The dominance of the “Magnificent Seven” will diminish in 2024, leading to a more broadly oriented equity market next year. This is the expectation of equity experts. “There will no longer be seven next year,” they predict. On other themes, opinions are divided.
The big question looming over the market is the impact of the rapid rate hikes by central banks this year and the pace at which the Fed and the ECB will start implementing possible rate cuts. Experts generally agree that a recession in the US and Europe will be mild. “For a deep recession, you need major imbalances in the global economy, but that is not on the cards,” says Joost van Leenders, investment strategist at Van Lanschot Kempen.
There is a consensus that central banks worldwide will cut interest rates, potentially softening the impact of the numerous rate hikes on the global economy. Experts suggest that as much as 100 to 150 basis points could be cut in the US. The ECB could see a sharper rate cut than the Fed, with reductions of up to 200 basis points being discussed.
“We think Fed and ECB rate cuts are now realistically to even somewhat aggressively priced in by the market,” Van Leenders remarks. This leaves little room for monetary policy to offer further relief. “Further rate cuts beyond current expectations could lead to a rapid cooling of the economy and falling corporate profits, combining falling interest rates with falling stock markets.”
Earnings growth under pressure
Investors appear overly optimistic in their earnings expectations for companies in 2024. The market is currently pricing in around 12 percent earnings growth for US companies, while European companies are expected to see 7 to 8 percent earnings growth. “We believe company sales will fall back, making it difficult to maintain profit margins,” says Andrew Harvie, equity specialist at Columbia Threadneedle.
“It helped last year that companies could raise prices due to high inflation, but that strategy seems to have reached its limit,” adds Siegfried Kok, portfolio manager at OBAM Investment Management.
“2023 was a strong stock market year, driven not just by valuation but also by real earnings growth,” argues Van Leenders. “Sustaining that growth in the coming year will be challenging, which is why we think equities are in for a tough period.”
Van Leenders does not discount a stock market price drop of 10 to 15 percent from current levels before a recovery in the second half of the year, aided by central banks cutting interest rates.
Magnificent Seven fall apart
Fidelity’s chief economist, Anna Stupnytska, believes tech companies could benefit from looser monetary policy, but the impact won’t be significant. “Interest rates will remain structurally higher for an extended period. Central banks will have to accept that inflation will stay above the 2 percent target, resulting in higher interest rates.” In the current cycle, Fidelity expects US interest rates to stabilize around 3 percent, above the Fed’s target of 2.5 percent.
Many experts also believe that the dominance of the “Magnificent Seven” will become more limited, leading to more broad-based stock market gains. “Much of last year’s optimistic mood in stock markets was due to the Magnificent Seven, but the sustainability of such a tight market is questionable,” says Columbia Threadneedle’s Harvie. “We see more opportunities now in the broader markets than in the past decade. Good times are ahead for the active stock picker.”
Kok of OBAM anticipates the end of the “Magnificent Seven.” “It’s more likely to be five.” Tesla and Apple are expected to face challenges, with little innovation at Apple and no short-term benefits from AI.
Monetising AI opportunities
The surge in artificial intelligence benefited tech stocks last year, particularly Nvidia. “The AI hype is over, and it’s time for companies to monetise AI opportunities,” Harvie states. He highlights Microsoft and Amazon for their cloud computing capabilities facilitating AI.
Experts are leaning towards a more defensive position ahead of 2024, favoring sectors like healthcare and energy. Companies need clout to tackle current challenges, according to Harvie. A significant increase in capital spending is required for decarbonisation, automation, reshoring, nearshoring, and supply chain investments. “Companies seizing these investment opportunities will benefit substantially.”
Harvie also praises financials, especially payment companies like Mastercard and Visa, bolstered by online purchases and the decline of cash.
Emerging markets
While traditional banks in developed markets don’t excite Harvie, he sees opportunities in emerging markets, notably Indian bank HDFC and Bank Central Asia, with their conservative governance and support from domestic GDP growth.
Other experts also see opportunities in emerging markets, particularly Japan, due to its non-restrictive monetary policy. “We don’t expect a cooling of the Japanese economy,” says Van Leenders. However, concerns are raised about Japanese companies’ exposure to China.
This equity outlook is the second of four 2024 outlooks published by Investment Officer. On Wednesday 13 December, the CIOs of Europe’s three largest asset managers gave their views. In the coming days, we take a closer look at the outlooks for fixed income and private markets.