To The Moon

Content:

·       2023 Recap

·       Wall Street’s S&P 500 2024 Year-end Forecasts

·       Will There be a ‘Second Wave’ of Inflation in the US?

·       When Will the Fed Cut Rates in 2024?

·       Why a March Rate Cit is still a Likely Scenario?

·       The Prediction of 6 Rate Cuts in 2024 Appears Overly Aggressive

·       Equity Risk Premium: The Stock Market Isn't Rewarding You for Taking Risk

·       Our S&P 500 2024 Year-end Forecast

·       The Fed could pull off a Soft Landing

·       Don't Fight the Fed: The S&P 500 Generally Rallied After the First Rate Cut

·       Why the US Dollar Matters?

·       Why the S&P 500 may rise by 10% in 2024?

·       The S&P 500 Typically Encounters a 13% Drawdown in a Presidential Election Year

·       Investment Strategies

·       What Does the Chart say?

·       Conclusion

Disclaimer: The information provided here is for educational and informational purposes only and does not constitute financial advice, investment recommendation, or an offer to buy or sell any securities.

2023 Recap:

The Nasdaq 100 recorded a 55% return, while the $S&P 500(.SPX)$ achieved a 26% return in 2023. If your portfolio hasn't matched these returns, it could be because your portfolio is holding too many assets outside the U.S.

While many assets displayed above underperformed U.S. equities last year, most investors are contemplating taking profit off the table in U.S. equities this year. However, looking at the 5-year or 10-year annualized performance, U.S. equities have a superior track record, with the $NASDAQ 100(NDX)$ boasting a 10-year annualized return of 18%, and the $S&P 500(.SPX)$ at 12.5%. Thus, holding a higher proportion of U.S. stocks in your portfolio seems wiser to achieve better long-term performance.

Wall Street’s S&P 500 2024 Year-end Forecasts

On average, Wall Street forecasted a year-end target of 4,958, representing a 3.94% upside compared to the 2023 closing price or just a 2% upside compared to the January 24th closing price at 4,868.

There appears to be limited upside on the $S&P 500(.SPX)$ . However, analysts often revise their target prices. Thus, we are not surprised to see a revised target price when the $S&P 500(.SPX)$ approaches 4,958.

The key takeaway from the optimistic forecast is that most research houses have given up on a hard landing scenario. They are mostly expecting a soft landing now.

Will There be a ‘Second Wave’ of Inflation in the US?

It may be premature to discuss a second wave of inflation, as inflation does not seem sticky, and inflation data still shows a downward trend.

When Will the Fed Cut Rates in 2024?

According to CME FedWatch, traders anticipate the Federal Reserve to begin cutting rates in May. However, there is still a notable probability that we might witness the first rate cut as early as March.

Why a March Rate Cit is still a Likely Scenario?

• With real GDP growth anticipated to slow down this year, the Fed may opt for an early rate cut to stimulate the economy.

• An early rate cut could provide President Joe Biden with a boost in his bid for re-election."

The Prediction of 6 Rate Cuts in 2024 Appears Overly Aggressive

• Market participants are currently predicting a total of 6 rate cuts in 2024, which would bring interest rates down to a range of 3.75% to 4%, from the current range of 5.25% to 5.5%.

• However, we find this forecast of 6 rate cuts too aggressive. The current dot plot chart indicates that Fed members are anticipating only 3 rate cuts in 2024.

• Our projection aligns more closely with the dot plot chart, anticipating 3 to 4 rate cuts. We believe that investors may face disappointment and trigger a correction in US equities as they adjust their rate cut expectations lower later in the year.

Equity Risk Premium: The Stock Market Isn't Rewarding You for Taking Risk

Presently, the equity risk premium at 0.1% indicates that the stock market isn't providing substantial rewards for taking risk, suggesting investors may find bonds more preferable to stocks.

However, I posit that for the equity risk premium to rise, it isn't necessary for stock prices to decline. I believe that an impending interest rate cut by the Federal Reserve will lead to a decrease in bond yields, ultimately causing the equity risk premium to increase.

Our S&P 500 2024 Year-end Forecast

• In my base case for 2024, I anticipate the $S&P 500(.SPX)$ to gain 10%, reaching 5,250, with a projected 11% growth in EPS.

• In the worst-case scenario, $S&P 500(.SPX)$ could decline by 13% to 4,140, accompanied by a modest 5.5% gain in EPS and a PE contraction to 18x.

• In the best-case scenario, a 20% increase to 5,750 is possible, driven by a 14.7% rise in 2024 EPS to 250, with PE remaining elevated at 23x

The Fed could pull off a Soft Landing

The Federal Reserve projects a slowdown in real GDP to 1.4% in 2024, while the US Conference Board predicts a slightly lower figure at 1.2%. Notably, the anticipated contractions in Q2 and Q3 of 2024 are modest, at just -0.7% and -0.4%, respectively. Consequently, it appears that the US is not on a trajectory towards a hard landing.

Don't Fight the Fed: The $S&P 500(.SPX)$ Generally Rallied After the First Rate Cut

After the first rate cut, the $S&P 500(.SPX)$ generally experiences an upward trend in prices. On average, the return for the S&P 500 after the initial rate cut is 6.88% after 6 months, 8% after 12 months, and an impressive 26% after 2 years. This suggests that holding onto stocks for the long term post the first rate cut may be a prudent strategy, as the returns tend to increase with time.

Notably, if the Federal Reserve opts for a rate cut in March, the data indicates that by the end of 2024 (9 months later), the average return is projected to be 5.87%.

Why the US Dollar $USD Index(USDindex.FOREX)$ Matters?

With approximately 60% of $S&P 500(.SPX)$ companies’ revenue comes from overseas, a falling US dollar would act as a tailwind for U.S. corporate profits. Put simply, for every 1 percent drop in the US dollar, S&P 500 EPS growth is projected to increase by 0.5%. This correlation explains why the US dollar typically exhibits a negative relationship with US stocks. Overall, the anticipation of a lower US dollar following a rate cut is expected to contribute to a boost in US company earnings.

Why the $S&P 500(.SPX)$ may rise by 10% in 2024?

• 68% of the time, the S&P 500 generally rises an average of 10%, following an annual return of more than 20%.

• Generally, the S&P 500 provides an average return of 10% in an election year.

The S&P 500 Typically Encounters a 13% Drawdown in a Presidential Election Year

We anticipate a drawdown of 10 to 15% this year based on election year seasonality. Historically, the S&P 500 tends to experience a sell-off in February to March and September to October. Therefore, investors are advised to exercise caution during these periods.

Investment Strategies

• The key theme to invest in this year is still Artificial Intelligence, and the key beneficiary is still the Magnificent Seven, namely $Microsoft(MSFT)$ , $Apple(AAPL)$ , $Amazon.com(AMZN)$ , $Alphabet(GOOG)$ , $NVIDIA Corp(NVDA)$ , $Meta Platforms, Inc.(META)$ . They are the large-cap AI companies with the ability and cash flow to spend capital expenditures on developing AI.

• Other key AI players that you may consider are $Advanced Micro Devices(AMD)$ , $Taiwan Semiconductor Manufacturing(TSM)$ , $ASML Holding NV(ASML)$ .

• Optimism about rate cuts may drive the performance of small-cap companies, as represented by the $iShares Russell 2000 ETF(IWM)$ , in 2024.

• The $SPDR S&P 500 ETF Trust(SPY)$ and $Invesco QQQ Trust-ETF(QQQ)$ remain among the easiest ways to participate in the US equity market. We also believe that these two ETFs offer investors a good avenue to gain exposure to the 'Magnificent Seven' stocks, accounting for 28% and 39% of the $S&P 500(.SPX)$ and $NASDAQ 100(NDX)$ weights, respectively

What Does the Chart say?

An inverted head and shoulders pattern was formed when the S&P 500 broke above the neckline at 4106. The S&P 500 has reached its inverted head and shoulders' target price at 4896. Thus, I would not be surprised if it starts the correction from now.

However, since the earnings results are so far, so good, we may see the S&P 500 shoot up to the Fibonacci extension level of 127% at 5111 or 141% at 5223 before encountering a meaningful correction

Conclusion:

• We prefer to stay optimistic on US equity market because 72.6% of the time, $S&P 500(.SPX)$ posted positive annual total return.

• My base case for 2024 is that the $S&P 500(.SPX)$ could gain 10% to reach 5,250.

• The maximum drawdown is expected to be between 10-15%, possibly occurring in Feb-Mar or Sep-Oct based on seasonality.

• Our preferred investment strategy continues to recommend allocating at least 70% of funds into the market to capture market return, with the remaining 30% reserved for short-term investments.