Fallout from the pandemic made the last two years particularly tumultuous for investors. The S&P 500 (^GSPC 1.02%) tumbled 19% in 2022, dragged down by runaway inflation, rapid interest rate hikes, and recession fears. That was its worst annual performance since the global financial crisis in 2008.
Yet, the recession many economists predicted for 2023 never materialized, and the S&P 500 rebounded 24% during the year, propelled higher by cooling inflation, excitement around artificial intelligence, and the anticipation of rate cuts. The benchmark index ended the year with nine consecutive weeks of gains, its longest win streak since 2004.
The stage is now set for another exciting year. Here are three not-so-wild stock market predictions for 2024.
1. The S&P 500 will gain 10% in 2024
My first prediction is the S&P 500 will increase by 10% in 2024, a more modest performance than its 24% gain in 2023 but a good year nonetheless. I base that prediction on two pieces of information.
First, Wall Street analysts expect S&P 500 revenue and earnings growth to accelerate in 2024. That could energize investors and move the index higher. Indeed, analysts believe that will happen. The S&P 500 has a median 12-month price target of 5,090, which implies about 8% upside from its current level.
Second, the Federal Reserve has hinted that its rate-hiking campaign is finished, and its latest projections imply three 25-basis-point cuts in 2024. Lower rates boost spending and economic growth, and investors tend to get excited by those prospects. As a result, the S&P 500 returned an average of 17.6% during the 12-month period following the last six hike cycles, according to JPMorgan Chase.
To add context, the Federal Reserve last raised its benchmark rate in July 2023, and since then, the S&P 500 has advanced 3.6%. That leaves potential upside of 14% through July 2024.
Between the 8% upside based on the analysts' median target price and the 14% upside implied by the end of the Fed rate hikes, I chose 10% specifically because it aligns with the average annual return of the S&P 500 for the last 30 years. In other words, I expect the S&P 500 to have an average year.
2. The technology sector will outperform the S&P 500
My second prediction is the technology sector will outperform the broader S&P 500, propelled higher by strong momentum across artificial intelligence (AI) and cybersecurity stocks. I base that prediction on three pieces of information.
First, the technology sector was the best-performing of all 11 market sectors over the last year, the last five years, and the last decade. In fact, the technology sector increased 465% over the last 10 years, nearly tripling the 160% return of the second-best-performing sector (consumer discretionary), as shown in the chart below.
Data by YCharts.
The technology sector has also outperformed the S&P 500 in nine of the last 10 years, meaning recent history implies a 90% chance that the technology sector will beat the market once again in 2024.
Second, a recent survey from Morgan Stanley found that AI was the second-largest IT budget priority in the third quarter of 2023, up from third in the second quarter. That trend will likely gain momentum in 2024. Experts like Microsoft founder Bill Gates and veteran analyst Dan Ives see AI as the most revolutionary technology in decades, and the AI market is forecasted to grow at 37% annually through 2030.
Third, the same Morgan Stanley survey identified cybersecurity as the largest IT budget priority in the third quarter of 2023, up from No. 2 in the second quarter. Digital transformation projects are driving cloud migration and connected device proliferation, making cybersecurity increasingly imperative. That trend is poised to gain momentum in 2024, given the upcoming presidential election. The market is forecasted to grow at 12.3% annually through 2030.
Companies that blend both elements could see their share prices soar in 2024 and beyond. One that comes to mind is CrowdStrike (CRWD 2.03%), a recognized market leader in endpoint security, cloud security, and threat intelligence. And that success is due in part to superior AI.
Indeed, consultancy Frost & Sullivan recently wrote, "CrowdStrike leads the industry with regards to the application of artificial intelligence and machine learning to endpoint security, as well as providing unparalleled prevention of malware and malware-free attacks."
3. Microsoft will become the world's most valuable company
Apple (AAPL -0.35%) is worth $2.8 trillion as of this writing, and Microsoft (MSFT 1.82%) is worth $2.7 trillion. Both businesses have been wildly successful during the past decade, but my third prediction is that Microsoft will surpass Apple as the most valuable public company by the end of 2024. Here's why.
Apple is a wonderful business. It is the second-largest smartphone manufacturer in the world, and its installed base of more than 2 billion devices is driving strong growth in its high-margin services segment. But the stock appears overvalued. Wall Street expects Apple to grow earnings at 9.1% over the next three to five years, and the stock currently trades at 29.6 times earnings. That gives it a price/earnings-to-growth ratio (PEG ratio) of 3.2, well above the five-year average of 2.3.
Meanwhile, Microsoft has more robust growth prospects. It is the market leader in enterprise software and operates the second-largest cloud computing platform. Better yet, Microsoft is leaning into generative AI across both business segments, tapping into explosive demand.
To that end, Wall Street expects Microsoft to grow earnings at 14.6% annually over the long term. Compared to its current valuation of 35.6 times earnings, that gives it a cheaper PEG ratio of 2.4, and that multiple is identical to the five-year average.
To be clear, I predict the market will reassess its valuation of both companies such that Microsoft lands on top. That does not necessarily mean Apple will lose value.
