A 'goldilocks slowdown' likely for early 2024: Strategist

There are only a few more trading days left in the year and Wall Street is continuing to debate what the economy will look like next year. Mona Mahajan, Edward Jones Senior Investment Strategist joins Yahoo Finance to give insight into how she thinks the economy and inflation will look like for 2024.

Mahajan explains her outlook: "We do think the economy has some potential to slow in the first half of the year, but what we are calling it is kind of a goldilocks slowdown... not too hot and not too cold. A gradual cooling to below trend levels, but then a re-acceleration perhaps in the back half of the year. That's similar in the earnings front as well."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

JULIE HYMAN: Stocks rebounding from the sell off on Thursday. The Dow and S&P 500 trading near record highs. And this year, much of the market's strength has been driven by the Magnificent Seven. But our next guest believes doubling down on diversification will be the best play for 2024.

Let's bring in Mona Mahajan, who's senior investment strategist at Edward Jones. Hey, Mona, it's great to see you. So when we're looking ahead to next year, you heard this debate that we have been talking about how many cuts there are going to be next year. Is this the pivotal question for stocks in 2024, when the cuts are going to happen and how many of them are going to be? Or do you think something else is going to catch our attention once we around the calendar year?

MONA MAHAJAN: Yeah. Thanks so much for having me ahead of the holiday season here. And it does seem like Santa Claus came a bit early for the stock markets. We've been on a tremendous upward move. S&P 500 up nearly 15% since that October 27 low.

And as we look to 2024, to your point, we do think the number of rate cuts will be critical. And our view is that we probably won't get the six that the market is hoping for, probably closer to 3 to 4, so maybe slightly above what the Fed is penciled in at their last FOMC meeting. But there are other factors besides rate cuts that we're watching carefully. And, of course, inflation is one of them. And the good news is we continue to see inflation moderating through 2024, especially as that shelter and rent component plays some catch-up. There is a lag impact from what we're seeing in real time to when it flows into the CPI basket. And we also think wage gains can cool further. And that'll slow services inflation as well.

So inflation, the Fed, and the third part of this three-legged stool is certainly the economy and earnings. We do think the economy has some potential to slow in the first half of the year. But what we're calling it is kind of a Goldilocks slowdown, as you guys were alluding to earlier, not too hot, not too cold. A gradual cooling to below trend levels, but then a re-acceleration perhaps in the back half of the year. And that's similar on the earnings front as well.

So we do think if there's any volatility early in the year and you haven't yet positioned for your 2024 portfolio, that may give you the opportunity to then think about that diversified portfolio, both in stocks and bonds for the year ahead.

JOSH LIPTON: And, Mona, I'm also interested, kind of, obviously, another variable we have to consider, after this rally that we've seen here Mona, this melt-up, how does valuation look to you?

MONA MAHAJAN: Yeah. It's a great point. And look, throughout the year we have seen valuations being stretched in a certain segment of the market. And that segment was really that Magnificent Seven large-cap technology part of the market, which, by the way, did play some catch-up on the earnings front as well. So the E in the PE did hold up nicely. But we did see a lot of valuation expansion for much of the year.

Now where we didn't see much expansion was in that S&P 493 or that equal weighted S&P basket. So more recently over the last few weeks, there has been some valuation expansion in that part of the market as well. But really, we're looking at probably somewhere closer to 15 times 2025 earnings, which is still quite reasonable.

So when we think about 2024, where there is that potential for valuation expansion, especially as interest rates come down, it's probably still more so in that lagging segment of the market rather than where the market leadership has been. So, you know, S&P returns or market returns are a combination of earnings growth and valuation expansion. We certainly see earnings growth across the board but more scope for valuation expansion in the lagging parts or the cyclical value parts of the market as well.