The U.S. stock market ended 2023 on a high note, with the S&P 500 posting an annual gain of just over 24%. This substantial increase has market strategists optimistic about the potential for further gains in the coming year. The strong performance of 2023 has historically had a positive impact on subsequent years, driven by factors such as momentum and solid fundamentals.
In the fourth quarter alone, the S&P 500 recorded an 11% increase, setting the stage for the potential strength in the new year. Analyzing data as far back as 1950, LPL Research found that following a gain of 20% or more, the S&P 500 has risen an average of 10% in the subsequent year. This outperforms the average annual return of 9.3%. Additionally, years with significant gains have generally had a higher likelihood of positive returns, with the market ending the year up 80% of the time compared to the overall average of 73%. This trend can be attributed to the concept that momentum begets momentum, and themes capable of driving a market up by at least 20% tend to be durable trends that persist beyond a single calendar year.
LPL Research has set a target range for the S&P 500 at the end of 2024, projecting it to be between 4,850 and 4,950. However, the firm believes that there is potential for the index to surpass 5,000 if certain factors align. These factors include lower interest rates supporting higher valuations, double-digit earnings growth for companies, and the U.S. economy avoiding a recession. Despite the index currently being at 4,769.83, an economic soft landing scenario could provide a boost to investor confidence.
Looking at historical data, it is evident that the stock market tends to perform well after rebounding from significant declines. Since 1950, there have been six instances in which the S&P 500 rebounded by at least 10% following a drop of 10% or more the previous year. In each of these cases, the bounce continued into the second year, with an average return of 11.7%. This data supports the argument that 2024 should be a favorable year for the bulls.
The market reaching a record high is another positive sign for stocks. According to chief U.S. strategist at Ned Davis Research, Ed Clissold, there have been 14 instances since 1928 where the S&P 500 experienced a gap of at least one year between all-time highs. In each of these cases, the index rose by an average of 14% in the year following the new high. This positive correlation further reinforces the potential for a strong year ahead.
As the market progresses into the new year, there are a few key events that could influence stock performance. U.S. companies will begin reporting fourth-quarter results in the coming weeks, and investors are anticipating stronger profit growth in 2024 compared to the modest 3.1% increase in 2023 earnings. Additionally, the conclusion of the Federal Reserve’s first monetary policy meeting in late January will provide insight into whether policymakers will maintain the dovish pivot they signaled in late December. The market will also closely monitor the state of the economy, as signs of a potential slowdown or accelerating inflation could impact future rate cuts and soft-landing hopes.
While history serves as a helpful guide, it is important to recognize that it is not always a definitive predictor of future market outcomes. However, multiple indicators point to a positive year ahead for the U.S. stock market in 2024. The strong performance of 2023, along with historical trends, strengthens the case for continued momentum and potential gains. As investors navigate through the year, they will closely monitor economic data, company earnings, and central bank policies to assess the market’s resilience and direction.
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