That could weigh on the upside seen in the benchmark average during 2024, according to Goldman Sachs. The firm sees the S&P 500 closing 2024 at 4,700, about a 5% increase from current levels and below the average 8% return typically seen in election years.
"Our macro forecasts imply a benign outcome for equities, but the current starting point will limit the potential appreciation for the benchmark US equity index in 2024," Goldman Sachs chief US equity strategist David Kostin wrote in the firm's outlook for next year released on Wednesday.
Goldman's economics team has been bullish on the economy and still sees just a 15% chance of a recession in 2024.
But the equity strategy team feels the 2.1% GDP growth expected next year is already reflected in stock prices. While the latest round of earnings show profit margins at companies have improved, Kostin's team argues there might not be more expansion from current levels coming in 2024. So Goldman largely sees the market properly pricing stocks as of now.
In fact, Goldman sees the majority of the upside in the S&P 500 concentrated in the back half of the year, in line with its call for Fed rate cuts to come in the fourth quarter of 2024.
"Resilient economic growth in the beginning of the year will force the market to push back its current pricing that Fed cuts will begin in 2Q, and US election uncertainty will suppress risk appetite," Kostin wrote. "Later in the year, the first Fed cut and resolution of election uncertainty will lift US equity prices."
Goldman projects the Magnificent Seven will once again outperform the other 493 stocks in the S&P 500 in 2024.
"The 7 stocks have faster expected sales growth, higher margins, a greater re-investment ratio, and stronger balance sheets than the other 493 stocks and trade at a relative valuation in line with recent averages after accounting for expected growth," Kostin wrote. "However, the risk/reward profile of this trade is not especially attractive given elevated expectations."
Kostin's team highlights that when the tech bubble burst in 2000 the eventual underperformance from mega-cap tech companies came as those companies failed to meet elevated growth expectations. The Magnificent Seven could underperform if this dynamic plays out again, particularly if enthusiasm around artificial intelligence fades.
Goldman highlights 2024 will still be a year for "high quality" stocks, growth stocks with high returns on capital, and beaten-down cycle plays.
Some stocks Goldman highlights in its quality basket included Alphabet (GOOGL), O'Reilly Automotive (ORLY), Tractor Supply (TSCO), and Sherwin-Williams (SHW). In cyclicals, the firm highlights Russell 3000 (^RUA) cyclicals, excluding energy.
Broadly, the firm named its 2024 outlook after Taylor Swift's song "All you had to do was stay."
"The title of the song from Taylor Swift’s 1989 album reflects our baseline forecast that despite intermittent volatility, fund managers will ultimately be rewarded for staying invested through the end of next year," Kostin wrote.
Josh Schafer is a reporter for Yahoo Finance.