US stocks are forecast by Goldman Sachs Research to have a modest return next year, as above-consensus economic growth is partly offset by high equity valuations.
The S&P 500 index is expected to rise to 4700 by the end of 2024, representing a price gain of about 5% and a total return of around 6% including dividends. Our economists’ forecast for US GDP growth of 2.1% in 2024 is already reflected in stock prices.
“Our macro forecasts imply a benign outcome for equities, but the current starting point will limit the potential appreciation for the benchmark US equity index in 2024,” David Kostin, Goldman Sachs Research chief US equity strategist, writes in the team’s report titled 2024 US Equity Outlook: “All You Had To Do Was Stay.” Aggregate stock multiples are high: He points out that the S&P 500’s price-to-earnings ratio trades in the 87th percentile since 1976. And while the Federal Reserve has likely finished hiking rates during this cycle, our economists expect it’s unlikely the central bank will cut rates until the last quarter of 2024.
Mega-cap tech may not be worth the risk
Our analysts expect S&P 500 index gains to be concentrated in second half of 2024. “Resilient economic growth in the beginning of the year will force the market to push back its current pricing that Fed cuts will begin in the second quarter,” Kostin writes. “US election uncertainty will suppress risk appetite. Later in the year, the first Fed cut and resolution of election uncertainty will lift US equity prices.”
The massive outperformance of a handful of mega-capitalization tech stocks has been a defining feature of the equity market in 2023. Our analysts predict these stocks will collectively outperform the remainder of the index in 2024. The seven large tech-stocks have faster expected sales growth, higher margins, a greater re-investment ratio, and stronger balance sheets than the other 493 stocks.
“You’ll get slightly better returns from the seven leading stocks, but not nearly the dramatic difference that you’ve had this year,” Kostin said in an interview during a media roundtable event on Nov. 16.
Kostin points out that the risk-reward for mega-cap tech stocks isn’t especially attractive given expectations are already elevated. Meanwhile hedge fund ownership of these companies is higher than usual, and there’s potential for an “inflection” for AI enthusiasm among stock investors, both of which he says could be a risk to mega-cap stocks. Generative artificial intelligence could potentially drive higher-than-expected growth in company earnings, but in most cases AI is expected to have limited impact on profitability next year.
Cash will be a competitive alternative to stocks
Cash, with a 5% risk-free return, will be a competitive alternative to stocks — three-month Treasury bills yield around 5.5%, similar to the earnings yield on the S&P 500 Index. Meanwhile many categories of investors already own a lot of US stocks. Households, mutual funds, pension funds, and foreign investors collectively have an allocation to stocks (48%) that ranks in the 97th percentile versus history, while bond (20%) and cash (14%) allocations rank at the 43rd and 23rd percentiles, respectively.
“We forecast most of these ownership categories will be net sellers of stocks in 2024,” Kostin writes. The combination of company stock buybacks and strength in mergers and acquisitions will lead corporations to purchase $550 billion (net) of US stocks in 2024.
And although Goldman Sachs Research expects below-average US equity returns in 2024, our analysts think there are more attractive investment opportunities beneath the surface. "Quality" stocks — with higher profitability, stronger balance sheets, and stable sales and earnings growth — could outperform in an environment of persistent investor concern about an impending recession. Our analysts project that growth stocks, which have a higher expected growth rate than the rest of the market, may be attractive given stable economic growth and interest rates. Lagging cyclical stocks that are sensitive to a downturn may rally, given that our economists believe recession risk is lower than feared.
This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.