Stocks have surged to record highs at the start of 2024.
This optimism reflected in recent market action and the economic consensus serves as the central theme of the latest Yahoo Finance Chartbook, which brings together more than 30 charts from some of Wall Street's top strategists.
It marks a significant shift from the first Yahoo Finance Chartbook, published in August 2023.
Readers likely left the last edition waiting for a final shoe to drop before the US economy tipped into recession and the 2023 stock market rally ran out of gas. Seven months later, profit forecasts are on the rise and a new bull market has come into view.
Still, there remain concerns.
Consumer spending has held up, but wage gains are moderating and household debt balances are "becoming more challenging." The path any Fed rate cuts may take comes with plenty of uncertainty. And November's election is not to be ignored, even nine months away.
This project would not be possible without the work of Yahoo Finance Senior Editor Brent Sanchez, who turned Wall Street jargon into a digestible visual presentation of the current market moment. And a special thanks to Yahoo Finance's team of editors who worked on this project, including Myles Udland, Adriana Belmonte, Grace O'Donnell, Becca Evans, and Anjali Robins.
Most of all, thank you to all of the experts who contributed their time and thought to this project and helped make this Chartbook such a valuable snapshot in economic time.
The following commentary has been edited for length and clarity.
The inflation story
Goldman Sachs macroeconomics team led by Jan Hatzius
"Core PCE inflation fell surprisingly quickly in 2023, from a 4% annualized pace in the first half of the year to a 2% pace in the back half. We now expect the year-on-year rate to fall much more quickly in 2024 than we had expected just a few months ago, reaching 2.2% already by Q2. As a result, we think the FOMC will likely be comfortable cutting earlier and a bit more quickly than we had initially envisioned."
Andrew Hunter, deputy chief US economist, Capital Economics
"The annual rate of core PCE inflation remains elevated, but in annualized terms, it has already been running in line with the Fed's 2% target for the past six months. Despite claims from a number of commentators that the 'last mile' of getting inflation back to target will somehow be the hardest, this ignores the fact that we've already been there for half a year. Rather than a further slowdown, all the Fed needs to see is this current pace of price increases sustained for a few more months."
Matthew Luzzetti, chief US economist, Deutsche Bank
"The Federal Reserve has surprised markets over the past month with a dovish pivot that kicked off the discussion around rate cuts. A key reason for the timing of this shift is the surprisingly quick deceleration in inflation. Softer inflation has, in turn, raised the prospect that Fed policy could overtighten in the coming months if the Fed does not begin to reduce rates. Such an outcome could put the soft landing at risk.
"The accompanying chart demonstrates how the real fed funds rate — measured as nominal fed funds minus spot inflation on a year-over-year basis — is likely to lurch higher as inflation falls. If the Fed does not reduce rates over the coming months, the real fed funds rate would begin to tighten to historically elevated levels that have often been followed by economic slowdowns or recessions."
Nancy Vanden Houten, lead economist, Oxford Economics
"The Federal Reserve needs to be confident that inflation is on a sustainable path to 2% before lowering interest rates. ... The decline so far has been led by declines in goods prices as supply chain snarls have been resolved. The key to the final leg down in inflation is slower inflation in services, including housing.
"As with the CPI, housing costs in the core PCE lag changes in actual rents; given weaker rent growth over the last several months, further declines in the housing component of core PCE are pretty much assured. Services inflation apart from housing is being propped up by higher wage growth, which the Fed would prefer to see at around 3.5% y/y [year over year]. We expect slower job growth will translate into ongoing moderation in wage growth as we move through 2023.
"We expect the y/y increase in core PCE to fall to about 2.7% in the second quarter and that that will be enough to trigger the start of Fed rate cuts in May. The Fed won't wait for core PCE inflation to hit 2% before lower rates. As Fed Chair Powell said last month, waiting until inflation hits 2% would be too late and risk causing too much weakness in the economy."
Stock market reset
Goldman Sachs Portfolio Strategy Research team led by David Kostin
"Last year, strong earnings growth and AI enthusiasm drove a large increase in valuations for the mega-cap tech companies. At the same time, concerns about the Fed hiking cycle weighed on the prices and valuations of most of the equity market. This created a large gap between the valuation of the market-cap weighted S&P 500 Index and the multiple of the average stock. In recent months, investor expectations for a soft landing have started to broaden the US equity market, but this valuation gap remains unusually wide."
Brian Belski, chief investment strategist, BMO Capital Markets
"The S&P 500 closed more than 20% above its 10/12/22 bear market price low on June 8, a feat commonly accepted to mark the start of a new bull market. ... The S&P 500 has gained an average of 23% in the 18 months following the 20% threshold, which in the current context would roughly represent 2024 year-end. For reference, the S&P 500 closed at 4,294 on June 8, and applying the average 18-month gain would imply an index level of roughly 5,280. In other words, we believe this is and continues to be a bull market now entering its second year."
Keith Lerner, co-chief investment officer, Truist
"With stocks trading toward the high end of historical valuations, and the consensus forecasting double-digit earnings for the S&P 500 in 2024, a key question for investors is: Will corporate America be able to preserve profit margins, as they have done so well over recent years, in an environment of slowing economic growth and inflation?"
Scott Chronert, US equity strategist, Citi Research
"Flows into equity mutual funds and ETFs have begun to inflect positively as investors react to decline in 10 [year] yields. From early '22 through late '23, flows were a headwind for US equities, but that tide seems to be turning. Note that during '23 the S&P 500 equal weight index was -2.4% through the end of October. As flows begin to turn to the positive, that index is +16.6% from Oct. 31 to Jan. 12."
Callie Cox, US investment analyst, eToro
"This has been a weird bull market, and you can see that in the wide gap between large- and small-cap stock performance. The S&P 500 has outperformed the Russell 2000 by 20 percentage points since the low on October 2022. This is highly unusual for the beginning of a bull market, when the mood shifts so dramatically that riskier stocks take the lead.
"I think this is an encouraging chart, though. If you're optimistic about the economy and you think the Fed can engineer a soft landing, there could be opportunity in small-cap stocks and other companies that were largely ignored during last year's recession worries. This is the year of the bull finally feeling like a bull market."
Tom Lee, head of research, Fundstrat
"I think small caps are a really good opportunity. The bottom chart [dark green line] is the price-to-book ratio of small caps versus large [caps]. You're back to 1999 levels. ... The top is the price ratio, and look from that low [in] '99. Small caps outperformed for 12 years. So, that's a great launch point."
Sam Ro, editor, TKer
"S&P 500 earnings have been at record levels, and they're expected to rise to new records in 2024 and 2025. This is a tailwind for stocks as earnings are the most important driver of prices in the long run."
JJ Kinahan, CEO of IG Group North America & President of Tastytrade
"This chart may not be the one that predicts the next market move, but in my opinion, it’s one of the most important ones to help gauge the health of the markets. It is the chart that shows ... the growth in retail options trading over the last four years. After absolutely explosive growth through COVID and the meme stock craze, you can see that retail traders continue to stay very much engaged in the markets. ...
"As retail becomes more educated on uses of these products, it means that they can continue to build their whole portfolio and continue to grow their participation in the whole market. ... My conclusion is that this chart continuing up to the right will help the market participants at all levels and most importantly mean that more average investors are starting to understand more of the tools that are available to them in the market."
Sam Stovall, chief investment strategist, CFRA Research
"As of Jan. 12, 82% of the S&P 1500's 153 sub-industries were trading above their 10-week (50-day) moving average. It recently had been as high as 94%. Typically, the market is overbought when above the 85% threshold. As a result, we think the market is undergoing a much-needed digestion of gains before it can take another run at a new all-time high." (Editor's note: This data was received on Jan. 12, before the S&P 500 rallied to a new record high on Jan. 19.)
Steve Sosnick, chief strategist, Interactive Brokers
"The oversimplified version is that the National Association of Active Investment Managers (NAAIM) surveys their members and asks them for their net exposure.
"We see that at the end of October, exposures were near a low ebb, with a reading of 24.82. As the market improved, investors' exposures steadily increased until they peaked at the end of December with a 102.71. Yes, on balance, the survey respondents were net levered long. As the calendar turned, so did the need to play catch up, so they lightened their exposure and the major indices dipped. These fit with other turning points, which seem to occur when exposures either reach low 'cash is king' levels or full investment [at or above] 100."
The economic forces staving off recession
Claudia Sahm, founder, Sahm Consulting
"During the past two years, most forecasters told us that a recession was right around the corner. Some commentators like Larry Summers, the former Secretary of the Treasury, even argued that we 'needed' a recession to get inflation down. They were wrong. My recession indicator, the so-called Sahm rule, showed throughout that we were not in a recession, and it was unlikely that one was near.
"The Sahm rule uses the unemployment [rate] to characterize the economy. Specifically, it uses the three-month average of the unemployment rate to smooth out month-to-month swings. Then the most recent value of that series is compared to its low over the prior 12 months. If it is 0.5 percentage point or more higher, then we are in a recession. It is perfectly accurate since the 1970s, never triggering outside a recession and always triggering early in each recession. During the past few years, the Sahm rule did not trigger, nor was it particularly close."
Mark Zandi, chief economist, Moody's Analytics
"Critical to the economy in 2024 will be if consumers continue to do their part and maintain their spending. It is thus encouraging to see inflation moderate to below the growth in wages across all wage tiers. Consumers' improving purchasing power, combined with low debt service burdens, higher net worth, and still plenty of excess saving among high income households, should ensure that consumers hang tough and that the economy and markets have another good year."
Neil Dutta, head of economic research, Renaissance Macro
"A popular bearish talking point is that US consumers are 'out of gas.' They have drawn down all their excess savings, and, as a result, they no longer have a cushion of savings from which to spend. I don't buy it. The excess saving story is one that has officially outlived its usefulness.
"Consumption is being supported by ongoing gains in real incomes. With consumer price inflation slowing, and the labor markets solid, real incomes are rising. Since May, real incomes net of [excluding] transfers, a key recession determinant, are up roughly 3% at an annual rate. Indeed, the personal saving rate is somewhat higher than it was a year ago. Bottom line: Consumers are not 'out of gas.'"
Binky Chadha, chief global strategist, Deutsche Bank
"For more than a year now, the economist consensus has been steadfast in calling for a sharp imminent slowing in US growth. When this did not happen, the economist consensus has repeatedly simply rolled forward the forecast timing of the slowdown."
Torsten Sløk, chief economist, Apollo Global Management
"The story in markets in 2023 was that US growth expectations were first revised down and then revised up after the easing in financial conditions following [the regional banking crisis] in March. ... With the significant easing in financial conditions since November, we are beginning to see the same pattern in 2024. ...
"The performance has been different in Japan and Europe, where growth expectations have been steady in Japan and revised significantly lower in Europe. In other words, the lack of a slowdown in 2023, which surprised the Fed, the consensus, and markets, was only a US story, and we are starting to see the same pattern play out again in 2024." (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
Gregory Daco, chief economist, EY-Parthenon
"The resurgence in US immigration is playing a pivotal role in bolstering population growth and enhancing labor force participation, contributing significantly to the rebalancing of the labor market. This influx of new workers is aiding in alleviating the tightness in labor supply, especially in the sectors still experiencing a supply shortfall, which in turn is helping to moderate wage growth pressures, thereby favoring disinflationary pressures.
"This demographic shift promises to inject much-needed dynamism and diversity into the workforce, offering a more balanced and sustainable path forward for the economy."
Ryan Detrick, chief market strategist, Carson Group
"We haven't seen high productivity in our country for decades, but we think that is about to change.
"The past two quarters saw strong productivity numbers, and with AI innovations and nearly 8 million hires the past two years getting more comfortable with their jobs, we think we could see a major jump in productivity for many years coming up.
"This matters because the Fed hates to see higher wages, but when productivity is strong, this can allow for higher wages but inflation remains checked. It also opens the door for the Fed to cut rates as inflation is no longer a major issue. We saw a similar scenario take place in the mid-'90s. ... Take note, the mid to late '90s was a great time for our economy and for investors."
Linda Yueh, adjunct professor of economics, London Business School, and fellow in economics, Oxford University
"This chart is a key factor for interest rates in a year which, absent another shock, looks to be a turning point in the business cycle. Central banks are concerned about inflation becoming embedded, the so-called second order effects, which is when headline inflation leads to higher inflation in wages, costs, and expectations. ...
"This chart shows that wage growth has been slowing though remains elevated in the US and major European economies. This is particularly important in this rate cycle because the labour market has been tight and unemployment has been low despite inflation rising to double digits and a slowing economy. Therefore, central banks have been monitoring labour market developments for embedded inflation. This chart indicates ... slowing wages alongside slowing price increases, which would bolster the case for cutting rates from their current restrictive stance in the US, UK, and the Eurozone this year."
Liz Everett Krisberg, head of Bank of America Institute
"Throughout 2023, the US consumer demonstrated resilience. Despite moderating from its peak, overall spending growth remains positive, though higher-income household spending growth lags lower- and middle-income households. Differences in household wage growth explain why. Bank of America internal data demonstrates that higher-income households’ wage growth is lagging lower- and middle-income household wage growth, and, in fact, higher-income household wage growth turned negative (-0.1% YoY, 3-month moving average, [seasonally adjusted]) in December while lower-income households’ wage growth improved to +2.5% YoY, suggesting that higher-income household spending growth will continue to lag."
Liv Wang, lead data scientist, ADP Research Institute
"Pay gains have slowed for more than a year. According to ADP Pay Insights, which uses payroll transactions data to provide a view on the wages and salaries of a cohort of almost 10 million matched employees over a 12-month period, the median year-over-year change in pay for workers who have stayed with the same employer over a 12-month period fell to 5.4% in December 2023, the smallest since September 2021. For workers changing jobs, the median annual pay change fell to 8%, the smallest since June 2021.
"Pay increases have stepped down from an unsustainable high level. We've passed the post-pandemic stage when pay gains for job changing or for leisure & hospitality workers hit double-digit percentages. The pay premium for changing jobs has narrowed."
Why Treasury yields still matter for stocks
Wei Li, global chief investment strategist, BlackRock Investment Institute
"Brace for (more) volatility!
"Throughout last year, markets flip-flopped between hopes for a soft economic landing — where inflation falls durably back to 2% without a major hit to growth — and fears of yet higher rates that ultimately result in recession. Data surprises drove the sharpest, sustained swings in U.S. 10-year Treasury yields seen for two decades, as the chart shows.
"Markets then seemed to fully embrace the soft landing narrative at the end of the year after the Fed apparently blessed hopes of multiple rate cuts this year, sparking a year-end rally. But the jittery start to 2024 suggested they're not, in fact, fully convinced. That uncertainty around the economic outlook is likely to keep volatility high this year."
Liz Ann Sonders, chief investment strategist, Charles Schwab
"Specific to what we now generally think of as the 'Great Moderation era,' which was from the late 1990s up until the pandemic [in 2020], that was a 22-, 23-, 24-year era where you were essentially in disinflation the entire period of time. ... The moves in bond yields would tend to be in the same direction as the moves in stock prices because when bond yields were, as an example, rising in that era, it was typically because growth was improving without the attendant concern about inflation. That's a great backdrop for equities (vice versa).
"But if you look at the 30-year period, prior to the Great Moderation, you can see that the correlation was negative nearly the entire period of time. And that was because there was more of an inflationary backdrop, there was more inflation volatility, which meant, again, as an example, when yields were rising, it was often because inflation was sort of rearing its ugly head again, not necessarily because growth was improving. That's not a great backdrop for equities (vice versa). If yields were coming down, it was often because, you know, the inflation genie had been put back in the bottle. And that was a good backdrop, and I think the secular shift might be underway towards something that looks a little bit more like what we've been calling the 'temperamental era' that preceded the Great Moderation era."
"The yield on the 10-year Treasury note closed at 0.508% on August 4, 2020, an all-time low. The yield over the next three years rose markedly, reaching 3.94% on Jan. 12, 2024. The mid-January yield marks a sharp decline from just three months earlier: On Oct. 19, 2023, it reached its highest yield dating from July 2007, when it closed at 4.99%.
"To put the long-term trend into perspective — its average yield over the past five years is 2.22%; its average yield over the past ten years is 2.28%; its average yield over the past 20 years is 2.90%; its average over the past 30 years is 3.84%; its average yield over the past 58 years is 5.98%.
"In our view, the bond market is currently pricing in monetary policy easing by the Federal Reserve in 2024 after the Fed's presentation materials presented at its December meeting suggested declines may be coming if inflation continues to ebb."
Kathy Jones, chief fixed income strategist, Charles Schwab
"This cycle is different in many ways since it was pandemic driven. The economic data have been volatile, and the Fed's reaction function has been different. That has made it hard for analysts (and the Fed) to figure out market moves. This chart illustrates one of those differences.
"In past cycles, 10-year Treasury yields have peaked before the Fed's final rate hike as markets anticipated the Fed's pivot. But this time around, yields peaked after the last rate hike of the cycle (assuming it was last July) and have only now fallen back to [the] level that prevailed at the time. It underscores the uncertainty about Fed policy in this cycle and the inability of forward guidance to provide a signal for markets. It wouldn't be surprising to see uncertainty about the Fed's reaction function continue to keep volatility high in 2024 — even though we do anticipate rate cuts starting in mid-year."
Risks for 2024
Michael Feroli, chief US economist, JPMorgan
"Over the past year one thing that has continued to impress has been the pace of job growth. But increasingly that has been dominated by two sectors: government and health & social assistance, accounting for 76% of job growth in Q3 and 83% in Q4. When one considers that over 50% of health care payers are governmental agencies maybe we should really consider these two sectors as one. I think this says two things. First, maybe the rate hikes did work. The part of the economy that is not government or government-affiliated has eked out only modest job gains recently. Second, as these two sectors get staffing back on-sides we can expect they will deliver fewer job gains, and overall employment growth should continue to slow."
Wells Fargo economics research team led by Jay Bryson
"Household debt has risen considerably in recent years, but so too has income. Consumer leverage, measured by the household debt-to-income ratio, for instance, is roughly in line with pre-pandemic levels, or about 37 percentage points below its peak in 2007. Households may not yet be over-levered, but servicing this growing debt burden is getting more challenging.
"In stripping away mortgages, which are mostly fixed-rate payment structures in the United States, households' interest expense as a share of income is rising rapidly. Even as the Fed eases rates this year, a key question for 2024 is how households navigate higher financing costs amid a moderating labor market."
Michele 'Mish' Schneider, chief strategist, MarketGauge.com
"Inflation versus disinflation is not only a contentious debate, but also the single most important consideration for 2024. Has this inflation cycle peaked, and we are over the worst, as many think, or could we be in for another wave similar to what we saw in the 1970s?
"The chart shows an overlay of [year-over-year CPI change in the 1970s with that of 2014 to the present]. We see striking similarities, almost an exact mirror image. The 1974-1975 inflation peak looks very similar on the chart to the 2022 peak and decline. However, in 1977, inflation turned back up and made a new high and continued that cycle for another 5-6 years. Super cycles don't just fade away — they cycle — with volatility and passion just like the word super suggests, and inflation is known to be persistent and pernicious. ...
"We expect the next wave of inflation to begin to occur in late spring/summer 2024. If that does indeed happen, the domino effect to Fed policy, the economy, ... and equities will have a huge impact."
Thomas Simons, US economist, Jefferies
"Over the last few weeks, Fedspeak has shifted to the potential tapering of QT [quantitative tightening], i.e., the Fed slowing down the rolloff of maturing Treasury and MBS [mortgage-backed securities] from its balance sheet. Some Fed officials think it's premature to begin this discussion since bank reserves are still quite abundant. Looking at the chart, it looks as though bank reserves are relatively little changed since the beginning of QT, despite the Fed having allowed over $1 trillion in USTs [US Treasuries] [to] roll off, in addition to another $276 billion [in mortgage-backed securities].
"The Fed has done over $1 trillion in QT, and all it has done so far is shuffle up the investment strategy of money funds. There will come a time in the near future that participation in the [overnight reverse repo facility] stops going down, and new buyers of Treasury debt will have to step up. As they pay for those bonds out of their bank accounts, reserves will finally start to drop. Let's hope the Fed is a bit better prepared for this than they were in September 2018 when overdoing it on QT and underestimating the definition of 'ample reserves' sparked an acute liquidity crisis."
Michael McDonough, chief economist, Bloomberg
"As the US embarks on another election year, fresh off the New Hampshire primary, betting markets and polling data indicate a rising chance of Donald Trump becoming the GOP nominee and a serious contender for the presidency. Despite dual impeachments and numerous legal challenges, he currently leads the GOP nomination and presidential race odds on PredictIt's betting markets and RealClearPolitics' polling averages. Bloomberg Terminal users can stay updated on this and other election-related data by navigating to 'WSL Election<Go>' on their terminals."
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.