A year ago at this time, Tom Lee, co-founder and research director of Fundstrat Global Advisors, a US investment firm, predicted that the S&P 500 index would soar by more than 20% to 4750 points in 2023, and many investors were skeptical at the time.
But as of the close of the US stock market on Thursday, the S&P 500 index rose 0.037% to 4783.35 points, just over 30 points away from the level set by Lee at the beginning of the year. According to reports, among the strategists tracked by Bloomberg, his prediction is the closest.
Lee was one of the few bulls on Wall Street last year, and he once again predicted that the stock market will usher in a stable year. By the end of 2024, the target point for the S&P 500 index is 5200 points, which is likely to rise by 9% from the current level.
Key driving factors
Lee said that the easing of financial conditions throughout 2024 will be a key driving force for further stock market gains. The Federal Reserve has hinted that its next interest rate decision is more likely to be a rate cut rather than a rate hike, and currently the market expects at least five rate cuts of 25 basis points next year.
If interest rates continue to decline from their recent peak, it should lead to a decrease in mortgage rates, which should help revive the real estate market. If inflation continues to decline and the financial environment becomes more relaxed, then consumers' actual income should increase, thereby enhancing their purchasing power.
Corporate profitability
Lee predicts that the earnings per share of the S&P 500 index will increase by 11% to $240 in 2024, and by 8% to $260 in 2025, mainly driven by cyclical profit recovery.
"In the past few years, corporate capital expenditures have declined, but a easing financial environment means a recovery in capital expenditures," he said, adding that GDP growth in Europe and Asia should recover, helping to boost the global economy.
In addition, another factor that will boost corporate profits in 2024 should be the weakening of the US dollar and increased productivity.
Stock valuation
"We expect the P/E ratio to expand to 20 times in 2024. Although many advocate for compressed valuations, since 1937, higher P/E ratios have been achieved when returns are between 3.5% and 5.5%. When stock prices are between 4% and 5%, P/E ratios exceed 65%," Lee explained.
His target price for the 2024 S&P 500 index is 5200 points, which is based on his expected P/E ratio of $260 per share for 2025, which is 20 times.
Personal preferences
Lee is most optimistic about small cap stocks in 2024, and he believes that small cap stocks may catch up with the overall market next year, with an increase of over 50%. He also likes stocks in the finance, industry, and technology sectors.