Why the Stock Market Could Keep Rallying Despite Mounting Geopolitical Risks

As we approach the close of 2023, market sentiment points toward a bullish 2024 for stocks. The year-over-year expected stock market earnings growth rate is expected at 8.1%, according to FactSet.

Despite various uncertainties throughout 2023, the most effective strategy proved to be buying without excessive contemplation.

Factors such as the ones listed below were the primary sentiment drivers:

• Elevated interest rates from the Federal Reserve, the European Central Bank, the Bank of England, etc.
• Apprehensions about entering an economic recession.
• Ongoing conflicts such as the war between Russia and Ukraine, the Israel-Hamas conflict, and the Red Sea tensions.

Broader Market Follows Magnificent 7 - Relieving Concerns of a Narrow Rally

While technology stocks, particularly the Magnificent 7, significantly contributed to the stock market's upswing, the broader market also experienced a positive year.

Before Thanksgiving, approximately 90% of S&P 500 stocks were above their 20-day moving averages—a positive sign for breadth momentum, indicating a high percentage of stocks moving upward.

A healthy market rises with the support of many bullish stocks, not just a select few.

Although the S&P 500 trades at 19 times expected 2024 earnings according to FactSet, indications suggest Wall Street's upward trajectory will persist.

Anticipated interest rate cuts and favorable company earnings forecasts, potentially reaching +8-10%, contribute to this outlook.

The robust labor market and rising wages further support expectations of sustained consumption, accounting for 65% of the country's GDP.

Historically, years with S&P 500 rallies exceeding 20% are seldom followed by similar performances. Out of 26 years with at least one +20% rally, only nine featured consecutive gains of that magnitude.

Even if a market downturn occurs early in 2024, it's likely to be short-lived. The more probable scenario involves a pullback alleviating near-term excesses, setting the stage for another bull market stretch in 2024.

Reasons for confidence in continued bullishness include:

• A market with good breadth (a high percentage of stocks on the rise).
• Anticipated interest rate cuts.
• Expectations for a soft landing of the economy.
• Higher company earnings forecasts.

Declining Bond Yields to Lift Stocks?

Additionally, historical data suggests that declines in bond yields benefit the stock market. Since 1980, there have been 33 instances where United States 10-Year yields fell 50 basis points or more in one month.

The three-month trailing average yield for the S&P 500 was nearly +8%, and for the Russell 2000, it was +8.2%. On Wall Street, cyclical stocks, as well as industrial stocks, could prove interesting for the year.

In Europe, these catalysts support the positive outlook:

• Expected interest rate cuts from the European Central Bank.
• Goldman Sachs (NYSE:GS) estimates that European listed companies will be the most significant buyers of European equities in the coming year, with major share buyback programs anticipated in the banking and energy sectors.
• Buybacks, being a more flexible way of returning money to shareholders than dividends, are poised to continue at around 150 billion euros.

This analysis indicates a potentially optimistic 2024 for the global stock markets.

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Disclosure: The author holds no positions in any of the asset classes mentioned.