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The 12 Charts of Christmas

| December 18, 2023

It’s clear this year’s market performance outdid most expectations from “experts.”

Wall Street predicted a 7.0% market gain this year, with an average year-end target for the S&P 500* of 4,100. As of this writing, the index is around 4,560. Our readers know we weren’t in the “low end” camp.

What is Wall Street saying for next year? On average, the S&P 500 year-end 2024 forecast from the top ten Wall Street brokerage firms is just 4,740. That’s up about 4.0% from today's mark, as of this writing.

We’ll take the over (more on that when we plant our S&P 500 target flag next week).

But first we want to lay the groundwork for 2024. We think it will be another strong year for stocks. In the 12 charts of Christmas that follow, we'll debunk popular bearish arguments and highlight underappreciated bullish macro signals. If you’re near a bear, hug them – they'll need it.

Pain Relief

The much-doubted “soft landing” from inflationary doom is playing out beautifully as a solid job market continues to underpin resilient consumer spending.

As the chart above shows, inflation also continues to fall. This frees the Federal Reserve to start cutting rates. The Fed funds futures market is currently pricing in four quarter-point rate cuts next year, beginning in May. Thus, the market’s biggest pain point is ready for release.

Low Premium

This new interest rate reality plays into one of the popular bearish narratives. The spread between the S&P 500 earnings yield (the index level divided by 12-month forward earnings per share) and the 10-year Treasury yield is called the equity risk premium (ERP). Right now, it stands at 1.0%:

As the chart shows, the ERP averages 3.0% since 2005. Bears argue that a low ERP means stocks are bad relative to bonds from a value perspective. That’s perhaps reasonable, but let's dig deeper.  

Low Concern

Here’s what the bears are missing: history shows when the S&P 500 ERP is between zero and one, as it is now, the average gain over the next year is an above average 12.2%:

History gives reason to not fret over today's low ERP. Also, the low ERP simply reflects 2023’s unnatural jump in bond yields and sluggish first-half corporate earnings growth. Stocks are rallying as rates decrease and profit growth reaccelerates – remember that the market looks forward.

Small Breadth, Big Gains

Another popular bearish narrative is the 2023 market rally is unsustainable because only a handful of stocks have led the charge (they’re dubbed “The Magnificent Seven”). However, narrow market leadership is good because it historically precedes strong forward returns:

This makes sense after most stocks lagged because they now likely represent value. When breadth is strong, it often leaves few stocks (if any) with room to catch up.

Earnings Growing Again

“Recessionistas” who believe a recession is imminent will have you believe earnings are weak and getting worse. It's true year-over-year earnings growth was slightly negative in the first half of 2023. But for the full year, corporate profits are shaping up to be roughly flat – keep in mind, at the start of the year flat corporate profits would’ve been cause for a parade. Again, the market looks forward.

After turning modestly negative in June, year-over-year 12-month forward S&P 500 earnings growth reaccelerated to 5.7%. Also, the consensus forecast indicates 11.0% year-over-year EPS growth for the S&P 500.

Stocks Follow Earnings (Perhaps the Best Part)

Stocks don't follow headlines; stocks follow forward earnings. Since 1977, the S&P 500 averages a 13.0% gain in the 12 months following bottom-quartile 12-month forward earnings growth:

Investors anticipate a profit recovery. And when earnings turn from down to up, stocks follow suit. Sorry bears, this bullish evidence is strong…and there’s more of it.

Sidelined Cash

We’ve written extensively about the $5.7 trillion sitting in money market accounts. Doubters think this money stays put because it’s earning a juicy “risk-free” interest rate of 5.0% or more. Here’s what a crowded trade looks like:

After taxes the yield is more like 3.5%, which barely keeps up with inflation. More importantly, yields have peaked. That huge balance will eventually melt like winter snow in the spring when the Fed begins cutting rates.

Some of that money will want more yield and make its way to the stock market. The entire U.S. stock market is worth roughly $50 trillion. Even if only 44.0% ($2.5 trillion) of the sidelined cash moves into equities, that's 5.0% of the market's total value flowing in, which is extraordinarily bullish.

“Big Money” Upside

The trusty Big Money Index (BMI), a 25-day moving average of buys and sells from “big money” investors, from our friends at MAPsignals has an amazing record of predicting market peaks and troughs. As of this writing, the BMI has shot back up and stocks have ripped higher:

There's still plenty of upside left. And as our readers know, the BMI can remain overbought for extended periods. In 2020, the BMI stayed overbought for 87 days! It’s more important when the BMI starts to fall from overbought than merely being overbought.

Consistently Stunning Returns

The BMI’s last day of being oversold was Nov. 6, 2023. Since 1990, the S&P 500 forward returns from the last day of being oversold have been amazing:

The average S&P 500 returns after an oversold BMI are stunning:

  • One month: 3.0%
  • Three months: 5.4%
  • Six months: 9.1%
  • 12 months: 15.4%

For perspective, the S&P 500 historically averages about 9.0% annual returns. Buying when the BMI is oversold produces that return and a bit more in just six months, on average.

Growth Leaders

The best move when the BMI goes oversold is to buy stocks aggressively. Often, it's more important that you buy than what you buy. Rips off an oversold BMI are usually powerful enough for rising tides to lift all boats. But if you want to dig deeper to do better, the sector rankings show growth-oriented technology, discretionary, and industrials as good areas for focus:

Reliable Quality

This post has been positive, but leading economists still see a 50% chance of recession in the next 12 months, per a recent Bloomberg survey.

However, when growth slows, quality growth stocks tend to outperform because investors pay a premium for reliability. Earnings predictability is key, which is why “The Magnificent Seven” fit the bill so well this year. Oddly enough, they live in the technology, communications, and discretionary sectors:

Those three sectors’ earnings are expected to outperform the market. As for health care being an outlier, the sector fell so much in the past, the year-over-year comparison baseline is quite low (energy was similar a year prior), so there’s a low bar to clear.

All Boats

It's one thing to measure what's happening now. It’s another thing to study the historical evidence, which holds weight. Thus we do both.

Analyzing the 12-month forward sector returns since 1996 after an oversold BMI, it’s clear all sector “boats” rise with the tide, though some much more than others. The top sectors check the macro, fundamental, and historical boxes:

Merry Christmas – Enjoy Your Stock Market Returns!

So, there you have it. The macro situation is much better than you think, and the BMI data now and over time concurs. That's a powerful 1-2 punch for our data-driven approach.


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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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