The first on the list is that the US economy delivers 'Goldilocks' growth next year.
2024 consensus GDP forecasts have only just started to inflect higher, rising from 0.6% to 1%. The Fed want to see a gradual uplift to their 1.5% forecast. However, too rapid upgrading over the next few months could trigger unease at the Fed (creating a second half of 2023 replay).
Exhibit 1: A smooth and gradual glide path for 2024 GDP forecasts is required.
2024 also needs to deliver continued disinflation and the focus turning to the easing cycle
Both the Fed and consensus forecast a continued decline in inflation in 2024 with year-end levels approaching the range last seen in 2019. This has contributed to conviction that interest rates have hit peak (terminal) levels, and that next year focus will turn to the timing and tempo of the easing cycle.
Exhibit 2: Markets are pricing in a 90bps cut in rates next year starting in Q2
2024 needs to deliver a broad-based recovery in EPS growth
2023 witnessed a drawn-out process of negative revisions to EPS growth forecasts. If the contribution of the top 10 stocks is deducted, then the US is forecast to deliver negative -3.1% EPS growth in 2023. The good news is that consensus forecasts point to a double-digit recovery in growth expectations in 2024.
Exhibit 3: Sector contributions to 2024 aggregate EPS growth projections.
The report also covers the other four key 2024 risk appetite drivers:
1. Disinflation is mainly driven by declines in services prices.
2. That the pressure on equity valuations is alleviated by a decline in the bond yield.
3. That 2024 will see US EPS estimates inflect higher.
4. That US politics and the presidential election does not inject volatility into markets. The Biden campaign is facing 3 key economic headwinds.
Source: Wilshire Indexes, Refinitiv, FactSet and Federal Reserve. Data as of November 14, 2023.
