What prospects does the American stock market have this year?

After one of the most difficult years for investors in the last century, in which stocks and bonds suffered double-digit declines, in 2023 the two asset classes had a comeback. The evolution was supported by the robustness shown by the United States economy, the disinflationary trend, the halting of the monetary tightening cycle by the Federal Reserve and the excitement around artificial intelligence, which fueled the performance of the "magnificent seven" - the engine of the growth of the US stock market .

The S&P 500 index appreciated by 24.2% last year, while the "magnificents" had increases between 48% for Apple and 239% in the case of Nvidia. In the area of fixed income instruments, the S&P US Aggregate Bond Index rose 5.8%, following a rally in the last months of the year.

Analysts believe that this year is set to be positive for stocks and bonds, in a climate where inflation will continue to decelerate, the Fed will begin to cut interest rates and liquidity abounds. But there are differences in valuations between markets and sectors, which can be exploited to enhance the returns of investment portfolios.

• Adrian Mitroi: "I think that the 60/40 portfolio will deliver a return slightly above double digits in 2024, double the deposit or government securities for one year"

Adrian Mitroi, CFA analyst and professor of behavioral finance, says that allocation between stocks and bonds in a portfolio is far more important to investment success than instrument selection or timing.

In his opinion, the 60/40 portfolio will be a winner this year, but underperform last year. "I believe that such a portfolio will deliver a yield slightly above double digits, double the deposit or one-year government bonds, which remain repressive. This is why investors need to take risk. Go for government securities with the longest maturities, corporate bonds and shares. To even assume substantial corrections and inappropriate timings", Adrian Mitroi told us.

The 60/40 portfolio, composed of 60% stocks and 40% bonds, is the traditional allocation for a balanced portfolio, where stocks represent the growth component and bonds the defensive component. Last year, the Morningstar Global 60/40 NR USD index, which includes both U.S. and non-U.S. stocks, was up 14.8 percent after a sharp fall in 2022.

"Total shareholder returns (TSR) for corporations and interest rate cuts by central banks are the driving force behind the substantial returns of 2023 and 2024," says the behavioral finance professor.

• "Central banks will have to capitalize commercial banks through lower interest rates", believes the CFA analyst

Adrian Mitroi argues that, by not recognizing dormant losses on the balance sheets of credit institutions and through lower interest rates, central banks practically capitalize commercial banks, which has a positive impact on bonds.

"Instead of the central bankers persuading the market, now it's the other way around, the market persuading the central bankers. The big bondholders, mainly banks, are full of "deflated" bonds that are reflected on their balance sheets at Hold-to-Maturity rather than Available-for-Sale. Thus, large losses on bonds taken at low interest rates, on commercial loans, are not recognized now. Otherwise, a lot of new bank capital would be needed", says Adrian Mitroi. "Central banks will have to capitalize commercial banks through lower interest rates. By not recognizing dormant losses on banks' balance sheets and lower interest rates, central bankers, without moving or demanding cash, capitalize the banks."

According to the CFA analyst, the last period of 2023 was favorable for allocation to bonds, amid expectations of lower interest rates. "With the return of bonds, yields were 7-8% in the latter part of last year. In 2024 the yield will probably be 5%, which is very good", said Adrian Mitroi.

• "The stock market will go forward because there is a lot of liquidity, which favors risky investments", believes the finance professor

The CFA analyst believes that share prices in the United States will continue to appreciate, but not on the basis of economic growth, but because there is a lot of liquidity, which favors risky investments.

"There is a lot of cash that needs to be parked. There were no more IPOs, so the P/E of 20 is the P/E of 10 of old. We are repositioning ourselves on this plateau and we accept it, even if the valuations are not supported by economic growth", says Adrian Mitroi, adding: "Companies are increasingly using buybacks, splits, non-cash dividends. They no longer issue capital, they are no longer IPOs, but they give us TSRs (Total shareholder returns), which are the new elegant form of capitalization. It's a strong TSR play that remains a case for buying equity."

• Florian Munteanu: "Normally an investment at this moment in bonds or bond funds should yield"

Florian Munteanu, an investment consultant with extensive experience in finance and energy, points out that a disinflationary environment with interest rate drops is favorable for the evolution of bond prices.

"Expectations are that, in 2024, the central banks of developed countries will cut interest rates. In the United States, the Fed is expected to make three to four key rate cuts. Interest rate cuts are also expected from the European Central Bank and the Bank of England. However, a disinflationary environment with interest rate cuts is favorable for the evolution of bond prices. This occurs because there is an inverse correlation between yields and price - when yields fall, as a result of interest rates falling, bond prices automatically rise. Therefore, unless a Black Swan (a.k.a. a major impact surprise event) occurs, an investment at this time in bonds or bond funds should normally pay off. Of course, these expectations, to the extent that they are perceived by investors, are or will be incorporated into the price existing in the market. In this context, a well-founded macroeconomic analysis is useful", Florian Munteanu told us.

• "Innovation and the degree of development of the market represent very important advantages for the American stock market", says the investment consultant

In connection with the prospects of the actions, in Munteanu's opinion there are premises that the European markets will perform better than the market in the United States, this year.

"I think that at the moment there is a difference between the European (including British) stock market and the American one. In recent years, the US market has outperformed European markets, resulting in US valuations being quite high. European markets are at lower price multiples, which creates a bit more opportunity in Europe than the US for 2024," says the investment consultant.

The iShares STOXX Europe 600 ETF, a measure of the pan-European Stoxx 600 index, had a trailing-twelve-month (TTM) price-to-earnings ratio of 14.1 at the end of last year, while the iShares S&P 500 ETF, the ratio was 24.9, according to Yahoo Finance.

Florian Munteanu added: "Furthermore, there is a certain pessimism towards Europe and Great Britain and quite a lot of optimism regarding the United States. European markets are still perceived to be affected by the war in the proximity of the EU, there are concerns about the macroeconomic context of Germany, and in the UK the effects of Brexit are still being felt. But market sentiment is very volatile and I think at some point this perception of the European market will change because there are some fundamentals that cannot be ignored."

In addition to those listed, Munteanu does not exclude the scenario of a recession in the United States. "We don't know for sure how the economy will evolve, but there is this risk, which is another argument why an investor would be tempted to focus on some markets that have already gone through a period of significant pessimism and start from some levels lower", says Florian Munteanu.

In these conditions, according to the investment consultant, there are premises that European markets will perform better than the United States market in 2024. "But, over a longer period of time, innovation and the degree of market development, freedom and rights shareholders from the United States, represent very important advantages for which the American stock market must be taken into account", concluded Florian Munteanu.

• Andre Cappon: "I don't see much upside potential for US stocks this year"

Andre Cappon, founder of CBM Consulting Group in New York, United States, believes that valuations have become too high, so he does not see much upside potential for US stocks this year. "But unless some major event occurs, such as an invasion of Taiwan by China, I don't see any strong correction," the consultant told us, adding. "This year we have elections, on which the markets will focus".

On the other hand, Andre Cappon points out that the very good performance of the shares in the United States last year was due to the evolution of the seven big (magnificent) companies. "There are only a few actions that dictate the evolution of the market, so it is very important what will happen to these companies", says the consultant.

As for interest rates, Andre Cappon believes that rates will remain close to current levels. "The Federal Reserve fears inflation and an economic crisis. We don't have an economic crisis yet, and inflation has eased, but not back to the Fed's target of 2%. Or, I think that in this context, the Federal Reserve will want to keep interest rates high. Compared to recent years, the interest rates are high, but from a historical perspective they are normal", the consultant told us.

Currently, the federal funds rate is in the range of 5.25-5.5%, and from 1971 to 2023, the average interest rate in the United States was 5.42%, according to Trading Economics.

• Angelo Kourkafas: "Historically, the end of the monetary tightening cycle by the Fed has brought above-average bond yields"

The team at Edward Jones Investments believes that 2024 will be a positive year for bond and stock returns, according to the latest materials published on the financial services firm's website.

For bonds, analysts point out that, historically, the end of the Fed's tightening cycle has brought above-average yields.

In the case of stocks, the Edward Jones team sees three factors that will favor the performance of this asset class in 2024: the continuation of the decline in inflation, the potential for interest rate cuts by the Fed and the re-acceleration of the growth of corporate profits in the second part of the year, when in their view the economy American will re-enter an upward slope.

If last year the rally of the American stock market depended to a great extent on the evolution of the "magnificents", in 2024 some of the companies that were not in the foreground in 2023 can recover ground. "Valuations of the laggards segments of the stock market, including small-cap issuers, high-quality bond-like dividend stocks or companies in cyclical sectors, are favorable. Probably, in 2024, the strength and sustainability of the bull market will be confirmed, which represents an opportunity for the lagging stocks to recover from the distance from the leaders. We believe diversification will trump concentration in 2024," wrote Angelo Kourkafas, CFA, senior investment strategist at Edward Jones Investments, in his latest editorial.

According to the financial services firm's team, the field of artificial intelligence is still in the early stages of a multi-year growth trend, so analysts have an optimistic outlook for the big tech companies. "But, we believe that diversification towards technology is a critical component for portfolio profitability in 2024," wrote the Edward Jones team, in the report related to the outlook for the economy and markets for this year.