Macro Outlook: Charts Signal Big Gains in 2024

2023’s turned out to be a much better year than most investors expected.

The party isn’t over. A dozen charts signal big gains in 2024.

The much doubted, soft-landing is playing out beautifully. GDP growth is cooling down to 2% but a recession remains unlikely. A solid job market continues to underpin resilient consumer spending which represents 70% of US economic activity.
Meanwhile, inflation continues to fall, freeing the Fed to finally start cutting rates (chart 1). Fed funds futures currently price in 4 quarter point rate cuts next year, beginning in May.
The market’s biggest pain point is ready for relief:

This new rate reality plays into one of the popular bear tales being spread around: Higher treasury yields make stocks less attractive.
The spread between S&P 500 earnings yield (index level divided by 12-month forward S&P 500 EPS) and the 10-year Treasury yield is called the equity risk premium.
Right now, the equity risk premium is 1%. That’s the gap between the S&P 500’s earnings yield of 5.2% and the 4.2% 10-year Treasury yield.
Historically, the equity risk premium (ERP) has averaged 3% (chart 2). The bears argue a low ERP is a sign stocks are a bad bet relative to bonds.
Seems reasonable. Let’s dig deeper.

Here’s what the bears miss. History shows that when the S&P 500’s equity risk premium is between zero and 1%, as it is now, the average gain over the next year is an above average 12.2% (chart 3).
Here-and-now analysis rarely pays off:

History isn’t the only reason not to sweat today’s low ERP. It simply reflects 2023’s big jump in bond yields and sluggish first-half corporate earnings growth.
Stocks are rallying as rates come down and profit growth re-accelerates. You make money on Wall Street focusing on where we’re heading…not where we are now.
OK let’s move on to another popular bearish narrative to see if it holds up any better.
It’s no secret 2023’s market rally has been pretty narrow. The magnificent 7 have led the charge.
I’m sure you’ve heard this a lot. Common headlines read:
- This market rally is way too narrow.
- A handful of overpriced tech behemoths are driving all the gains.
- Stocks are headed for a big drop as this shaky foundation inevitably crumbles.
Sounds familiar right? So, are the bears onto something or just setting themselves up for more pain?
Here’s the chart to show your bear-suited buddies. Narrow market leadership is good because it precedes strong forward returns. This actually makes sense given that, after lagging badly, most stocks in the index likely represent value.
Consider the following:
Since 1928, the S&P 500 has posted 15.4% annual returns in the 12-months following periods of narrow market leadership vs. only 7.4% returns after very broad-based market rallies (chart 4).
Said another way, narrow leadership means more howling pain for the bears:

You may be wondering why strong breadth tends to result in weaker forward performance.
Ultimately, when everything has already run up, it makes sense that future performance would be weaker.
Today’s narrow leadership means there are still plenty of stocks with lots of room to play catch up.
OK let’s shift gears and check in on the outlook for corporate earnings.
The recessionistas would have you believe that earnings are weak and likely to get worse.
Let’s fact-check that.
It’s true year-over-year earnings growth was slightly negative in the first half of 2023. For the full year, corporate profits are shaping up to be roughly flat with 2022’s tally.
But the stock market is forward-looking. Today, equities are trading on 2024’s profit prospects and the future looks bright.
After turning modestly negative in June, year-over-year 12-month forward S&P 500 earnings growth has recently re-accelerated to 5.7% (chart 5). The consensus forecasts 11% Y/Y S&P 500 2024 EPS growth.
Follow the trend of earnings for direction:

Stocks don’t follow headlines. They follow earnings. But here’s the best part.
Since 1977, the S&P 500 has averaged a 13% gain in the 12-months following bottom quartile 12-month forward earnings growth (chart 6). Simply put, investors anticipate a profit recovery.
When earnings turn from down to up, stocks follow suit!

If you’re feeling bad for the bears now, we don’t blame you. But, the bullish evidence doesn’t stop here.
Here’s another underappreciated positive for stocks – There’s a record $5.7T sitting in money market funds (chart 7).
The doubters say _there’s no way this money will move into stocks_ because safe money markets offer juicy 5% interest.
OK. Sounds logical, let’s unpack that a little. Here’s what a crowded trade looks like: