What could go right (and wrong) in the markets next year?

Last November and December, experienced stock market watchers predicted that 2023 would be a year to quickly forget. They believed that high inflation, a looming global recession and rising interest rates were undermining household purchasing power and hurting corporate profits. For investors, they expected paltry profits and one of the S&P 500’s worst performances in the past fifteen years.

But the market professionals only got the story partially correct. As interest rates have risen to a nearly two-decade high, the S&P 500 has surprisingly risen to a near-record high. Fueled in part by a rally in the so-called Magnificent Seven mega-cap tech stocks, they are up nearly 25 percent this year as of Thursday’s close, following a banking crisis, wars in the Middle East and Ukraine, and slowing growth in the Chinese economy.

Crypto managed to do even better. Bitcoin bulls have brushed aside a legal crackdown against the sector’s biggest players to fuel an impressive rally. The digital token has gained more than 150 percent this year, making it one of the best-performing risk assets.

“Twenty-three was a great year for the contrarians,” David Bahnsen, the founder and chief investment officer of the Bahnsen Group, an asset management firm, told DealBook. “A year ago you had macroeconomic concerns that had no effect, and you had valuation and financial concerns that had no effect. And it’s particularly ironic that that’s not the case, because basically everything investors feared a year ago has gotten worse.”

Wall Street’s outlook for 2024 is brighter. Analysts see lower borrowing costs and a soft landing (i.e. an economic slowdown that avoids a recession) And a pretty good year for investors.

But if 2023 has taught market professionals anything, it’s that forecasts can start to look outdated pretty quickly. A whole host of things could disrupt markets in the coming year – inflation creeping back up, or not, is a big factor to look at. And there are also wildcards, where voters are expected to go to the polls next year in more than 50 countriesincluding the US

This is how Wall Street sees 2024 going:

The bull case

According to FactSet, the average forecast for the S&P 500 at the end of 2024 is 5,068. Such a level would imply an annualized gain of around 6 percent for 2024.

Bank of America’s equity strategists, led by Savita Subramanian, are in the bullish camp. In their annual forecast, they said the S&P 500 would likely close at 5,000 next year, helped by a sort of “Goldilocks” scenario of falling prices and rising corporate profits.

Goldman Sachs is even more optimistic. His analysts upgraded their call at the end of 2024 on the S&P 500 to 5,100. They made this change after the Fed’s surprise statement on December 13 that the equivalent of three rate cuts was on the table for next year. Lower borrowing costs tend to give consumers and businesses more purchasing power, which could boost corporate America’s bottom line.

Another catalyst: Investors put far more money into safe interest rate-sensitive assets, such as money market funds, than into stocks this year. That logic could be turned on its head in 2024. “If rates start to fall, investors may shift some of their cash holdings into equities,” David Kostin, chief U.S. equity strategist at Goldman Sachs, said in a recent investor note.

The bear case

On the more pessimistic side is JPMorgan Chase, which sets a target of 4,200 by the end of 2024. The analyst team, led by Marko Kolanovic, the bank’s chief global market strategist, sees a struggling consumer with depleted savings, a potential recession and geopolitical uncertainty that could push up commodity prices such as oil and dampen global growth.

The coming year will be “another challenging year for market participants,” Kolanovic said. (Most strategists are even gloomier about Europe, where recession fears are more acute. On the other hand, equities in Asia could see another year of solid growth, special in India and Japan, Wall Street analysts say.)

Lee Ferridge, head of multi-asset strategy for North America at State Street Global Markets, is more optimistic about the US consumer, but points to another challenge for investors. “If I’m right, the economy will remain stronger. But then that’s a double-edged sword for equities,” he said. The prospect of robust consumer and business spending poses an inflation risk that could force the Fed to keep rates high for longer and even suspend cuts, he said. “That will be a headwind for stocks.”

“I wouldn’t be surprised if we see a fairly flat year next year,” he added. “As we move up, it will be the Magnificent Seven who will be the drivers again.”

The wildcard: politics and the elections

Presidential elections are not rally killers, according to market analysis by LPL Financial that looks at the past 71 years. In that period, the S&P rose by an average of 7 percent during the American presidential elections. (The market typically does even better in a re-election year, the financial advisory firm notes.)

Even as some unusual questions arise in next year’s election: Will a mountain of legal troubles derail the Republican front-runner, Donald Trump? Will President Biden’s declining poll numbers open the door to a strong third-party challenger? Will the election results be contested, creating a constitutional crisis? – this is unlikely to add much volatility to the markets, Wall Street professionals say.

“The election will not be a stock market story until November 2024, for the simple reason that the stock market will not know who will win the election until November 2024,” Bahnsen said.

His advice: Don’t even try to gauge the impact of the election on the markets.