After the spectacular rally in the US stock market in 2023, investors were expecting the S&P 500 to continue rising and reach its first all-time high in almost two years. However, 2024 has started on a much more cautious note for investors as the market seems to catch its breath before its next move.

A slow start makes sense as many were caught on the wrong side in 2023, as they predicted gloom and doom but the S&P 500 jumped more than 24% despite bank collapses, recession fears and the highest borrowing costs in decades.

The Federal Reserve’s decision to raise interest rates to curb inflation has led to increased market focus on risks beyond monetary policy. Wall Street strategists are divided on the stock direction this year, with investors assessing the lagging impact of the Fed’s hiking cycle.

Equities have drawn support in recent months from growing speculation that the Fed will start lowering borrowing costs by mid-2024. What it transpires is that volatility could remain higher this year as uncertainty still exists across the board. From geo-political, interest rates, earnings, consumer spending, tech stocks to US elections in November – the list is long, not forgetting a ‘Black Swan’ event.

Investors should “buckle up” as markets are likely to be volatile in the first quarter of 2024 and could drop by up to 20% – but you could find there are more opportunities to make money,” says Nigel Green, CEO, deVere Group.

Rate-Cut Timing

The speculation is that the Federal Reserve is in no rush to reduce interest rates. The US inflation print due Thursday as well as the start of earnings season at the end of the week may offer investors further catalysts. “The recent Fed meeting minutes indicated a consensus to keep interest rates higher for an extended period, negatively impacting stock indices, especially the Nasdaq 100,” says Rania Gule Market Analyst at XS.com

“In my view, the most significant aspect is the rise in wage gains, reaching +4.1% every year, significantly surpassing current inflation rates. Historically, the relationship between wages and prices tends to continue in the psychology of inflation, likely compelling the Federal Reserve to maintain a cautious tone in its future policy decisions,” says Gule.

Magnificent Seven Stocks

In 2024, a lot of expectations are from the Magnificent Seven stocks, including Amazon, Apple, Alphabet, Meta Platforms, and Tesla which contributed 64% of the S&P 500’s rally last year, with an expected 22% earnings growth this year. “These firms have proven their ability to weather challenging economic conditions, with their diversified revenue streams, strong balance sheets, and global reach. The global shift towards digitalization and the acceleration of tech megatrends remain potent drivers for the Magnificent Seven,” says Green.

Further, Artificial intelligence (AI) has the potential to transform practically every industry in the next decade. “AI is rapidly moving from promise to reality as companies integrate these technologies into their products and services. The top AI stocks have made smart early bets and investments in AI that are starting to pay off. As these companies land major partnerships and roll out new AI-powered offerings, 2024 could be a breakout year for their stock prices as revenues ramp up,” says Tobi Opeyemi Amure, an analyst with Trading.biz.

US Economy

“To those who are buying stocks on the hope that the Fed will cut 6 or more times this year will be sorely disappointed, as that isn’t a reasonable assumption, however, if you are buying stocks because the economy is stronger than the bears would have you believe – as we are – you are going to be rewarded because a strong economy is going to lead to higher revenues and higher profits for companies, which is why we believe stock prices will go higher from here.

There’s an old political maxim that “It’s the economy, stupid,” however, we think that could be amended to “It’s the consumer, stupid.” As long as the consumer stays strong, the economy will grow and the stock market will eventually follow. Once unemployment jumps higher and layoffs begin, then all bets are off, but in the meantime, the death of this bull market has been greatly exaggerated,” says Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance

US Presidential Vote

Since 1949, the S&P 500 has experienced a nearly 13% gain in US stocks during election years with a sitting president, according to the Stock Trader’s Almanac. Saqib Iqbal, a financial market analyst at Trading.Biz said, “A re-election for President Joe Biden could result in initial market indecision until clarity emerges on tax policies and costly public initiatives. Investors can navigate this uncertainty by selling puts and calls and adjusting their positions.

In the event of Donald Trump’s re-election, the stock market will likely witness an initial rally. However, uncertainties arise regarding potential disruptions to the post-World War II international order and their impact on geopolitics and financial markets.”

Buy Back of Stocks

The fate of the stock market is not dependent on buybacks, but at roughly a trillion dollars each year, they represent one of the most powerful buying forces available. According to Bloomberg data, S&P 500 corporations spent about $800 billion on buybacks last year, a decrease of nearly 20% from the same period the previous year.

Because borrowing costs increased as a result of the Federal Reserve raising interest rates to combat inflation, US firms have been hesitant to buy back their shares. Bloomberg Intelligence reports that after reaching a record in 2022, buybacks have decreased for the past five quarters.

However, given the likelihood that the Fed will lower interest rates and the improving outlook for earnings growth, investors anticipate seeing more businesses use their newly acquired cash in the stock market. S&P 500 firms are expected to spend at least $840 billion toward buybacks in 2024, according to preliminary data from S&P Dow Jones Indices.