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Interest Rates Still Influence Stocks in 2024

3 Mins read

DataTrek Research reveals that interest rates will continue to play a crucial role in shaping the stock market in 2024. As Wall Street anticipates fresh record highs for U.S. stocks, investors must focus on the direction and pace of interest-rate movements.

Outperformance Potential based on Interest Rates

Nicholas Colas, co-founder of DataTrek Research, suggests that rate-sensitive stocks, such as financials, utilities, and staples, with lackluster fundamentals might experience an uptick in performance early in the year if interest rates decline quickly and permanently. On the other hand, if interest rates prove to be more volatile, stronger groups like technology and tech-adjacent sectors are expected to fare better.

Weak Performances and Strong Performances

FactSet data reveals that, so far in 2023, the S&P 500’s utilities, consumer staples, and energy sectors have been the poorest performers within the large-cap benchmark index. The utilities sector has faced a significant decline of over 10% year-to-date, while the broader index has advanced by 23.6%.

Meanwhile, the information technology sector has been the best-performing sector, exhibiting a growth of 56.5% during the same period. However, consumer staples and energy sectors have experienced declines of 2.6% and 4.1%, respectively.

Defensive Investment Sectors under Pressure

Typically considered defensive investment sectors or “bond proxies,” utilities and consumer staples serve as safe havens during economic downturns. Companies in these sectors provide essential services such as electricity, water, gas, and offer products consumers consistently purchase regardless of economic conditions.

Nonetheless, utilities and consumer staples have faced significant challenges this year. The continuous rise in U.S. Treasury yields in October made defensive stocks less attractive compared to government-issued bonds or money-market funds offering a 5% return. Additionally, with a resilient economy and recession expectations pushed further out, the appeal of these defensive stocks diminished.

The Future of Weaker Groups

Colas predicts that if interest rates continue to decline, weaker groups of stocks will experience a stronger tailwind, potentially leading to improved performance.

See: Markets are declaring victory over inflation for Powell, and that has some economists worried

The Changing Market Landscape

The recent announcement by the Federal Reserve regarding potential rate cuts in 2024 has had a significant impact on the market. As a result, the 10-year Treasury yield (BX:TMUBMUSD10Y) experienced its largest weekly decline in a year. This development has also played a role in the S&P 500’s remarkable performance, as it achieved its longest winning streak since 2017.

Sector Performance and Projections

When analyzing the performance of different sectors within the S&P 500, it becomes evident that some sectors have fared better than others. Last week, the utilities and consumer staples sectors registered gains of 0.9% and 1.6% respectively, while the information technology sector surged by an impressive 2.5%. On the other hand, the communication services sector experienced a slight decline of 0.1%, as reported by FactSet data (XX:SP500.50).

Looking ahead, it is essential to consider the expected earnings growth for each S&P 500 sector in 2024. Sectors to the left of the dotted black line are anticipated to showcase stronger bottom-line results compared to the S&P 500 as a whole. Conversely, sectors to the right are expected to exhibit weaker earnings growth.

According to Wall Street predictions based on FactSet data, next year is projected to witness an 11.5% growth in S&P 500 earnings-per-share (EPS), amounting to $244. Additionally, a steady revenue growth rate of 5.5% is forecasted.

Disparity Among S&P 500 Sectors

However, it is important to acknowledge the varying performance levels across different sectors within the S&P 500. For instance, while the energy sector is projected to experience only 2% revenue and 3% earnings growth, the information technology sector is expected to achieve substantial growth with figures reaching 9% revenue and an impressive 17% earnings growth. This data, compiled by DataTrek Research, underscores the disparity across sectors.

Investing in weaker sectors carries a greater risk, particularly considering the current rate environment. Therefore, sticking to established and successful sectors like technology remains a safer bet, as stated by Colas.

Sector Outlook for 2024

Looking specifically at the projected earnings growth for 2024, it becomes evident that sectors such as utilities, financials, and consumer staples are unlikely to achieve 10% earnings growth. Conversely, the health care sector and dominant groups within the technology industry, including communication services, technology, and consumer discretionary, are expected to outperform the average with robust revenue and earnings growth, as indicated by FactSet data cited by Colas.

Market Performance and Outlook

On Monday, U.S. stocks closed higher, continuing the positive sentiment from last week. The Dow Jones Industrial Average (DJIA) built upon its all-time high reached previously. The S&P 500 also experienced gains of 0.5%, while the Dow Industrials closed slightly higher. The Nasdaq Composite (COMP) finished the day up 0.6%, according to data from FactSet.

In conclusion, the market is witnessing shifts due to the Federal Reserve’s announcement. Certain sectors are poised to perform better than others, and careful consideration is necessary when navigating these changes.

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