The Tell: Goldman Sachs channels Taylor Swift in 2024 markets outlook: ‘all you had to do was stay (invested)’

A Goldman Sachs Group strategist has some advice for investors thinking about tweaking their portfolios in 2024: Maybe try listening to Taylor Swift instead.

In his 2024 investment outlook released Wednesday, Goldman’s Chief U.S. Equity Strategist David Kostin channeled America’s favorite pop star, advising Goldman clients that “all you had to do was stay — invested” to reap more market gains next year. For those who may be unfamiliar with Swift’s oeuvre, that’s a reference to “All You Had To Do Was Stay,” a popular track from Swift’s “1989” album.

As the title of Kostin’s report implies, the analyst and his team expect the S&P 500 index
to continue to climb in 2024, setting a year-end target of 4,700 for the index. That would be a gain of about 5% from Tuesday’s close (6% if dividends are included). By comparison, the S&P 500 is up 17.1% year-to-date in 2023, largely thanks to strong performance from a handful of the most valuable companies included in the index.

To be sure, a 5% appreciation in stocks, while certainly better for investors’ portfolios than a decline, would be relatively weak compared to the market’s average gain during election years. According to Goldman, the S&P 500 typically rises around 8% in years where Americans head to the polls to vote for president.

The investment bank is basing its outlook for equities on a few factors, including expectations that the U.S. economy will achieve a “soft landing” while avoiding a recession. The bank expects GDP growth of 2.1% in 2024, which is higher than the consensus view on Wall Street, and also higher than the 1.5% penciled in by the Federal Reserve from its latest batch of projections, released in September.

Using a common metric for valuing stocks, Goldman expects the S&P 500 will continue to trade at a price-to-earnings ratio of about 19 times expected earnings over the next twelve months. That would keep it in line with what Goldman considers fair value on a historical basis. After valuations on U.S. stocks exploded higher in 2023, Goldman expects stocks will rise roughly in line with earnings growth in 2024.

As long as a recession doesn’t arrive, the Federal Reserve likely won’t start cutting interest rates until late next year, Goldman believes.

“We expect the Fed has finished its hiking cycle and Treasury yields have peaked. However, solid economic growth means the Fed will remain on hold until 4Q 2024, compared with market pricing of cuts beginning in 2Q,” Kostin said.

As a result, most of the market’s gains likely won’t arrive until later in the year.

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As for where investors should expect the best opportunities, Goldman sees a few options for investors looking to diversify beyond simply investing in funds that track the index.

While Goldman expects the so-called “Magnificent Seven” megacap tech stocks to continue to outperform in 2024 after driving most of the S&P 500’s gains in 2023, investors keen on bargain-hunting should look to beaten-down cyclical stocks.

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To be sure, markets rarely move higher in a straight line, and with so many risks facing markets, there’s likely to be a few bumps in the road next year.

That means investors will need to have the wherewithal to hang on during brief but potentially dramatic downturns driven by economic, financial, corporate, political and geopolitical risks. Here’s a breakdown of some of the “known knowns” that investors should watch out for.

  • Economically, fear of a recession will plague investors despite the Goldman Sachs economics view that the likelihood of a recession beginning during the next year is only 15% (vs. Bloomberg consensus of 55%.)”

  • Financially, the commercial real estate plight will likely imperil several regional banks holding mortgages where the collateral value is below the loan amount. As of 3Q, US banks held $2.8 trillion of commercial real estate loans and 64% of the total ($1.8 trillion) was held by banks with less than $100 billion of assets. More than $500 billion of commercial real estate loans will mature in 2024.”

  • From a corporate perspective, ‘unknowns’ include at least one consequential antitrust ruling expected in 1Q (US vs. Google) as well as many other government lawsuits in the US and the EU alleging monopolistic practices by leading ‘Big Tech’ firms such as AMZN, META, and AAPL that collectively account for 29% of the S&P 500 index.”

  • Politically, the quadrennial sweepstakes also known as the US presidential election will take place in just 51 weeks. Prediction markets are signaling that a Biden-Trump rematch is the most likely general election contest. Recent polls suggest the general election is basically a toss-up.”

  • Geopolitically, the Israel-Hamas War, the Russia-Ukraine War, and the US-China Trade War remain enormous sources of potential financial market risk.”

One of the most notable elements of Goldman’s 2024 outlook is the bank’s expectations for interest rates.

There’s a brewing disagreement among Wall Street economists about how quickly the Fed will move to cut interest rates next year. After the central bank raised rates at the fastest pace since the 1980s, economists from UBS and Morgan Stanley expect sharp cuts next year. Goldman, on the other hand, expects the central bank to lower rates more slowly.

Their view also contrasts with what interest-rate futures traders are expecting, based on data aggregated by the CME Group’s FedWatch tool.

“Our economists believe that July 2023 marked the final Fed hike of this tightening cycle and that the funds rate is unlikely to rise above the current 5.25%-5.50% level,” the Goldman team said.

“However, our economists expect that, amid resilient economic growth, the Fed will remain on hold until 4Q 2024 when core PCE falls below 2.5%. That forecast stands in contrast with the 100 bp of Fed cuts in 2024 currently reflected in forward market pricing.”

The Fed’s policy rate target currently stands at between 5.25% and 5.5%, the highest level in more than 20 years.

Goldman expects both corporate profits and profit margins to expand in 2024. But while the investment bank is optimistic about the potential for artificial intelligence to supercharge corporate earnings growth over the long term, the bank’s analysts doubt these benefits will have broadly accrued by next year.

However, there’s reason to take Goldman’s forecasts with a grain of salt. As Kostin acknowledged in his outlook, the bank got it wrong last year, along with many of their Wall Street rivals, by expecting the S&P 500 to finish 2023 at 4,000. While this is still possible, it would require stocks to crash by about 9% before the end of the year.

There was one detail that Kostin did get right, however: Goldman forecast that corporate earnings would be stagnant this year. Right now, their on track to grow by about 1%.

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