Wall Street Analysts Are Optimistic For 2024
It’s that time of the year where Wall Street polishes up their crystal balls and pins targets on the S&P index for the upcoming year. As is often the case, while Wall Street is always optimistic, the forecasts prove pretty wrong. However, the guessing game is an annual tradition of Wall Street analysts and, as is always the case, “Predictions Are Difficult…Especially When They Are About The Future” – Niels Bohr. All we can do is analyze what occurred previously, weed through the noise of the present, and discern the possible outcomes of the future. The biggest problem with Wall Street, both today and in the past, is the consistent disregard of the unexpected and random events that inevitably occur. “The estimates from sell-side strategists put the average target for the S&P 500 at 4,836 for the end of 2024, implying an advance of merely 6.3%, according to MarketWatch calculations of the data. That is below the average yearly return of around 8% for the large-cap index since 1957 and its year-to-date surge of 18.5% in 2023.” The problem with current forward estimates is that several factors must exist to sustain historically high earnings growth. Economic growth must remain more robust than the average 20-year growth rate. Wage and labor growth must reverse to sustain historically elevated profit margins, and both interest rates and inflation must reverse to lower levels. More notably, if the Fed cuts rates significantly, it would be in response to a near-recessionary or recessionary environment. Such would not support current strong earnings estimates of $220.24 per share next year. In the no-recession scenario, the assumption is that valuations will fall slightly as earnings increase to 22x earnings over the next year. (22x earnings has been the average over the last few years.) The S&P 500 should theoretically trade at roughly 4845 by year-end 2024. Given the market is trading at approximately 4550, this would imply a 6.5% increase from current levels. However, should the economy slip into a mild recession, valuations would be expected to revert toward the longer-term median of 17x earnings. Such would imply a level of 3744, or roughly a 17% decline next year. Which would also coincide with Fed rate cuts to offset the deflationary risk to the economy. However, we must consider one more scenario. We assume the $220/share in year-end estimates remains valid. The economy avoids a recession even as inflation falls. The Federal Reserve pivots to a lower interest rate campaign. Valuations remain static at 22x earnings. In this scenario, the S&P 500 should rise from roughly 4550 to 5395 by the end of 2024. This would imply an 18.5% gain for the year. Here is our concern with the bullish scenario. It entirely depends on a “no recession” outcome, and the Fed must reverse its monetary tightening. The issue with that view is that if the economy does indeed have a soft landing, there is no reason for the Federal Reserve to reverse reducing its balance sheet or lower interest rates. More importantly, the rise in asset prices eases financial conditions, which reduces the Fed’s ability to bring down inflation. While the bullish scenario is possible, that outcome faces many challenges in 2024, given the market already trades at fairly lofty valuations. Even in a “soft landing” environment, earnings should weaken, which makes current valuations at 22x earnings more challenging to sustain. As investors, we should hope for lower valuations and prices, which gives us the best potential for long-term returns. Unfortunately, we don’t want the pain of getting there.
