RBC Capital Markets strategists project a constructive longer-term outlook for US stocks, even as they acknowledge a potentially turbulent phase beginning in January.
Analysts have revised their end-2024 target for the S&P 500 to 5,150 points, up from the earlier target of 5,000. This new target suggests an approximately 10% upside from the Friday close of the S&P 500.
“Like many strategists, we weren’t nearly constructive enough on the S&P 500 in 2023,” the strategists said in a weekly blog column.
“The stock market ended 2023 at a valuation level that was reasonable in the context of the stronger than anticipated economy and the moderating in inflation that occurred, and that we should look for additional gains in the equity market and a trailing P/E of around 23x in 2024 if inflation continues to ease and interest rates come down a tiny bit more as anticipated by the broader investment community.”
In addition to the revised target, the strategists have increased their 2024 EPS forecast to $234, up from the previous estimate of $232. They emphasize that equity valuations can remain higher than perceived by many investors.
“But we think for a rotation into Value and Small Caps to be sustainable, US economic expectations need to improve,” they said.
While expressing optimism, the strategists acknowledge headwinds, including highly bullish sentiment, expectations for a sluggish economy, uncertainty surrounding the 2024 Presidential election, and the potential for a rotation out of US equities into other geographies.
“On average, the S&P 500 rises by about 7.5% in Presidential election years, below trend and less than what we typically see in the 3rd year of the Presidential cycle. This stat tells us that any given Presidential election year is a source of uncertainty for the US equity market.”
Furthermore, they anticipate challenges for the large cap growth trade and give an edge to value and small caps in the coming year.
“We continue to see opportunity in Small Caps, but are concerned about how consensus this call has become,” the strategists concluded.