Scotiabank The Scotiabank strategy team led by Hugo Ste-Marie has identified 10 major market themes for 2024. Most revolve around a couple of seeming Catch-22s: a scenario of strong economic growth would be accompanied by fewer interest rates cuts than expected and thereby undermine stock prices, but if there’s to be a deeper slowdown it would then lead to downward earnings revisions.
Theme one is “Don’t fight U.S. GDP revisions.” Returns in the S&P 500 and S&P/TSX Composite have tracked changes in consensus U.S. GDP forecasts. For instance, they rose 29 per cent and 25 per cent, respectively, in 2021 when revisions were positive. When GDP forecasts were trimmed during the year in 2022, they fell 18 per cent and 5.8 per cent.
Theme two concerns U.S. savings, which jumped during the pandemic thanks to government support. Mr. Ste-Marie believes these savings will run out in 2024, crimping overall consumption and corporate profits.
Theme three involves rate cuts. Futures markets see a 90 per cent probability of four Federal Reserve cuts and Scotia believes this is overly optimistic.
Theme four concerns fixed income. He believes government bonds should be favoured over corporate issues because credit spreads are already extremely tight, limiting the extra yield corporates offer. Mr. Ste-Marie believes earnings will disappoint on both sides of the border in 2024 and this is theme five. S&P 500 and TSX profits are still expected to climb 11 per cent, however, despite expectations for slowing economic growth that has historically compressed revenue growth.
For theme six, the strategists prefer large caps over small caps, as the latter are more sensitive to an expected economic slowdown. Theme seven, “Equities: Hard to get really excited... unless we get that “perfect” landing,” features the S&P 500 forecast of 4600, which is close to current levels. The target is derived using a weighted average of bear and bull case scenarios.
The Magnificent 7 stocks – Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, Tesla and Amazon.com – are the topic for theme eight. Mr. Ste-Marie does not expect the tech giants’ dominance to continue in 2024 as stock prices are now divorced from where forward earnings expectations would dictate.
The ninth market theme for next year concerns emerging markets, where the strategists expect Latin American equities to outperform their Asian counterparts as China struggles for growth.
Theme ten concerns the best stocks to buy ahead of 2024. The strategists’ explain their cautious view by noting that “If markets are priced for a ‘perfect landing’, odds of a ‘bumpy landing’ remain high.” They recommend inexpensive high quality stocks with low valuation levels, low debt and dependable if unspectacular earnings growth.
Some of the “cheap quality” U.S. stocks listed as ideas that are most likely to interest Canadian investors include Pulte Group, Hewlett Packard, Textron, Gilead Sciences, Johnson & Johnson, Cisco Systems, Lockheed Martin and Caterpillar. Domestic ‘cheap quality’ names include Mullen Group, Enerplus, Suncor Energy, Manulife Financial, Russell Metals, Capital Power and Empire