The S&P 500 is Predicted to Reach 5,000 in 2024 by RBC and Bofa, but There Are 10 Reasons Investors Should Still Be Cautious

Lori Calvasina, the Head of U.S. Equity Strategy at RBC Capital Markets, has aligned with Bank of America's Savita Subramanian in setting a year-end target of 5,000 for the S&P 500 index in 2024. This projection implies a 10% increase from the index's closing value of 4,538.19 on Tuesday and would establish a new record for the widely followed U.S. stock-market benchmark, which has already shown an impressive 18% gain year-to-date in 2023.

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Similar to Bank of America, RBC Capital Markets employed a quantitative methodology for its analysis. The RBC team utilized a base-case target derived from the median of five distinct models incorporating various inputs such as sentiment gauges, economic leading indicators, political risk, and cross-asset dynamics. The resulting year-end targets from these models ranged from 4,500 (now RBC's bear case) to over 5,300, according to Calvasina.

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However, despite the relatively optimistic target, Calvasina underscores lingering concerns, particularly emphasizing the ongoing uncertainty surrounding the post-COVID-19 investing environment. In a cautious tone, she notes that the world is still in the early stages of establishing new investment norms in the aftermath of the pandemic.

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Within this context, Calvasina and her team outline ten themes in their market outlook for 2024:

1. Potential Pulled-Forward Gains: The November rally may have accelerated some gains expected in 2024, but RBC remains optimistic about the U.S. equity market for the upcoming year, balancing positive signals from valuation and sentiment with headwinds from economic sluggishness and uncertainties tied to the 2024 Presidential election.
2. Promising Sentiment: RBC places significant trust in the American Association of Individual Investors weekly sentiment survey, highlighting its historical reliability in signaling stock buy opportunities. Bullish sentiment recovery by mid-November aligns with RBC's positive outlook.
3. Valuation Dynamics: Investors' tendency to underestimate how high price-to-earnings multiples can climb, especially for large-cap stocks, prompts RBC to adopt a long-term approach to valuation assessment, leveraging data dating back to 1962.
4. Earnings Outlook: While RBC's 2024 S&P 500 EPS target of $232 justifies further gains, potential nuances in the earnings backdrop, such as current pricing already factoring in anticipated recovery, may lead to brief periods of market indigestion.
5. Impact of Bond Yields: With attractive bond yields competing with stocks, Calvasina notes that the era of "TINA" (there is no alternative) to stocks is fading, as the earnings yield for the S&P 500 falls below the 10-year Treasury yield.
6. Election-Year Concerns: Historically, U.S. stocks underperform during presidential election years. RBC points to potential challenges in 2024, including a unique second-round showdown between President Biden and former President Trump, with considerations of an unclear outcome and unprecedented circumstances.
7. Economic Downturn Risks: RBC's analysis indicates a correlation between tepid GDP growth and weak equity-market performance, suggesting that investors should temper excitement about a potential "soft landing" for the U.S. economy.
8. Establishing New Macro Rules: In the post-COVID-19 era, RBC and its clients engage in ongoing discussions about the new macro rules, with considerations for deglobalization, higher inflation and interest rates, ongoing labor market tightness, potentially lower valuations, margins, and heightened geopolitical risk.
9. Crowded Long-Growth Trade: Acknowledging the already crowded long-growth trade, Calvasina anticipates potential further crowding despite a potential shift in performance dynamics between value and growth in 2024.
10. Interest in Small-Caps: Small-cap U.S. stocks, despite a strong comeback in November, still appear undervalued, especially with the Federal Reserve potentially cutting interest rates in the first half of 2024. However, their sensitivity to economic downturns poses notable risks.

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Heading into 2023, RBC had set a conservative year-end target of 4,100 for the S&P 500, which has proven to be far too modest given the unexpected historic rebound in technology stocks. As 2023 concludes, the market remains dynamic, and the potential for further shifts and developments underscores the need for vigilance among investors.

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