US Economy Poised for Expansion as Consumers Thrive and Inflation Subsides
Sinead Colton Grant, the chief investment officer at BNY Mellon Wealth Management, is optimistic about the US economy in the year ahead. Despite concerns over rising interest rates and inflation, Colton Grant believes that the economy will continue to expand as consumers remain healthy and inflation subsides.
According to BNY Mellon Wealth Management’s 2024 outlook report, there is only about a 30% chance of a recession in the US, and GDP growth is expected to slow to between 1% and 2% this year. Colton Grant attributes the continued growth to a 40% increase in aggregate wealth since March 2020 and a less-than-anticipated impact from debt service costs. Consumer spending, which accounts for two-thirds of US GDP, has remained strong, and reports suggest that shopping continued at a healthy pace throughout the holiday season. Additionally, while interest rates and mortgage rates have risen, those who already have fixed-rate mortgages are not affected.
However, Colton Grant acknowledges that there are discrepancies between high- and low-income households in how they experience the economy. Consumer sentiment has been weak among lower-income households, despite relatively low unemployment rates. Inflation hit multi-decade highs in 2022, which significantly squeezed households, but the rate of price growth has since receded. Wage growth has also improved, offsetting the impact of inflation to some extent.
BNY Mellon Wealth Management’s CIO Explains Limited Upside in Stocks
Colton Grant believes that if the US economy continues to grow as expected, corporate earnings should also grow. She predicts $235 to $245 worth of S&P 500 earnings next year, which would be roughly 7% to 11% growth. However, she cautions that investors should not expect profit growth to translate to proportional gains in stocks.
Colton Grant believes that the S&P 500 will likely be stuck within a range of 4,600 to 5,000 this year, with a midpoint of 4,800. This implies a downside of 3.5% or an upside of 5% based on last year’s closing prices. She attributes this limited upside to concerns that the market may have borrowed some of this year’s return in the previous year’s acceleration following the Fed meeting in December. Colton Grant emphasizes that double-digit returns every two months are not sustainable.
Although a double-digit return for the next 12 months may be unlikely, Colton Grant believes the S&P 500 could potentially reach 5,200 if there is no recession and earnings perform well. This would represent a 9% gain, in line with the index’s long-term average.
5 Comforting Investment Opportunities in Today’s Market
BNY Mellon Wealth Management is neutral on equities overall but has a bullish overweight rating on US stocks. Within domestic markets, Colton Grant highlights five investments that she believes are promising:
- Large-cap companies: Colton Grant prefers large-cap companies due to their better positioning to benefit from technology advancements, the deployment of AI, and a history of adopting innovation. Financial conditions also favor large companies that are immune from high interest rates.
- Growth and value stocks: Colton Grant recommends a balanced approach between growth and value stocks. She sees attractive opportunities in value stocks that have been beaten down over the past year.
- Financials: Colton Grant is bullish on the financial sector, citing increased efficiency and capital strengths across the board.
- Technology: Colton Grant sees technology firms as becoming more efficient, quickly deploying technology, and expanding their reach. Though there are headwinds to monitor, such as export restrictions, she believes the sector overall is poised to continue dominating.
- Real estate: Colton Grant believes there are attractive investment opportunities in real estate, particularly in areas where population growth and job creation are strong.
While there may be uncertainties in the market, Colton Grant believes that these investment opportunities offer potential for investors to feel comfortable amid the current conditions.
Expert Insights on the Economy in 2024: A Healthy Slowdown
BNY Mellon Wealth Management’s 2024 outlook report suggests a “healthy slowdown” for the US economy. Colton Grant believes there is a lower chance of a recession this year, with GDP growth expected to slow to between 1% and 2%. The report attributes the continued expansion to factors such as increased aggregate wealth and a less-than-anticipated impact from debt service costs. Consumer spending and a strong labor market also contribute to the positive outlook.
Colton Grant acknowledges that there are disparities between high- and low-income households in how they experience the economy. While overall consumer sentiment has been weak, contradicting low unemployment rates, wage growth has improved to help offset the impact of inflation. Despite concerns over inflation and rising interest rates, the report expects the Federal Reserve to cut interest rates four times in 2024, albeit at a slower pace of price growth.
Looking ahead, Colton Grant is optimistic about the investment opportunities that may arise as rates are cut and new investment opportunities emerge. She believes it is an exciting time to be a steward of clients’ portfolios.
Forecasting the Stock Market: Expectations and Potential Gains
Colton Grant predicts that if the US economy continues to grow as expected, corporate earnings should also increase. However, she cautions that investors should not expect proportional gains in stocks. While she predicts $235 to $245 worth of S&P 500 earnings next year, she believes the index will likely be stuck within a range of 4,600 to 5,000, with a midpoint of 4,800. This implies a limited upside potential for stocks.
Colton Grant attributes the limited upside to concerns that the market may have borrowed some of this year’s return in the previous year’s acceleration following the Fed meeting in December. A slowdown in the rate of price growth and the potential for the Fed to cut interest rates multiple times in 2024 provide some optimism. However, she emphasizes that double-digit returns every two months are not sustainable.
Despite the limited upside in stocks, Colton Grant believes the S&P 500 could potentially reach 5,200 if there is no recession and earnings perform well. This would represent a 9% gain, in line with the index’s long-term average. Overall, investors should remain cautious and carefully consider their investment decisions in light of the current market conditions.
Analyst comment
Positive news. The US economy is poised for expansion as consumers thrive and inflation subsides. BNY Mellon Wealth Management predicts limited upside in stocks with the S&P 500 likely to range between 4,600 to 5,000, but potential gains if there is no recession and earnings perform well. Overall, investors should remain cautious and consider their investment decisions carefully.
