(News Bulletin 247) – In 2023, several factors supported the S&P 500 index: robust American consumption, a recession which did not materialize, a limited decline in profits, and high expectations around artificial intelligence. As the end of the year approaches, Lombard Odier puts forward three scenarios for 2024 on the American markets.
In 2023, American equity markets were supported by continued robust consumption despite the rise in interest rates. Moreover, retail sales for September – adjusted for inflation – actually increased year over year, for the first time since January.
The S&P 500, the flagship index preferred by managers, has also appreciated by 13% since the start of the year, a performance described as “remarkable” by the Swiss private bank Lombard Odier.
And at the start of the third quarter results season, the Lombard Odier teams have worked on three possible scenarios for American stocks over the next 15 months, i.e. until the end of 2024 .
If growth slows but inflation persists
Lombard Odier puts forward a central scenario which it believes will determine the evolution of the S&P 500 index. Its projections are based on a slowdown in real GDP (measured at constant prices, Editor’s note) which will be accompanied by continued disinflation. In this context, the Swiss private bank expects “corporate margins to remain generally stable thanks to still positive nominal economic growth”. “Which, in turn, would allow companies to continue to post positive profit growth of around 6%, while the consensus forecasts growth of 12%,” continues Lombard Odier.
Any decline in economic growth inevitably puts pressure on company profits, recalls Lombard Odier, who nevertheless adds that this context is favorable since it should lead to a reduction in interest rates by the Federal Reserve towards the end of 2024. “We we therefore expect price/earnings ratios to remain more or less at their current levels,” says the Swiss bank.
“We believe this is a typical end-of-cycle environment for stocks, and US valuations are high, but not overly expensive,” she continues.
If we narrow the spectrum to equities, energy and basic consumer goods will be the sectors that should benefit from this environment. Lombard Odier also increasingly favors the technology sector which, if growth continues, remains relatively attractive thanks to the influence of artificial intelligence, the cloud, the Internet of Things and digitalization deeply rooted in our professional and private lives.
Lombard Odier also evokes two diametrically opposed secondary scenarios, namely on the one hand a resurgence of inflation accompanied by a recession, and on the other hand a rapid recovery of the economy, allowing American stocks to outperform other markets. world stock exchanges.
In case of recession
For the first “alternative” scenario, the Swiss bank is dealing with a risk of recession which has certainly diminished but which has not necessarily disappeared, she recalls.
“In the case of a sharper US slowdown resulting in a recession in 2024 and reflecting the cumulative impact of monetary tightening, we could expect a 20% decline in earnings growth, which would be typical of a first year of recession”, says Lombard Odier.
In such a scenario, the bank estimates that company valuation multiples based on expected earnings should increase as stock markets see, “beyond the drop in the index, a recovery partially supported by the reduction faster and more aggressive rates by the Fed. In this context, she sees the S&P 500 trading around 3,800 points by the end of next year, which would represent a double-digit drop for the index which currently stands at around 4,330 points. .
The scenario described by Lombard Odier would therefore favor defensive stock market sectors and certain alternatives to bonds, such as health stocks. “Regionally, the United States, Switzerland and even the United Kingdom are expected to perform well in relative terms, due to their defensive characteristics sought by investors,” adds the Swiss private bank.
If growth starts again
As for the most optimistic scenario, corporate profits could increase, thanks to a potential re-acceleration of manufacturing activity. And without further interest rate increases, Lombard Odier sees the S&P 500 exceeding 5,000 points within fifteen months.
Regionally, US and Japanese stocks could relatively outperform other markets. From a sector perspective, this would disadvantage companies that are highly leveraged, slower growing and exposed to the high cost of debt repayment, and would argue against investments in telecommunications, utilities or real estate, for example.
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