By The S&P 500 reached a new all-time high on Friday, thanks to the impressive performance of Big Tech. However, it would be unwise to assume that the same pattern will repeat itself in 2024.
Closing last week at 4,839.81, the S&P 500 has gained 1.5% since the beginning of the year. This is undoubtedly good news for bullish investors. However, even they must acknowledge that the index is no longer cheap, considering its rally and recent gains in 2023. The price-to-earnings ratio of the index has been hovering around 20 times the expected forward earnings.
While this may not have been a major concern in the past, Stifel believes that valuation will soon become a more significant consideration for investors. Barry Bannister, the Chief Equity Strategist, argues that if the inflation ceiling of the 2010s becomes the floor for the 2020s, it will greatly impact valuation.
This is not a new argument from Bannister. He has previously emphasized that sustained higher interest rates will affect equity multiples more significantly than investors have grown accustomed to in recent years. As a result, this could restrict the potential gains of the S&P 500 for an extended period, possibly stretching for years.
Bannister points out that when taking into account an equal-weighted basis, the S&P 500’s forward price-to-earnings multiple is not significantly higher than its prepandemic average of 16 times. This adjustment helps to mitigate concerns about the inflated multiples of Big Tech.
Consequently, while the index may appear to be priced to perfection, there may be opportunities for other sectors that are comparatively less expensive to outperform. This is particularly important as Bannister suggests that persistent inflation will dampen hopes of substantial interest-rate cuts this year and potentially weigh on the overall economy.
Rethinking the Market Outlook for 2024
The Potential Winners in the First Half of 2024
According to expert analyst Bannister, the cyclical value plays such as banks, capital goods, energy, financial services, insurance, materials, real estate, and transports are poised to outperform the broader market in the first half of the year. These sectors will likely benefit from increasing investor confidence in economic growth and sticky inflation.
Balancing Growth and Value
Bannister believes that the current economic growth reflected in cyclical growth (Big Tech) is unsustainable, while cyclical value is undervalued. This imbalance needs to be corrected for a more stable market.
A Cautious Outlook for 2024
Bannister, known for his cautious outlook, has predicted that interest rates will remain higher for a longer period. He expects the S&P 500 to experience some pullback, with a projected level of 4,650 by the middle of the year.
Recession Concerns and the Market
Although there are concerns about the potential impact of higher interest rates on the market, some experts argue that any recession would likely be mild and wouldn’t significantly slow down stocks. However, Bannister believes that a recession has been delayed rather than avoided and expects the market to recover but not at a rapid pace.
Allowing Other Sectors to Catch Up
If there is a temporary slowdown in Big Tech, it could potentially create opportunities for other sectors to catch up. This may result in a slower market advancement compared to the previous surge led by the dominant tech components. Nevertheless, it will promote a healthier market with more winners.
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