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Tom Lee of Fundstrat had the most accurate stock outlook for 2023, while almost everyone else was bearish.
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A year ago, he said the S&P 500 would end 2023 at 4,750 points, or within 1% of its current level.
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Here’s what he expects the stock market to do in 2024.
Tom Lee of Fundstrat raised many eyebrows a year ago when he predicted the S&P 500 would soar more than 20% in 2023 to end the year at 4,750.
Investors were still licking their wounds after a brutal bear market that lasted most of 2022, and there were few indications that a strong stock market rally was imminent.
« The U.S. economy is remarkably resilient in the face of the Fed’s rapid cycle of rate hikes. The majority of stock investors expect an inevitable recession as the Fed raises rates until it breaks something. But if the above assessment (falling inflation, end of rate hikes) is correct, a « soft landing » is the highest probability, » Lee said in his 2023 stock outlook.
And that’s exactly what happened, with growing calls for a soft landing for the economy as the Federal Reserve ended its cycle of rising interest rates thanks to lowering of inflation.
THE S&P500 has climbed 25% in 2023 to its current level of around 4,785, which is less than 1% of Lee’s original price target for 2023. In fact, his forecast was closest to those of the S&P 500. among the strategists tracked by Bloomberg.
Lee, who was one of the few bulls on Wall Street last year, once again expects a strong year for the stock market, with an S&P 500 price target of 5,200 for the end of 2024which represents a potential increase of 9% from current levels.
Here’s what Lee expects to happen next year, according to his 2024 outlook released earlier this month.
The key engine
Easing financial conditions throughout 2024 will be the main driver of continued stock market gains, he said. The Fed has indicated that its next interest rate decision is more likely to be a cut than a hike, and the market is currently pricing in at least five 25 basis point cuts next year.
If interest rates continue to fall from their recent highs, this should lead to lower mortgage rates, which should help revitalize the housing market. And if inflation continues to fall, allowing for looser financial conditions, then consumers’ real incomes should rise, giving them stronger purchasing power.
Business profits
Lee expects the S&P 500 to generate earnings per share growth of 11% in 2024 to $240 and 8% growth to $260 in 2025, primarily through a cyclical earnings recovery.
“Business investment has declined in recent years, but easing financial conditions mean a recovery in investment,” he said, adding that GDP growth is expected to recover in Europe and Asia, contributing to stimulate the global economy.
The weakening US dollar and rising productivity are also expected to boost corporate profits in 2024.
Stock market valuations
« We expect price-to-earnings to increase in 2024 to reach 20x. While many argue for valuation compression, since 1937 the highest price-to-earnings ratio has been achieved when yields (are between) 3, 5% and 5.5%. When they are between 4% to 5%, the price-to-earnings ratio is higher than 18 x 65% of the cases,” Lee explained.
His 5,200 price target for the S&P 500 for 2024 comes from applying a 20x earnings multiple to his 2025 forecast of $260 per share.
Best ideas
Lee’s main idea for 2024 is small-cap stocks, which he believes could catch up to the broader market next year and climb more than 50%. He also likes stocks in the financial, industrials and technology sectors.
Read the original article on Business Insider
