Why the SP 500 may go to 5.500 and the NASDAQ 100 to 20.875 in 2024

Top market strategists predominantly predict that the stock market will sustain its upward trajectory in the coming year, albeit at a pace that falls short of historical norms, based on various forecasts for 2024 published this week and last week.

What the crowd is saying

Goldman Sachs projects the S&P 500 to reach 4,700 by year-end 2024, as noted by David Kostin and his team in a recent day client brief. This estimate sits 3.25% higher than its present mark of 4,550 but doesn’t surpass its all-time peak of 4,797 from January 2022.

This outlook from Goldman is part of a broader consensus on Wall Street, suggesting that while stocks may build upon their 2023 gains, surpassing the high water mark set just before the surge in interest rates remains challenging.

In a starkly cautious forecast, Morgan Stanley’s permabear U.S. strategist, Michael Wilson, pegged the S&P 500's end-of-2024 target at 4,500, indicating a standstill from current levels in his actual commentary.

Echoing these temperate growth expectations, Wells Fargo Investment Institute and UBS Global Wealth Management anticipate targets of 4,600 to 4,800 (a 1.0 to 5.5% rise) and 4,700 (a 3.25% increase), respectively.

With five weeks remaining in 2023, these predictions of 1.0% to 5.5% gains by the end of the following year are notably lower than the S&P's average annual return of roughly 10%, not accounting for dividends.

The restrained optimism is largely attributed to the view that stock valuations have a limited ceiling following the S&P’s roughly 20% advance year-to-date despite stagnant corporate earnings. Wilson elaborates that the index will likely grow to match its historically high price-to-earnings ratio as interest rates stabilize.

From my knowledge - what is obvious on Wall Street is obviously wrong. What is consensus never materializes that way.

Alternative scenarios

Goldman Sachs has sketched out a range of dramatic yet possible scenarios for the stock market in 2024 that could lead to significant fluctuations. The firm suggests the S&P 500 has the potential to climb to 5,000 if the Federal Reserve opts to lower interest rates sooner than the market anticipates, which is presently expected around May. Conversely, the index could tumble to a low of 3,700, a level not seen in two years, should the economy descend into a recession.

Ed Yardeni from Yardeni Research independently predicts that the S&P will ascend to 5,400 by the close of 2024. This target is a roughly 19% leap from its current valuation and about 12% higher than its previous peak. Yardeni attributes last year's steep market downturn to widespread concerns that rampant inflation would compel the Federal Reserve to implement rate hikes leading to a credit squeeze and a recession, as he detailed in a note on Monday.

However, with the economy not yet showing definite signs of an impending recession, Yardeni suggests the S&P is poised for continued robust growth if this trend persists. Yardeni believes in the rolling recession/rolling expansion scenario underpinned by strong productivity growth fueled by AI in the following years.

While the services sector may struggle a bit more due to the lagged effects of rising rates in 2024, the goods sector may bottom in 2023 and start growing stronger again in 2024. Furthermore, a cyclical downturn in economic activity may continue to meet a secular labor shortage. In contrast to a normal slow growth/shallow recession scenario, unemployment should stay low, and consumption should hold up quite well in 2024 in this scenario.

I mostly agree with the scenario.

The presidential cycle

Bolstering the favorable scenario is the presidential cycle. As measured by the S&P 500 Index, the U.S. equity market has been favorable overall in 20 of the 27 election years from 1916 through 2020, only posting negative total returns five times.

The average total return of the S&P 500 Index during a presidential election year during those 100+ years was just under 11%, and the average price return of the S&P 500 Index during a presidential election year for the same time frame was approximately 6.6%. (Price returns do not take into account dividends.)

There's a school of thought that suggests the stock market actually influences the outcome of the presidential election, rather than the election swaying the stock market's direction —particularly when looking at equity market performance in the three months leading up to the vote. However, it's important to remember that averages are precisely that — averages — and one shouldn't mistake correlation for causation. To quote a theorist, "...just when you think that you have figured it all out, you find another pattern that can suggest different possibilities."

NASDAQ may be up 25 % from the closing date of 2023 in 2024

Historically, years when the Nasdaq 100 index soared by 40% or more led to continued growth the following year, except for the dot-com bubble burst in 2000.

Based on this pattern, if the Nasdaq 100 maintains or increases its 2023 gains, it might see an average rise of 24.1% in 2024 (historical average in such a scenario).

Nasdaq 100 and Elliott Waves

My preferred Elliott wave count supports the historical performance. As I see it, we are currently in wave 5 of a larger wave III, which may lead us to ATHs by the end of 2023 and a bit further into January 2024.

This may be followed by the usual February Blues and some heavy tax selling in March, forming consolidation wave IV. This may be followed by the final up-wave V, leading us to an index level of 20.000 to 21.000 (the average 25 % rise in the follow-up year after the Nasdaq 100 rose +40 % in the previous year) to be reached in late summer 2024.

All the uncertainties surrounding the US presidential election may lead to a subdued third quarter of 2024 as we know it (September and October are the two worst months in any given year on average), with the usual low on 27 October (this is the seasonal low when tax selling ends) and some form of year-end relief rally when the election results are available.

Compared to Nasdaq, I see the SP 500 rising to an index level of only 5.500. I will add a separate Elliott Wave analysis of the SP 500, the DJIA, the various Russel indices, and some SP 500 sectors separately shortly.

Nasdaq 100 and S&P 500 "Funnymentals"

We have seen very little indication and guidance about 2024 from any Nasdaq 100 company so far. The same applies to SP 500 companies.

So, doing the earnings per share math and relating this to different levels of short/medium and long-term interest rates, applying DCF or other valuation methods is still virtually impossible.

A lot depends on whether one sees no recession, a shallow recession, or a steep recession for 2024. The same applies to inflation, seeing it as sticky or moving quickly to the 2 % level the Fed likes it to move.

Yardeni Research (YRI) has just predicted future values of the S&P 500 Revenue per Share for the years 2023, 2024, and 2025 of 1823 for 2023, 1896 for 2024, and 1970 for 2025.

The Consensus Forecast is slightly different, with 1805.99 for 2023, 1893.30 for 2024, and 1994.72 for 2025. Operating profit margins from 2023 until 2023 are predicted as follows: YRI Forecasts 2023 (12.3), 2024 (13.2), 2025 (13.7); Consensus Forecasts 2023 (12.0), 2024 (12.7), 2025 (13.5).

YRI Operating Forward Earnings Forecast per Share for the SP 500 for 2023 until 2025 is as follows: 2023 (250.00), 2024 (270.00), 2025 (290.00)

The table below details the dates, earnings of the Nasdaq 100, and YoY returns in %.

The table below details the Nasdaq 100 Earnings per Share, S&P 500, and Value and Growth of the Nasdaq 100.

With a long-term perspective of at least five years, investing in a growth index like the Nasdaq-100 is seen as opportunistic regardless of the timing.

Actionable Advice on Nasdaq 100

I believe that the outperformance of the Nasdaq 100 versus the broader technology sector will continue as the current technology landscape will continue to be characterized by a "winner takes most" environment.

This means continued trouble for newbies and smaller tech stocks with a point-of-excellence solution and continued gains for larger incumbent ecosystem stocks. This is reflected by the performance of the Mag-7 and the performance of leaders such as Adobe, ServiceNow, SAP, Salesforce, etc.

This trend will be strengthened by AI as the current leaders will add AI in time to their service and product mix, leaving a very short window of opportunity for new kids on the block to enter and penetrate the market.

A good example is the miserable performance of AI cybersecurity stock Sentinel One vs. Crowdstrike, Palo Alto, and Microsoft in 2023.

The trend will persist IMO, and the Nasdaq 100 will outperform both - the Nasdaq and the SP500 in 2024. A period of quite heavy tax selling in spring 2024 may be a good opportunity to rebalance individual portfolios.

This is just the start of the 2024 analysis. I will provide details in December and January when more data is available.