To The Moon

With the end of the year approaching, major institutions begin to provide outlook for US stock market in 2024.

According to some reports released so far, most institutions are slightly more optimistic this year compared with the widespread concerns last year.

We have selected three outlook reports from David J. Kostin team of Goldman Sachs, Michael J Wilson team of Morgan Stanley and the Mark Haefele team of UBS.

Let’s look at their forecasts for the US stock next year, as well as their analyses and judgment on important issues and directions.

Forecasts for S&P 500; Chart made by Tiger_Insights

1. Up or down? US stocks growth forecast for 2024

It is difficult to accurately predict the rising/falling points of US stocks next year. It is common for institutions to be "proven to be wrong" for many times, but their perspectives remain valuable for reference.

In these reports, Goldman Sachs, Morgan Stanley and UBS gave their own judgments on $S&P 500(.SPX)$ in benchmark, bull and bear markets, respectively. The conclusions of the three institutions are similar, and all believe that

in the benchmark scenario, the U.S. stock market will rise modestly next year, and the S&P 500 will rise to around 4500 to 4700.

Interestingly, the Goldman Sachs report quoted a Taylor Swift lyric "All You Had To Do Was Stay", which means that the US stock market will have a positive return in the next year, although there will be fluctuations during the period.

Goldman Sachs analysts believe the S&P 500 is expected to rise about 5% for the full year 2024, with almost all of the gains coming in the second half of the year.

Due to the current strong economic growth elasticity, the rate cut in the first half of the year won’t happen, and the S&P 500 will also fall down. But on the contrary, due to the increased uncertainty of the US election in the second half of the year and the increasingly strong expectation of the Federal Reserve to cut interest rates, S&P 500 will also rise.

Goldman Sachs: S&P 500 forecast for next year

Although the overall expectation of the institutions is moderate growth, Morgan Stanley analysts through the leading macro data also tested that the United States is currently in the "late cycle", that is, cost growth is greater than revenue growth, and corporate profit growth may be returned or even negative.

Coincidentally, Goldman Sachs also believes that the current profit margin has stabilized, it is difficult to expand significantly next year, and the Federal Reserve will maintain the current high interest rate until the end of 2024.

As a result, S&P 500's earnings for the whole of next year could be below its historical average.

 Morgan Stanley: Conference Board Leading Economic Indicator shows that the United States is at the end of the "late cycle"

2. Can investors continue to invest in tech giants?

This year, tech giants especially the "Magnificant 7" including $Apple(AAPL)$ , $Amazon.com(AMZN)$ , $Alphabet(GOOG)$ , $Meta Platforms, Inc.(META)$ , $Microsoft(MSFT)$ , $NVIDIA Corp(NVDA)$ and $Tesla Motors(TSLA)$ , are definitely the brightest stars. 

According to UBS statistics, the S&P 500 has gained 15.1% so far this year, of which the Magnificant 7 have contributed 12.5%, accounting for 83% of the total return.

On the contrary, according to the statistics of Morgan Stanley, if excluding the Magnificant 7, $S&P 500(.SPX)$ only rose 6%. So, one of the biggest topics in 2024 must be:

Can we continue to buy tech giants?

UBS, Morgan Stanley: The earnings contribution of Magnificant 7 to the S&P 500

In these outlook reports, major institutions have placed special emphasis on the prospects and forecasts of the technology industry.

UBS promotes the IT sector from neutral to the most preferred.

They believe that there are many highly profitable and high-quality companies in the IT sector, they have strong moats. AI is developing at a rapid pace, which is a good opportunity worth investing in for the long term.

UBS has mentioned at length that the development and application of AI will disrupt many fields 

For example, in the semiconductor, cloud, software, and even entertainment, gaming, advertising and other industries, these technology giants will continue to play an important role. Although there may be fluctuations and shocks in short-term share prices, giants are likely to continue to rise in the long-term.

UBS: Focus on high-quality large-cap technology stocks

Goldman Sachs analysts, by contrast, are relatively cautious.

While they agree that large-cap tech earnings growth will continue to lead the market next year, the pricing is already high and not particularly attractive from an earnings/volatility perspective.

In this regard, Goldman Sachs has counted the excess returns of the Top7 to Bottom493 in history and found that the excess performance of the past year has little relationship with the excess performance of the next year.

In other words, even if this year the tech giants outperform the broader market, it doesn't mean that they will still lead next year.

Goldman Sachs: Little relationship between trailing and forward returns of top 7

Morgan Stanley: AI will drive profit growth

By profitability, Morgan Stanley believes AI has driven the improvement of production efficiency, which will be reflected in the profit growth in the next 1-2 years.

In a broad recession environment, these giant companies can achieve more considerable profit growth than other enterprises by relying on their own operational efficiency and cost advantages.

Therefore, Morgan analysts  believe that tech giants' earnings are expected to climb rapidly in 2024, well ahead of other companies.

Morgan Stanley: Profit expectations of seven giants are far ahead in 2024

On the whole, most of the institutions are optimistic about the profit growth of the tech giants and the further rise of stock prices in the future, while looking forward to the breakthrough of AI and the deep application of cross-industry. 

3. How to allocate stocks next year?

At present, it is the consensus of the institutions that we are in the late cycle.

According to Goldman Sachs, the blue areas are the late cycle based on the definition of full employment. Historically over the past 40 years, the late cycle has always been followed by a recession cycle.

Goldman Sachs: late cycle and recessions in history

 In response to possible recession expectations, Goldman Sachs and UBS both recommend high-quality stocks, which usually have stronger financial statements.

These high-quality companies can be more resilient in the recession sentiment. From the historical review, the balance sheet factor and margin factor have positive long and short returns.

Goldman Sachs: long-short average return of different factors in late cycle

By contrast, the more pessimistic Morgan Stanley recommends conservative traditional defensive sectors, including healthcare, consumer spending and utilities. Historically, “Defensives” have shown good outperformance at the end of most cycles.

Morgan Stanley: Performance of Defensives sector in previous late cycles

Other than directly avoiding recession risks through 'defensive stocks' that protect against the late cycles, Goldman Sachs and Morgan Stanley seem similar in their recommendations across other sectors, but their underlying logics differ significantly.

For instance, both recommend growth stocks.

Goldman Sachs, based on optimistic economic expectations and the possibility of sustained high interest rates, suggests high-profit-margin growth stocks.

In this scenario, investors might find it challenging to rely on valuation expansion for profits, whereas income growth could better support stock prices.

On the contrary, Morgan Stanley, in anticipation of potential recession risks, recommends defensively oriented low-volatility growth stocks.

Regarding cyclical stocks, Goldman Sachs, being more optimistic about recession than the market, encourages seeking out undervalued cyclical stocks that have been excessively pessimistic.

By strategically positioning these stocks, there's potential for excess returns once unexpectedly positive economic data emerges.

Meanwhile, Morgan Stanley, still operating on the logic of the tail end of the economic cycle, opts for historically performing well industrial and energy stocks.

Morgan Stanley: Industrial and energy stocks have better relative performance in the late cycle

Overall, both Goldman Sachs and Morgan Stanley recommend a 'barbell' approach consisting of defensive stocks, growth stocks, and cyclical stocks, aiming for a combination that balances defense and growth.

However, their inclinations toward next year's economic growth differ: Goldman Sachs and UBS are more optimistic, recommending fewer defensive positions and emphasizing more on quality.

Goldman Sachs even allocates tactical positions to some cyclicals that are generally viewed pessimistically.

Morgan Stanley holds a slightly more pessimistic view on economic performance and stock indices, thus their recommendations across sectors lean more towards defensive positions.

4. Summary

Generally speaking, based on the outlook reports released so far, the market's benchmark expectations for next year can be summarized as: 'moderate growth, bullish on giants, defensive allocation.'

However, the current situation is rapidly changing, and market trading sentiment has shifted from extreme fear in October of this year to greed within a short span of a month.

When Morgan Stanley wrote the report, $S&P 500(.SPX)$ already reached 4500 points - they forecast in benchmark scenarios at the year end of 2024.

Therefore, we believe that

the conclusions drawn in the major institutions' outlooks may not be crucial.

However, their logic should still be continuously monitored as the prevailing market expectation.

When subsequent changes lead the market away from these expectations, it presents an opportunity to capture high-value investment trades.

Interestingly, Bank of America recently introduced 12 trades that go against consensus expectations for next year. For your reference, let’s see how many point would happen next year.

Bank of America: 12 major trades against consensus expectations

Bank of America: 12 major trades against consensus expectations