Investment Outlook January 2024

Will the Fed Declare Victory in 2024?

2024 Investment Outlook

The U.S. economy is rolling into 2024 with a substantial head of steam.  The Commerce Department reported this morning that fourth quarter gross domestic product grew at a rate of 3.3%, far exceeding the Wall Street estimate of 2%.  And, in addition to the stronger-than-expected growth, inflation, as measured by the Fed’s preferred inflation gauge, core personal consumption expenditures (Core PCE), rose only 2% for the quarter.  For the entire year, GDP rose at an annualized rate of 2.5%, accelerating from 2022’s 1.9% increase and defying the recession expectations of many economists.  From the perspective of Fed Chair Jerome Powell and the Fed’s Board of Governors, things could hardly be going better, with inflation continuing to trend down while both growth and employment are holding steady.  The Fed is on final approach for a soft landing.

As we enter 2024, investors are optimistic for several reasons.

  • First, the Federal Reserve continues to move closer to its goal of bringing inflation down to its target rate of 2% while not crushing the economy.  Investors now having growing hopes that the Fed will soon declare victory over inflation and begin to reduce short-term interest rates.  For this year, investors have priced in several Federal Reserve interest rate cuts and expect short rates to end the year at lower levels than today’s 5%.
  • Second, stronger economic growth may translate into a broadening of earnings growth from predominately large-cap technology companies to a wider range of companies in different sectors of the economy.  While the headline performance of the S&P 500 Index was very strong in 2023, nearly 60% of the performance came from the several giant technology companies that occupy the top tier of the market-capitalization weighted index.  A stronger economy with rising consumer confidence and falling interest rates could produce a favorable operating environment for many companies, helping the stock market to broaden out from its very narrow reliance on large-cap technology stocks.
  • Third, corporate earnings are expected to rebound in 2024 after mostly marking time in 2023 (outside of the technology sector).  Overall, analysts expect 2024 corporate earnings growth of 11.8% in 2024, which includes 5.5% revenue growth and profit margins expanding to 12.3% from 11.7% for 2023.  If this all seems improbably good to you, you are probably right.  Typically, analysts are too bullish in the early part of the year, then end up having to cut their estimates.  Nevertheless, Wall Street is expecting a strong year for corporate profits as rates come down and growth remains robust.

Geopolitical concerns, however, can sometimes deal unexpected body blows to financial markets, and, if anything, the geopolitical situation continues to deteriorate.  In the Middle East, ten countries are now actively engaged in fighting stemming from the Hamas terrorist attack on Israel on October 7.  Yemen’s Houthis have launched attacks on ships in the Red Sea, creating a major headache for any company looking to transport their goods between Europe and Asia and increasing both the cost and duration of shipping.  How things evolve from here is anyone’s guess.

Over in Asia, China seems increasingly impatient about Taiwan, where elections earlier this month saw Taiwan’s Democratic Progressive Party (DPP) notch an historic third consecutive presidential victory.  Voters were undeterred in voting for the pro-independence DPP, shrugging off warnings from their increasingly bellicose neighbor across the Taiwan Strait.  In response, China stated “There is one China.”

As always, we welcome your comments and feedback.  Please contact us if there is anything you would like to discuss about your investments or the markets.



*Photo credit: Csondy from Getty Images Signature

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Picture of Peter Thoms, CFA, MBA

Peter Thoms, CFA, MBA

Peter Thoms, CFA, founded Orion Capital Management LLC in April 2002. Peter has extensive experience managing investment portfolios for clients pursuing a wide range of financial goals.

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