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2024 Investment Outlook

Capitalizing on today’s market opportunities to meet your financial goals.

Key takeaways

  • After reaching all-time highs in March, the stock market surrendered some gains to start April 2024.

  • Recent market volatility appears centered on the timing of potential interest rate cuts by the Federal Reserve.

After reaching a record high on March 27 (at 5,248.49), the S&P 500 retreated in the early days of April. After a sharp decline on April 4, the S&P 500 was down 2% from its peak, though some of that ground was quickly recovered.1 Markets enjoyed a generally solid start to 2024 (the S&P 500 is still up 19.1% through April 8). Among matters such as the economy’s continued recovery and corporate earnings, investors are closely watching for signs that the Federal Reserve (Fed) is ready to start cutting interest rates. After raising the federal funds target rate it controls to as high as 5.50% in July 2023, the Fed has indicated rate cuts are likely later this year.2

It is not clear if April’s slow start is just a temporary retreat in the midst of a sustained bull market that’s lasted since October 2023. “Investors are still keeping a close eye on the Fed’s position on rate cuts,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “The main issue is how long it will be before we see the first rate cut, and the Fed seems likely to hold the line on rates for some time.”

For most of 2023 and through the first quarter of 2024, communications services and information technology stocks outpaced the rest of the S&P 500. “What kept driving the markets to new highs were companies that are insensitive to persistently higher interest rates,” says Haworth. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.” In contrast, smaller companies that often need to borrow or issue debt to raise capital, face higher interest costs. As a result, small-cap stocks lagged large-cap stocks in 2024’s opening months.3

What factors are likely to affect the stock market today and for the remainder of 2024?

 

Interest rates influence stock market leadership

The Fed’s interest rate hikes were a response to a sudden inflationary surge. Inflation, as measured by the Consumer Price Index, peaked at 9.1% for the 12 months ending in June 2022, but has since dropped to 3.2% for the 12 months ending in February 2024.4 As the market anticipated an end to rate hikes and expectations of Fed rate cuts grew,5 the stock market soared from November 2023 through March 2024. In 2024’s first quarter, market leadership, while still favoring the communication services and information technology sectors, also included energy, financial and industrial stocks.1

“What keeps driving markets to new highs are companies that are insensitive to persistently higher interest rates,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.”

“The markets may have to wait longer than initially anticipated for the Fed to begin cutting interest rates,” says Haworth. “But persistently high interest rates are being reflected in market leadership.” Year-to-date, as was the case in 2023, tech-oriented sectors are the major beneficiaries. However, the spread between the top sectors and the rest of the market today is narrower than it was in 2023.

Chart depicts the performance of S&P 500 sectors on a total returns basis in 2023 and 2024 as of March 31, 2024.
Source: S&P Dow Jones Indices, LLC. *Year-to-date as of March 31, 2024.

Large-cap stocks continue to dominate

Coming off solid gains of 26.29% in 2023, the S&P 500 kicked off 2024 in impressive fashion, but not without some volatility. The S&P 500 index of large-cap stocks topped 5,000 for the first time in February and continued to reach new highs through the end of March.

The environment has been less beneficial to smaller stocks. “The Fed’s interest rate policy matters meaningfully to smaller companies that likely must borrow more to fund operations and business growth,” says Haworth. “As a result, small-caps stocks are under more pressure in the current environment.”

Investors appeared to recognize this based on stock market results in 2023 and 2024, comparing the S&P 500 to the Russell MidCap Index and the Russell 2000 small-cap stock index.

Chart depicts compares S&P 500 large cap stocks, Russell Midcap Index stocks and Russell 2000 small cap stocks total returns in 2023 and 2024 as of March 31, 2024.
Source: S&P Dow Jones Indices, LLC. and FTSE Russell. *Year-to-date through March 31, 2024.

Key stock market drivers in 2024

What are the keys to a sustained bull market? Haworth says three primary considerations deserve the most attention:

  • Inflation trends and future Fed policy moves. With headline inflation stubbornly hovering above 3%, “There’s some longevity to the inflation story,” says Eric Freedman, chief investment officer at U.S. Bank Wealth Management. “It’s not going away as fast as people might like.” Yet Freedman thinks the Fed won’t wait for inflation to reach 2%, its stated inflation target, before it begins cutting the fed funds target rate. If interest rates come down, it could alter market leadership, according to Haworth. “We may see the stocks that lagged technology-related sectors in 2023 and early 2024 start to recover under that scenario,” he says. “Small companies in particular need interest rates to come down to relieve borrowing stress.”
  • Consumer spending. “Consumers’ willingness to maintain reasonable spending growth has been the linchpin for the economy,” says Haworth. This is likely due in part to the strength of the labor market and more significant wage growth. Freedman anticipates more differentiation among consumers in the months ahead. “Higher end consumers still have the ability to spend, but those on the lower end of the income spectrum are more challenged,” says Freedman.
  • Corporate earnings. Fourth quarter 2023 earnings appear to be running approximately 3.2% higher than in the fourth quarter of 2022.6 Haworth notes that earnings results vary by sector. “Technology stocks have performed very well, due in large part to stronger earnings, which could continue in the current environment.” Overall, Haworth believes market valuations are “on the high side to fair, but to this point, earnings have held up, so that’s been supportive of the rising stock market.”

Additional risks to the market include the impact of global tensions highlighted by the Israel-Hamas conflict and the Russia-Ukraine war. The heated lead-up to what appears likely to be a closely contested Presidential election may ultimately draw more investor attention.

 

Keeping a proper perspective

Freedman says it’s important to maintain an appropriate perspective about the markets. He encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman. “Markets will do things at the exact opposite time you expect them to.”

Freedman emphasizes that having a plan in place that helps inform your investment decision-making is critical, particularly in times like these. “That’s the foundation of investing,” he says.

In the near term, investors should prepare for the market’s recent volatility to persist. “Expect continued choppiness in the markets, and not necessarily a straight upward path for stocks in the coming months,” says Haworth. Yet he says investors may be better served by positioning their portfolios for the long-run. “We’re encouraging investors who may have taken a more cautious approach before to adjust back to their long-term strategic target portfolio today.” Haworth says for those who still have a sense of caution about the stock market, “consider putting a portion of your portfolio to work in equities in a systematic way, such as dollar-cost averaging available cash over a series of months.”

Check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.

The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.

Frequently asked questions

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Disclosures

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  1. S&P Dow Jones Indices.

  2. Board of Governors of the Federal Reserve, “Summary of Economic Projections,” March 20, 2024.

  3. Sources: S&P Dow Jones Indices; FTSE Russell.

  4. Source: U.S. Bureau of Labor Statistics.

  5. Federal Reserve Board of Governors, “Summary of Economic Projections,” Dec. 13, 2023.

  6. Butters, John, “Earnings Insight,” FactSet, April 5, 2024.

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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

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