What's in store for stocks in 2024? The best answer is: No one knows for sure. There are too many variables in play to do anything but make a guess.
But those guesses can at least be based on solid underlying reasoning. With that in mind, here are my four predictions for the stock market in 2024 -- and which stocks will soar the most if they're right.
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1. Positive returns -- but smaller than in 2023
I think that the overall stock market will deliver positive returns in 2024. However, I expect those returns to be somewhat smaller than they were last year. Why? My prediction is based on three factors.
First, this is a presidential election year. Since 1916, the S&P 500 (a good proxy for the broader stock market) has risen in 20 of 24 years in which there was a presidential election. The party in control of the White House has ample motivation to do everything it can to boost the economy. That's usually good for stocks.
Second, there's another historical pattern that could also be applicable. The S&P 500's strong gain last year followed a big sell-off in 2022. In the past, every time the index fell by 15% or rebounded by 15% or more in the following year, it extended those gains in the year after the bounce. However, in each case, the subsequent gain wasn't as big as the previous year's jump.
Third, many Wall Street analysts predict that the S&P 500 will jump in 2024, but with a lower return than last year. Sure, they're guessing, just as I am. However, they think that moderating inflation and the potential for interest rate cuts should be good for stocks. I agree.
2. A stock market surge in the fourth quarter
Speaking of interest rate cuts, they could spark a stock market surge in the fourth quarter of 2024. This is certainly a prediction that's going out on a limb a bit, but I think a Q4 jump makes sense.
The Federal Reserve has indicated that it will likely reduce interest rates this year. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in December that he expects two rate cuts will come in the second half of the year.
Yes, some predict the Fed will cut rates earlier in 2024. However, Bostic isn't the only Fed official who isn't in a hurry. Federal Reserve Governor Christopher Waller also recently stated, "I see no reason to move as quickly or cut as rapidly as in the past."
My hunch is that Bostic and Waller are correct about the timing of potential rate cuts. If so, the chances that the stock market will surge in Q4, even if only modestly, should be pretty good.
3. The "Magnificent Seven" won't be the market leaders
Last year, the so-called "Magnificent Seven" stocks took the world by storm. Nvidia led the way with a jaw-dropping gain of nearly 240%. Meta Platforms wasn't too far behind, with its shares almost tripling in value. All the others delivered returns of at least 48%.
While I won't be surprised if several of these stocks rise again in 2024, I don't think that they'll be the market leaders as a group. I'm not alone in this view. Wall Street analysts aren't projecting outsized returns for most of the "Magnificent Seven" over the next 12 months, either.
Federated Hermes portfolio manager Damian McIntyre recently told Bloomberg that as more companies benefit from artificial intelligence (AI), the rally that was contained in large part to the huge tech stocks last year should "broaden out." Main Street Research's James Demmert agreed with similar language, stating, "Tech should continue to be in a very vibrant bull market in 2024, but it is one that will broaden out across the sector, and not just be confined to the top names."
4. Small-cap stocks will be big winners
So which stocks will soar the most in 2024? My last prediction is that small-cap stocks will be big winners.
One reason why I like small-cap stocks is their attractive valuation as a group. American Century Investments estimates that small-cap stocks are nearly 20% below their average forward earnings multiple. Such a discount won't last indefinitely.
Those aforementioned interest rate cuts also factor into my prediction. Small businesses are usually helped more by lower rates than large businesses are.
What I won't attempt to predict, however, is which small-cap stocks will deliver the greatest gains. Instead, I think that investing in exchange-traded funds (ETFs) such as the Vanguard Small-Cap Value ETF (VBR 0.37%) and the Vanguard Small-Cap ETF (VB 0.54%) is a better strategy.
Both ETFs focus exclusively on small-cap stocks. Both have low annual expense ratios. I look for these Vanguard funds to beat the overall market this year. And even if my prediction is wrong, they're still great ETFs to buy and hold over the long term.
