Where to Invest in 2024

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last updated 26 December 2023

As investors look ahead to 2024, the bull market is embarking on its second year. But this is no victory lap for the bull.

From the start of 2023 through October, the S&P 500 index returned 10.7%, including dividends – a decent run on the face of it. But the index's reputation as a "broad market benchmark" was misleading in 2023. In fact, most – and at times all – of the S&P 500's gains came from a handful of stocks, nicknamed on Wall Street "the Magnificent Seven." Without them, the index would be barely positive, up just 0.03% – a sign that the wider market has been plagued by doubts and uncertainties. (Returns and other data in this story are through October 31.)

There have been plenty of reasons to question the rally's underpinnings. Although a heavily telegraphed recession never materialized in 2023, hard times have nonetheless rolled through several sectors of the economy, and some economists have not yet ruled out a recession in 2024.

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We did get a recession in corporate earnings growth, with three quarters of negative growth starting in the fourth quarter of 2022. That means that the stock market's recent gains have not been driven by the engine of rising profits, but by expanding price-earnings ratios – think of it as investors shelling out increasingly more for each dollar of corporate earnings. Notably, sectors that typically lead fledgling bull markets, including small-company stocks and financials, have failed to launch.

In the battle against persistent inflation, interest rates have surged, fueled by Federal Reserve hikes at the short end of the yield spectrum and by bond traders pushing yields higher at the long end. A market mantra of "higher for longer" has raised questions about the ability of consumers, companies and the U.S. government to continue borrowing and servicing their IOUs comfortably while still powering the economy and financial markets forward. And those higher yields, on bonds and cash accounts alike, are providing stiff competition for stocks.

It's not surprising, then, that after peaking at the end of July, stocks pulled back, dipping into official correction territory in late October with a 10% drop in the S&P 500. Not one of the Magnificent Seven – Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) – bucked the downturn. Stocks have subsequently bounced a bit. But it's still fair to ask: Can this wobbly bull find surer footing in 2024?

In a year with more wild cards than most, including dysfunction in Congress, a U.S. presidential election and two global wars, prognosticating the course of the market is harder than ever. "We're tracking a swirling vortex of news," says Matthew Bartolini, a managing director at State Street Global Advisors. "Geopolitics will be something the markets have to contend with in 2024."

But several trends are heading in the right direction for investors, including inflation (down), corporate profits (up) and interest rates (peaking, pausing, perhaps falling). That's enough for stocks to deliver worthwhile returns. Given the challenges ahead, strategists at UBS Wealth Management have pushed their 2024 forecast of 4,700 for the S&P 500 from mid-year to year-end. But that still implies a 12% gain from the October 31 close of 4,194, and dividends will add nearly two percentage points to returns. The current target for the S&P 500 a year from now from a consensus of Wall Street strategists is a more optimistic 5,063.

In general, as we head into 2024, we'd tilt toward large-company, U.S. stocks, and we'd be mindful of valuations when buying. However, investors will do best this year by looking beyond broad market labels and zeroing in on stocks with high-quality hallmarks, regardless of company size, market value or investing style. In other words, 2024 "will be the year for the stocks that can show you the money, with high-margin and high-cash-flow businesses," says Jim Cahn, chief investment officer for investment management firm Wealth Enhancement Group in Plymouth, Minnesota.

Investors need to watch the economy in 2024

A question likely to be answered in 2024 is whether U.S. central bankers have achieved the rare success of bringing down inflation without pushing the economy into a recession. The corollary to that question is whether they can stop hiking rates. Eleven increases, starting in the spring of 2022, have pushed the Fed's benchmark rate from near zero to a target range of 5.25% to 5.50%.

Another hike wouldn't be a surprise, especially given the most recent reading on gross domestic product (GDP) growth that showed the economy expanding at the shockingly high annualized rate of 4.9% in the third quarter, buoyed by high-spending consumers. Although consumers, the backbone of the U.S. economy, are expected to remain resilient in a weakening but still strong job market, it's worth noting that credit card delinquencies have been rising, albeit only back to pre-pandemic levels for now. Many forecasters anticipate an economic slowdown in 2024, if not outright recession. Kiplinger sees average GDP growth of 2.4% for 2023, slowing to 1.6% on average in 2024.

Meanwhile, even the stickiest aspects of inflation appear to be moderating, including rents and recently hot new-car prices, says David Kelly, chief global strategist at J.P. Morgan Asset Management. Overall, Kelly sees inflation falling from a recent rate of 3.7%, as measured by the consumer price index (CPI), to 2.2% by the fourth quarter of 2024, right around the Fed's target level. Kiplinger currently forecasts a CPI rate of 2.4% by the end of 2024.

Inflation falling back to earth would ease the upward pressure on interest rates and open the door to cuts. "At some point in 2024, the Fed will cut – we don't know when or by how much, but we know they're highly likely to cut, if only to test the waters," says State Street's Bartolini.

After briefly breaching the 5% level for the first time in 16 years, yields on 10-year Treasury notes could float lower in 2024. But don't expect a return of the low, low levels that became the norm following the Great Financial Crisis. "We're going back to a normal environment for bond yields," says economist Ed Yardeni, of Yardeni Research, roughly in the 4.5% to 5% range.

When looking for where to invest in 2024, seek out value

Growth in corporate profits appears to have troughed in the third quarter and is expected to rebound in 2024, but the extent of the pickup so far remains unclear. A consensus of analysts' estimates shows a nearly 12% uptick in 2024 profits over 2023 levels. But those forecasts might be too optimistic, or not based on enough input from company executives. Earnings-growth forecasts from strategists we spoke to for this story range from 5% to 9% for 2024.

The more important question is whether stock prices, especially in competition with higher-yielding cash and fixed-income options, will be a good value.

"When you can get 4% to 5% in a money market fund, valuation matters more for stock investors," said Josh Nelson, head of U.S. equity at fund company T. Rowe Price, in a presentation to financial advisers.

The recent correction brought the price-to-earnings (P/E) ratio for the S&P 500, based on estimated earnings, down to 17.6, from 19.7 in mid-June, according to earnings tracker Refinitiv. That puts the recent P/E roughly in line with the 10-year average, says FactSet Research, another earnings-data firm. "Multiples are at a reasonable if not super-attractive level," says Nelson. But he adds that investors will "need to be more disciplined" when they buy. "You'll want to have a lot of free cash flow and earnings support for the companies you're investing in."

Sector-wise, David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, likes energy and consumer staples stocks. UBS sees favorable supply-demand dynamics pushing the per-barrel price of Brent crude oil into the mid $90s, up from the mid $80s recently. "And energy is a hedge if things get materially worse on the geopolitical front," Lefkowitz adds.

In mid-October, strategists at research firm CFRA turned from neutral to bullish on energy stocks, with oil and gas equipment and services firms, followed by integrated oil companies, the highest-rated subsectors. CFRA also boosted its call on Exxon Mobil (XOM, $106) from Hold to Buy, with a 12-month share-price target of $121. Kiplinger columnist James Glassman favors services firm ONEOK (OKE, $65). Exchange-traded fund Energy Select Sector SPDR (XLE, $85, expense ratio 0.10%) provides broad exposure to the sector.

The consumer staples sector fell 7.5% in 2023 through October as investors gravitated to higher yields in cash and fixed income and worried about changing tastes in soft drinks and snack foods, especially with the rollout of new drugs to treat obesity. But that rollout is slow-moving, and the market may be overestimating its impact, says Lefkowitz. "Innovation is the hallmark of any good company, and that's true of staples as well. If there are changes in consumer buying patterns, they'll adjust," he says. CFRA is not keen on the sector overall but gives Strong Buy ratings to Coca-Cola (KO, $56) and PepsiCo (PEP, $163).

Investors need to watch for traps in 2024

Investors in 2024 will need to sidestep sand traps when seeking stock bargains. That doesn't mean dumping stocks that provide portfolio diversification or income, say, but being careful about new buys. For example, typically the epitome of "defensive" stocks, utilities have been anything but as interest rates have climbed. Prices for stocks in the sector fell 16.2% overall in 2023 through October, a performance that left utilities ranked last among S&P 500 sectors. For these heavy borrowers, a higher-for-longer regime might not bode well for 2024.

International stocks have beckoned for some time, with prices that are tempting compared with U.S. counterparts. But even if valuations are compelling, earnings trends are not. Says David Bailin, chief investment officer at Citi Global Wealth: "International markets are cheap but don't necessarily have a catalyst. There's a value-trap possibility there."

The exception many strategists agree on is Japan. Structural corporate reforms are driving greater shareholder value there, and earnings have upward momentum. A fund we like is Fidelity Japan (FJPNX, 1.13%), with a one-year return of 10.0%.

Insist on high-quality stocks in 2024

One troubling aspect of the stock market, according to Michael Hunstad, deputy chief investment officer at Northern Trust Asset Management, is that the reward, relative to the risk of investing in stocks, has been well below average, measured by a wonky stat called the equity risk premium. "There's a lot of risk-seeking behavior in the face of macroeconomic uncertainty, and we're not getting paid for the risk," he says.

One way to counter risk is to emphasize high-quality stocks, such as those with strong balance sheets, consistent earnings growth, strong free cash flow and either low debt or the ability to cover interest payments comfortably. The iShares MSCI USA Quality Factor ETF (QUAL, $130, 0.15%) holds large and mid-size stocks with high returns on equity (a measure of how efficiently a company generates profits), stable earnings growth and low debt. Top-10 holdings include four of the Magnificent Seven, but also payment giants Visa (V, $235) and Mastercard (MA, $376), drugmaker Eli Lilly (LLY, $554), and oil and gas producer ConocoPhillips (COP, $119).

Companies must have a 10-year history of earnings and dividend growth and stability to make it into CFRA's High Quality Capital Appreciation Portfolio. A recent addition is Tractor Supply (TSCO, $193), a specialty retailer serving people who enjoy a rural lifestyle.

Find cash-rich companies with the Pacer US Cash Cows 100 (COWZ, $48, 0.49%), an ETF that targets companies with high free cash flow (cash left over after operating expenses and spending to maintain or expand the business). Top holdings include pharmaceutical products distributor McKesson (MCK, $455), CVS Health (CVS, $69) and Marathon Petroleum (MPC, $151).

The high-quality theme is not exactly undiscovered, and many choices are expensive, best bought on dips if your investment horizon is short. Or consider the SPDR MSCI USA StrategicFactors (QUS, $119, 0.15%). The ETF blends high-quality and low-volatility factors with a value filter. Stocks in the portfolio, on average, have a below-market P/E of 15.8. The one-year return is 9.8%.

Where should bond investors invest in 2024?

When the books close on 2023, it's possible that bond investors will have logged their third losing year in a row. But 2024 should be an improvement. Quality is the watchword for bond investors, too.

Fund investors should do well with a core holding such as the Baird Aggregate Bond (BAGSX, 0.55%), a member of the Kiplinger 25 (the list of our favorite no-load mutual funds) that invests in high-quality U.S. bonds, including government IOUs, asset- and mortgage-backed securities, and corporate debt. It yields 4.5%. Fidelity Intermediate Municipal Income (FLTMX, 0.35%), another Kip 25 fund, focuses on high-quality, medium-term bonds exempt from federal taxes. It yields 4.1% (equivalent to 5.3% for someone in the 24% federal tax bracket).

Individual-bond investors should consider locking in longer-term yields. The recent 5.5% yield on a six-month Treasury bill still beats the 4.9% yield on a seven- or 10-year note, but recognize the reinvestment risk on the shorter end if rates come down.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.