Like a college student cramming for exams, we at Pro Trader Today are squeezing a year’s worth of insight into this week’s articles. And it’s not just me. A great friend and 25-year colleague (who also happens to be the smartest investor I know) is joining us at Pro Trader Today. Christian DeHaemer reviewed his 2023 Predictions yesterday, and you’ll get his outlook for 2024 tomorrow (Thursday, December 21).
If you missed the introduction for my 2024 Market Predictions you can find it here.
Now let’s get to it…
S&P 500 hits 5,865 (or higher) – As recently as October 2023, the Wall Street consensus was that we’d get a recession for the U.S. economy early in 2024. Now, at the end of December, virtually all of Wall Street investment banks are calling for new record highs in 2024. If it seems like Wall Street has a hard time thinking independently, well, I think you might be onto something. These strategist-types seem to be more concerned with which way the prevailing wind is blowing at any given moment (and confirming client biases) than offering up any real analysis, but, that’s a discussion for another time…
With that said, typically bullish Bank of America has a 5,200 target for the S&P 500 in 2024. That’s roughly 10% higher than current levels…
Now, I can tell you exactly how BofA came up with this forecast. Earnings for the S&P 500, are expected to finish 2023 at $221 a share. And analysts are estimating 11% earnings growth for 2024 – to $246.30 a share. So Bank of America’s forecast for the S&P 500 is simply based on current estimates for earnings growth. Kinda disappointing isn’t it?
Right now, the S&P 500 trades at 19 times that $246.30 earnings estimate – a forward P/E of 19. The S&P trailing P/E (based on full year 2023 earnings expectations) is approximately 22. Bank of America’s 5,200 target for the S&P 500 implies a P/E of 21
Bank of America is basically saying “yeah, 2024 earnings will come in as expected and valuations will stay where they are now.”
Talk about going with the status quo…
Problem is: how often does the stock market do what people expect? Mmmm…that would be…never.
Let’s start with the Price-to-Earnings (P/E) ratio. A lot of investors pretend that a P/E ratio is an absolute measure of value. As in, a stock with a P/E of 10 is cheap and will go higher, and a P/E of 25 is expensive and means a stock will go lower.
It’s ridiculous. A P/E ratio is a measure of sentiment – how much investors will pay (P) for earnings (E). And the more bullish investors are, the higher P/E ratios will go.
And why do investors get bullish? Usually it’s because economic data and earnings are beating expectations and stock prices are moving higher.
One surprise from 2023 was the number of companies that beat earnings estimates. Over the last 12 months, Nvidia beat earnings estimates by a total of $1.49 a share. That’s added about 0.7% to full year S&P 500 earnings vs. expectations. Intel beat estimates by a total of $0.46. Microsoft beat by $0.73. GM beat by $1.41…
Pretty soon, earnings beats add up.
And remember, 2023 wasn’t all sunshine and roses. For 2024, there are tailwinds that could push earnings higher than expected. Fed rate cuts will make mortgages and car loans cheaper, low employment, higher wages and lower inflation could provide a significant boost to spending, the continuation of re-shoring will keep investment in the U.S…
There’s a strong case to be made that 2024 earnings will come in better than the current estimate of $246.30. And if companies are beating expectations, then stocks will trade with a higher P/E multiple.
2015-2018, the P/E ratio for the S&P 500 ran between 23 and 24. I believe 2024 S&P 500 earnings will come in better than expected, at $255 a share. At a P/E of 23, we get a high for the S&P 500 of 5,865. Increase that P/E to 24, and we get 6,120.
So there you have it: I estimate the high for the S&P 500 in 2024 to be between 5,865 and 6,120.
Sentiment Improves – Now, I said that the P/E ratio for the S&P 500 goes higher in 2024. Since P/E ratios are a sentiment indicator, sentiment has to improve, right? I say that finally happens in 2024. We have a U.S. economy that has (mostly) overcome inflation. The housing market stayed strong, unemployment stayed low, wages are increasing – and Americans hate it. Surveys say that only 7% of Americans rate the U.S. economy as “very good.” In 2019, before the pandemic, 35% of Americans said the economy was very good. Granted, it’s an uphill battle to get improving sentiment in an election year, but I say it happens in 2024.
Oil Prices will be lower – I’m usually not one to go with the status quo, but when it comes to oil prices in 2024, I think it’s the right call. We will finish 2023 with global demand at approximately 101 million barrels a day.
And for 2024? It depends on who you ask…
The US Energy Information Agency (EIA) says global oil demand will increase by 200,000 barrels a day. The International Energy Agency (IEA) says 1,000,000 barrels a day in demand growth. And OPEC+ says 2.2 million barrels a day…
You can throw that OPEC+ estimate right out the window. Saudi Arabia and its pals are desperate for oil prices to be higher, the cuts they’ve made aren’t working, so why not fudge the demand numbers a little?
Russia is obviously cheating and the production it agreed to with the Saudis. China is buying as much Russian crude as it can, helping to fund Putin’s war against Ukraine. China’s oil imports are up 6% this year, to 11 million barrels a day. But close to 1 million barrels have gone into storage.
Global supply is expected to grow by 1 million barrels a day in 2024, led by the U.S., Brazil and Guyana/Suriname. There’s just not much of a case for oil prices to move significantly higher….
In fact, the biggest risk for oil investors is that Saudi Arabia will attempt to punish US oil companies by opening the spigots and crushing prices like they did in 2014. Oil prices fell from $100 to $35 between 2014 and 2015. Though perhaps the Saudi bid to gain respectability on the global stage will keep it playing nice? We’ll see. I expect West Texas Crude to trade between $65 and $80 in 2024.
Who Benefits from Lower Oil – Obviously, lower gasoline prices help the U.S. consumer. Trucking companies, too. I’m interested in travel companies, namely airlines and cruise lines. Both categories will hit records for customers in 2024. But airlines hedge their fuel costs. Carnival Cruise Lines (NYSE: CCL) does not. Fuel costs bite when prices are high, and that was a problem for Carnival’s second quarter earnings. Lower fuel costs, however, will immediately boost Carnival’s bottom line. It’s one of my favorite stocks for 2024…and fuel isn’t the only reason…
Weight Loss Drugs Hurt Food Companies, Help Travel Companies – Retailers like Walmart (NYSE: WMT) and food companies like General Mills (NYSE: GIS) are worried that appetite suppressing drugs like Ozempic and Wegovy will eat(!) into their bottom lines. Expect more package “shrinkage.” United Airlines (NYSE: UAL) says it would save $80 million a year in fuel costs if the average flyer lost 10 pounds. Cruise ships spend ~$15 per person on food every day, roughly 5% of the fare. Less spending on food leaves more money available for travel. And smaller food bills for Carnival will boost earnings.
Bitcoin will hit all time highs – I’m not a crypto bull…at all. But with several Bitcoin ETFs likely to hit the market in 2024, there is upside for Bitcoin. The all-time high is $68,000, and I wouldn’t be surprised to see it make a run at those highs in 2024.
Chinese stocks and economy sink – China is the biggest risk to the global and U.S. economy. The big fear about China is that it will move to invade Taiwan. And its alliance with Russia is troubling. During the first half of 2023, China put nearly 200 million barrels of oil into storage. Much of it is from Russia – China is clearly funding Putin’s war in Ukraine.
But China’s economy is the immediate concern. It’s a mess. The property sector is loaded with debt and has overbuilt to the point that projects are stalled and real estate companies struggle to make interest payments. China’s population is in decline, youth unemployment is very high and it’s all made worse by the trade war with the U.S…
Foreign direct investment in China was $50 billion in 2021. It fell to just $5 billion for the first 9 months of 2023 – and foreign investment went negative in November by -$11.8 billion. And in November, China’s exports grew for the first time in 6 months – by 0.5%.
This is the direct result of U.S. companies moving their supply chains out of China and reshoring manufacturing to the U.S. and countries friendly to America.
Now, I talked a lot about this trend – that I call the Second American Industrialization – in the intro to this article. It’s hard to overstate the significance of the Second American Industrialization…
Because the symbiotic relationship between the U.S. and China was the foundation for global growth for over two decades. And the breakdown of this relationship has only just begun. We can expect the pressure on China’s economy to increase as the Second American Industrialization picks up steam.
I’ve been advising readers that Chinese stocks as an investment are off limits for over a year. Alibaba (NASDAQ: BABA), TenCent (TCEHY), Baidu (NASDAQ: BIDU) – all of them.
And I have concerns about U.S. companies that do a lot of business in China. Like, GM (NYSE: GM) has half of its production capacity in China. Tesla (NASDAQ: TSLA) gets nearly half its revenue from China. All of Starbucks (NYSE: SBUX) expected growth comes from its China expansion plans….
Remember: Wall Street and Corporate America still have hundreds of billions in exposure to China’s economy. None of them are going to yell “FIRE!” and publicly announce that they are worried. You, the individual investor, will be the last to know…
So, while I can’t say for sure that 2024 will be the year that China’s economic struggles become a priority for investors, it’s hard to imagine that it can linger under the surface for much longer.
Avoid Chinese stocks. Buy U.S.-centric stocks (and countries/stocks in the American Circle of Trust).
One Electric Vehicle (EVs) stock to own – There’s been a lot of talk about the slowdown for EV sales in the U.S. Ford (NYSE: F) and GM (NYSE: GM) have both scaled back production goals for their various EVs. Tesla (NASDAQ: TSLA) has continued to cut prices to maintain market share. Most start-up EV companies have cut prices and production goals.
There’s one notable exception: Rivian (NASDAQ: RIVN). While it’s true that Rivian has slowed the buildout of its Georgia factory, it hasn’t cut prices and it didn’t cut production goals in the second half of 2023. Having Amazon as a customer is a serious tailwind, and Rivian is adding AT&T as a customer…
Now, about that slowdown. In the second quarter of 2023, EV sales grew 13% from the first quarter. So when third quarter EV sales grew just 6% sequentially, well, that’s when the “slowing EV sales” story really took hold. Ford and GM cutting production didn’t help…
But what they don’t tell you is that 2023 EV sales will grow +40% from 2022. Total volume will be over a million EVs. And market share will be close to 10% of all new cars sold.
EVs are a new product, going up against a product that has been an essential component to American identity for 70 years: internal combustion engine vehicles. There is bound to be fits and starts…
And I want to point out something that Elon Musk and Rivian understand about the EV market that Ford and GM do not. It is that the EV customer is not the same as the regular new car customer. Tesla didn’t get where it is by appealing to the masses. Musk didn’t find his niche selling EVs, he sold Teslas. They were very expensive and appealed to an exclusive group. The cheaper Model 3 is cheaper, but it still appeals to an exclusive group.
It’s the same with Rivian. Rivian trucks are not an alternative to Ford F-150s. Rivian has a unique product and customer base. And I think this is why Ford cut back on its Lightning electric trucks. I’m sure Ford thought it would have no problem transitioning F-150 drivers to the Lightning EV. But in a general sense, the customers who make the F-150 the best selling truck of all time are not EV buyers…
After Tesla, Rivian (NASDAQ: RIVN) is the EV stock to own for 2024 and beyond.
Amazon Joins the $3 Trillion Club – Amazon spends more than twice as much on R&D as any other tech stock. A big chunk of that spending goes to building out AWS. Next year, AWS customers will have access to AI applications running on Nvidia’s top performing chips, the H200. Just like how Amazon’s marketplace is brand agnostic, its AI offerings on AWS will feature any application that wants to be there. Yes, Microsoft will keep ChatGPT to itself, and Google will keep Bard. But for companies that want to sample a range of offerings to find the best fit, Amazon will be the top choice.
I expect Amazon shares to double in 2024
All Time Highs for Intel – I’ve been busting on Intel for its glaring missteps for a few years. But I can admit when it’s time to
pivot change my mind. Intel has always made (fabricated, to use the correct semiconductor jargon) the chips it designs. But now it is following the Taiwan Semiconductor (NYSE: TSM) model and becoming a contract fab for other semiconductor companies. Intel is building two fabrication centers in Ohio. This fits right into the Second American Industrialization thesis – Intel already makes chips in the U.S. Now it will make more, further strengthening the semiconductor supply chain.
Intel earnings will double over the next 12 months, and so will the stock price
Ok, I’ve hit the magic number of 10 Market Predictions for 2024. And there’s plenty more where that came from, which is why we send the Pro Trader Today e-letter to you every day.
Take care, and I’ll talk to you on Friday.