Wall Street had a dream run in 2023, reversing the nightmare of 2022. The three major stock indexes—the Dow, the S&P 500, and the Nasdaq Composite—rose 13.7%, 23.9%, and 43.4%, respectively. In 2022, the Dow, S&P 500, and Nasdaq Composite fell 8.8%, 19.4%, and 33.1%, respectively.
However, market participants remain concerned about whether the US stock market rally will continue in 2024. The first three trading days of this year have seen significant volatility and sharp declines in all three major stock indexes. Investors are not sure when the first rate cut will materialize.
The Bull Run will continue in 2024
The impressive rise is expected to continue into 2024. The minutes of the Fed’s December FOMC meeting clearly indicate a significant percentage cut in the benchmark interest rate this year. A rate hike is a distant possibility as the majority of FOMC members want to see the full effect of the existing 5.25-5.5% interest rate. The inflation rate has been declining steadily since June 2022.
A lower interest rate regime will stimulate economic growth, accelerating business investment. In 2022, small-cap companies suffered from record high inflation, steep interest rates and fears of an impending recession. However, in 2023, this segment of the economy found some relief from these three concerns. The reduction in interest rates will further stimulate medium and small enterprises.
A lower interest rate regime will benefit high-growth sectors such as technology and consumer discretionary. Several companies in these spaces depend on a cheap source of credit as the full potential of their business is realized over a long period of time. The low risk-free interest rate will lower the discount rate, thereby increasing the net present value of the investment in these stocks.
The global supply chain system has been slowly recovering since last year as US corporate giants rescheduled their supply system bypassing China. In addition, the fundamentals of the US economy remain strong despite record high inflation and interest rates. The latest report from the Atlanta Fed projected that US GDP would grow by 2% in the fourth quarter of 2023.
Finally, the preliminary estimate revealed that a whopping $1.4 trillion has flowed into US money market funds mainly due to an extremely high interest rate regime, with money yielding around 5%. A systematic decline in the market rate of interest will shift much of these giant funds to the equity markets.
Buy on Dip
Market participants are surprised to see such an impressive rise in 2023. Consequently, a large number of investors have already said that US stock markets will remain muted in 2024 as the valuation is stretched.
At this stage, investors should wait for an appropriate time to enter the market. The long-term trend on Wall Street is very bullish. However, markets are likely to fluctuate in the short term due to profit booking at a stretched valuation or unforeseen external disturbances such as geopolitical conflicts or volatile energy price behavior.
In this regard, any decline will be a good buying opportunity even for these stocks that skyrocketed in 2023 and have strong potential for 2024 and beyond. Investors sometimes invest in overbought stocks due to the FOMO (fear of missing out) factor. Instead, they should implement a SIP (Systematic Investment Plan) strategy.
Choose bold stocks, especially stocks of those companies that are market leaders in their respective sectors. Use any decline in the prices of these stocks to form a great portfolio over a period of time. At the end of the year, this portfolio is likely to outperform the average market return.
How to choose the right stocks
At this stage, several stocks look attractive for future growth. However, selecting the following four criteria will make the task easier. First, select US corporate giants (market cap > $100 billion) that have a well-established business model and a globally recognized brand.
Second, look for stocks that have strong growth potential for 2024 and beyond. Third, selected stocks have experienced positive earnings forecast revisions over the past 60 days. Fourth and most importantly, choose stocks that carry either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the full list of today’s Zacks #1 Rank stocks here.
The five stocks that meet these criteria, despite the stretched valuation, are:
General Electric Co. (GE – Free Report) has an expected revenue and earnings growth rate of 8.6% and 69.3%, respectively, for the current year. The Zacks Consensus Estimate for current year earnings has improved by 4.2% over the past 60 days.
Microsoft Corp. (MSFT – Free Report) has an expected revenue and earnings growth rate of 14.4% and 13.6%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the past seven days.
Amazon.com Inc. (AMZN – Free report) has an expected revenue and earnings growth rate of 11.7% and 34%, respectively, for the current year. The Zacks Consensus Estimate for current year earnings has improved 2% over the past 30 days.
Alphabet Inc. (GOOGLE – Free report) has an expected revenue and earnings growth rate of 11.3% and 15.6%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the past 30 days.
Netflix Inc. (NFLX – Free report) has an expected revenue and earnings growth rate of 13.9% and 32.4%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the past 30 days.
The chart below shows the price performance of the five stocks listed above over the past year.
Image source: Zacks Investment Research
