November will soon draw to a close, and with it another strong month for the market. Strategists are getting increasingly bullish about 2024, even as economic fears linger. For some, not even a recession is a cause for concern, and there’s some history to suggest they could be right.
On the surface, there seems plenty to worry about next year. Wars are upsetting the geopolitical outlook. The coming presidential election in the U.S. is likely to be contentious. Interest rates remain significantly higher than they were just a year and a half ago.
Here history provides some comfort, however, writes
BMO
Capital Markets Chief Investment Strategist Brian Belski. When the
S&P 500
closed more than 20% above its October 2022 low this past June, it entered a new bull market, and historically the second year of a rally brings an average return above 11%—not too shabby.
Nor are high yields the obstacle that many fear: Belski’s analysis going back to 1979 show that while U.S. equities do perform better when the 10-year Treasury yield is below its three-year moving average, the S&P 500 has still notched a very decent 8.7% average gain in an above-average yield environment.
The market has tended to deliver lower returns during election years—an average of 6.8% going back to 1950, below the 9.1% for all years. But that figure rises significantly, to 12.1%, during years when the president is up for re-election, as will be the case in 2024.
Belski isn’t just looking to history books for his bullishness though; he’s projecting S&P 500 earnings per share climbing more than 13% to $250 next year. “Yes, this may seem aggressive given that the consensus economic forecast is calling for little gross domestic product growth during 2024,” he writes. “But similar forecasts were being made last year and companies proved they were more than capable of delivering in a challenging macro environment in 2023 with the S&P 500 delivering its highest aggregate surprise levels in over 10 years (excluding the pandemic).”
And if that “little” GDP growth should shrink to nothing, that doesn’t bother Belski either. If a downturn were to happen, he thinks it would be a “RINO or recession in name only since labor market data continues to remain remarkably resilient and employment levels are what almost always determine how good or bad things get in the economy from our perspective.”
He’s not alone in that optimism. On Friday
Citi
U.S. Equity Strategist Scott Chronert wrote that S&P 500 earnings per share can keep chugging higher despite macro concerns.
Current 2024 consensus, he writes, show the index could see a new 20-year high in constituents with positive earnings growth, a milestone that barely budges even applying a 5% across-the-board estimate cut. In addition, fewer stocks are expected to see meaningful profit cuts next year when compared with this year and the five-year prepandemic average.
Chronert also isn’t rattled much by potential economic softness. (Citi’s forecast is for real GDP growth to trough at a 0.2% year-over-year decline.) He writes that “if we do hit a recession in 2024, we don’t expect to see a significant deterioration of index fundamentals like we have seen in recent crises. A higher earnings per share floor likely creates a more manageable index drawdown that investors may view opportunistically.”
In other words, while a recession is nothing to scoff at, he still thinks profits are set to expand, putting the market in a stronger position to weather downturn than some bears fear: “Put more succinctly, if fundamentals continue to prove resilient, investors should buy pullbacks.”
If this sounds similar, it’s because on Monday
Deutsche Bank
also said a mild recession wouldn’t be much of a speed bump for stocks, setting its year-end 2024 S&P 500 target at 5100—matching BMO’s target.
And as counterintuitive as it seems, it isn’t impossible to get market gains during a recession—however rare. According to Dow Jones market data, when measuring the S&P 500 from peak month closing high to trough month closing low, it’s happened four out of the last 15 recessions since the start of the Great Depression.
In the recession that began in February 1945 and ended in October of that year, the index rose 14%, a figure it repeated in the July 1953-May 1954 recession. In the April 1960 to February 1961 downturn the S&P 500 was up 8%, and it gained 1.5% from July 1981 to November 1982.
So in theory, strategists could have their cake and eat it too, with the S&P 500 rising despite a mild recession. However a few caveats are worth remembering: This phenomenon hasn’t happened in the last four recessions, and downturn gains have been getting smaller.
Moreover, the S&P 500 fell as much as 6.4%, 8.2%, 7.6%, and 21.8%, during each of the four recessions above, respectively, on a closing basis; in other words, there was pain along with the gains.
So while recessions don’t always impede the index’s progress, it’s still a tall order.
Write to Teresa Rivas at teresa.rivas@barrons.com
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