Morgan Stanley's Chief US Equity Strategist suggests that the trajectory of US stock prices in 2024 hinges on a resurgence in economic growth while interest rates remain subdued.
Analysts anticipate a year filled with twists and turns, with consensus views on key macro variables shifting back and forth, creating a trading range until outcomes become more definitive. As a result, they advised investors to express their macro views through individual stocks, factors, and sectors rather than relying on cap-weighted indexes.
Analysts outline three potential macro outcomes for 2024 with the probability distribution across these outcomes seen as balanced.
The most likely scenario is a soft landing characterized by muted real growth and decelerating inflation. In this case, stock-specific risks remain high, and a strategic blend of defensive growth and late-cycle cyclicals is expected to outperform.
“Lower volatility growth stocks also are likely to outperform. More specifically, from a factor standpoint, we'd expect large cap quality to perform well with a particular focus on earnings stability and operational efficiency,” analysts said.
The second potential outcome is a soft landing coupled with an acceleration in nominal growth, influenced by the Federal Reserve's recent dovish shift. This scenario could trigger increased spending, capital expenditure, hiring, and mergers and acquisitions.
A fall in interest rates might spur demand for housing, autos, and durable goods. This bullish case is expected to favor small caps, cyclicals, and economically-sensitive industries, with value outperforming growth.
The third scenario is a hard landing, where recession odds, while reduced, remain above average. Traditional defensives are anticipated to outperform, with large caps outshining small caps, and growth prevailing over value in this challenging backdrop.