and political titans shaping the market trajectory for next year.

S&P 500 Price Movement

It’s important to understand that stock prices are ultimately determined by the supply and demand of the market. It’s a unnerving thing to accept, but valuations are not based purely on the financials of a company such as book value or 2-3 times cash flow napkin calculations. Much like Gold, Houses, and Oil, it is determined by supply and demand, with the dollar normalizing valuations in a common language we can compare to. Businesses are no different. There is a strong mix of both quantitative and qualitative assessments which determine stock prices, below are examples to summarize:

During 2023, Federal Reserve meetings, economic reports on inflation and interest rates, single handedly move many of the securities and sectors of the S&P 500. Just a few days ago, December 13th, we saw REIT stocks like Realty Income (O) jump $2.00 from trader sentiment of pauses on rate increase and hints at cuts coming in 2024. I believe these meetings and reports will continue to heavily influence the S&P 500s performance in 2024. We saw a short cascade of bank failures tank the financial sector for a period of time. We’ve seen trader sentiment shifting entire sectors such as energy, mainly oil and natural gas prices, and technology, semi-conductor chips and artificial intelligence (AI) inspiring tech stock surges, much of which is a combination of strong earnings and speculative future strong earnings. All has been linked by the steep rise and sustained interest rates, but many feel the end of the cycle is in sight, but there are still several other factors to consider during this interplay.

Major S&P 500 Predictive Factors

• Magnificent 7
• US Presidential Election Year
• P/E Calculation

Magnificent 7

The technology sector makes up nearly 30% of the S&P 500. Of this 30%, the “Magnificent 7” (M7): Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), NVIDIA (NVDA), Alphabet (GOOGL), Meta Platforms (META), and Tesla (TSLA) make up just over 29% of the S&P 500. This is because about half of Berkshire Hathaway Inc Class B (BRK.B) shares are invested in AAPL.

By November 2023, we saw what a powerful influence the M7 has on the index, gaining 71% this year while the rest of the index returned just 6%. Due to the market cap weighting, this drives up the weighted average to get returns like 20%+ year to date as an index.

From 2013 to 2019, the Magnificent Seven stocks grew at a compound annual growth rate of 15% compared to a 2% growth rate from the rest of the pack. That margin narrowed in the past two years to 18% and 15% respectively, but Goldman sees it widening again in the coming years. From 2023 to 2025, Goldman sees the Magnificent Seven growing at a compound annual growth rate of 11% compared to a 3% rate for the rest of the S&P 500.

Sentiment is driven by their higher profitably, 19% vs. 9.8% for the rest of the index as well as stronger sales growth projections. Using their 11% and 3% CAGRs, I took a simple weighted average of 11% at 29% and 3% at 71% coming to a 5.32% growth rate for 2024.

US Presidential Election

2024 is another US Presidential Election Year. Historically, this brings a tamer market on average as investors wait to see policy direction and assess the sectors which could be most significantly affected. I analyzed S&P 500 total return data from 1928-2023 and separated it into three categories: the years before an election, like 2023, election years: like 1928, 1932..2020, 2024, and the first year in office like 2021. I took an average, standard deviation, and tested for a statistical significance (< 5% via a t-test) for each category. I found that election years do tend, on average, to bring a lower total return and less deviation from that average compared to the year before and after an election at about 6% +/- 15%. The years before tend on average to run higher than lifetime index return averages, almost 16.5%.

Click to enlarge

Below I summarize how to interpret the t-test results.

• There is a significant difference in performance between the year before an election and election year.
• There is a significant difference in performance between the year before and the first year in office.
• There is no significant difference in performance between election year and the first year in office.

6% is a good measured “split the dictionary” point in developing my prediction alongside the other factors in this article, particularly knowing that election years tend lower on both returns and variation.

P/E Calculation

Forward Earnings Per Share (EPS) are estimated to be about $58/share by Q4 2024. Annualizing this profit forecast results in $232 EPS. Using the previous subsequent sections, I split the difference of 6% (minus the dividend for election years) and M7 forecast, arriving to about a 5% price growth. This lands the SP500, which is currently at $4722, to $4958 by end of 2024 or a P/E ratio of 21.37.

This isn’t a ridiculous P/E ratio given historic correlation to interest rates, however what I caution with these predictions are the variation of the S&P 500s returns in relation to P/Es: even in an election year with less variation in returns historically. Averages should always be considered next to a standard deviation to quantify uncertainty of the average.

While the above chart correlating P/E ratios and Interest Rates has a low R-squared, only 22% of the variation can be explained by interest rate, there is a clear trend that lower interest rates drive higher P/Es and vice versa. Of note, around a 5% interest rate, a conservative estimate for the fed funds by end of 2024, has the highest amount of variation of P/Es, anywhere from 10-35, but just a quarter-half point lower tightens up band by about a third. Thus, given our current economy and upcoming election year, I lean more toward 2024 falling in a tighter band at sub 5% interest rates, making a 21 P/E ratio reasonable and ultimately, price prediction reasonable.

Risk Analysis

My key concerns which could close the S&P 500 lower than forecasted are American’s growing debt and delinquencies and looming World War III. Per the Federal Reserve’s latest Q3 2023 report statement regarding American Household Debt and Credit Report

Household Debt Rises to $17.29 Trillion Led by Mortgage, Credit Card, and Student Loan Balances. Total household debt rose by 1.3 percent to reach $17.29 trillion in the third quarter of 2023, according to the latest Quarterly Report on Household Debt and Credit. Mortgage balances increased to $12.14 trillion, credit card balances to $1.08 trillion, and student loan balances to $1.6 trillion. Auto loan balances increased to $1.6 trillion, continuing the upward trajectory seen since 2011. Other balances, which include retail credit cards and other consumer loans, were effectively flat at $0.53 trillion. Delinquency transition rates increased for most debt types, except for student loans.

Credit card debts, currently at $1.08T, surged by $48B or 4.7%. Auto loan debts rose by $13B, maintaining an upward trend since 2011 and reaching a total of $1.6T. Other debts, encompassing retail cards and diverse consumer loans, saw marginal movement, experiencing a $2B uptick. Student loan debts saw an expansion of $30B, now totaling $1.6T. Overall, non-housing debts witnessed an increase of $93B. Following this, delinquency rates increased in the Q3 2023. As of September, 3% of outstanding debt was in some stage of delinquency, up by 0.4% from Q2 2023, but still 1.7% lower than the Q4 2019.

With student loans only recently starting back up in Q4 2023, we have yet to see their effect on American’s spending heading into 2024. All those payments, a majority of which were directed at a variety of discretionary and non-discretionary spending, will have to again be concentrated to debt servicing, which may serve as a catalyst for tightening in consumerism and thus trickle up into corporate earnings. Credit card delinquency started rising prior to the student loan payment pause being lifted. I don’t see how restarting student loan payments will help reduce household debt handcuffing Americans and amplifying their risk to an economic recession and unemployment spikes, which can collapse this house of cards.

With ongoing conflicts between Ukraine-Russia and Israel-Hamas, any increasing escalation to these conflicts will drive market volatility, particularly in energy prices, which are foundational for economies to operate and currency stability which affects multinational corporation’s earnings and underlying market performance. Lower earnings ultimately drives stock prices lower, as investors will not want to pay more for a stock or even the index itself in one year than it did the prior year.

Outlook

All in all, I’m taking a modest growth position on the S&P 500 in 2024. There are too many unfinished economic pressures and phase delays yet to be priced into shifting the real earnings for 2024, especially coming into an election year which historically lower returns than years before and after. The M7 is over-leveraged in the index and will likely be scaled back, despite solid performance estimates next year, we will not see a repeat of 2023’s outstanding performance. Last, with inflation rates still not down to the Fed’s goal and interest rates yet to be cut, the market outlook and real earnings have yet to be realized. All this can easily be lowered significantly due to the sensitivity of the American consumer and geopolitics heading into 2024. Nonetheless, I’m long on the S&P 500 and a year of flat or modest growth is most welcome as I continue using the index as my primary retirement investment vehicle.

Editor’s Note: This article was submitted as part of Seeking Alpha’s 2024 Market Prediction competition, which runs through December 20. With cash prizes, this competition — open to all contributors — is one you don’t want to miss. If you are interested in becoming a contributor and taking part in the competition, click here to find out more and submit your article today!