The stock market forecast for 2024 paints a gloomy picture. Some systemic failures in the system could lead to stocks crashing in the immediate future. It’s a combination of various macro factors that have been predicted near the end of last year that could finally begin to come to fruition.
I’ve held that we’ve been in an overconfident bear market rally since March. Despite the S&P 500 reaching its arbitrary thresholds of being in a bull market, these thresholds don’t account for today’s underlying weaknesses.
So here are three reasons why stocks will bomb next year.
Consumer Overconfidence
Economist David Rosenberg mentioned recently that the recession is just starting and market bottoms typically occur deep into the Fed’s easing cycle. He also points out a disconnect between investor sentiment and their actual positioning, suggesting that many are still bullishly positioned despite bearish feelings.
If investors are still positioned optimistically while the broader market crumbles beneath them, that could lead to a feedback loop where investors sell their stocks, and the market falls further. That is a common observation seen during short and long squeezes and times when the options market is priced inefficiently.
There’s also a discrepancy between the widely expected recession and the analyst community’s expectations for positive corporate earnings growth in 2023. Rosenberg believes the consensus is too optimistic and that corporate earnings will likely decline. That would then be another feedback loop.
Overall, Rosenberg predicts the S&P 500 could drop hard from its current level before the Fed pauses its current run of interest rate hikes.
A Stronger U.S. Dollar
The U.S. dollar has been strengthening over the past few months, and it’s expected to strengthen significantly more in 12 months, according to Trading Economics.
A consistently rising dollar can adversely affect the earnings of multinational tech giants like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). The broader implications of this trend could ripple through the entire market, especially if the dollar’s strength persists.
These companies receive a significant portion of their revenues outside the United States. The currency risk means it can buy more of a foreign currency than before. So, when converting the foreign currency revenues back to U.S. dollars, the companies will receive fewer dollars than they would have if the dollar were weaker. That can lead to a decrease in reported revenues and profits.
A stronger dollar and higher interest rates also affect other economies and currencies. To prevent significant devaluation in the face of a strong dollar, other countries have also hiked their interest rates. That creates a risky situation as part of this stock market forecast, one that could lead to the fall of equities outside of the U.S., creating ripple effects elsewhere.
Market Indicators
We’ve seen the inverted yield curve, and more bearish indicators are forming. These indicators should carry more weight than the broader market rising above a historical inflection point, as seen in the S&P 500. Therefore, investors should position their portfolios against this stock market forecast and take appropriate measures to protect themselves.
China’s service activity growth slowed, and Europe’s dominant service industry contracted, hinting at a potential recession. Additionally, the U.K. reported a decrease in service activity, and Japan’s household spending has been on a decline.
All these factors and more point toward a more bearish outlook than otherwise anticipated, meaning investors could be acting with irrational exuberance. That makes this stock market forecast important for investors to pay attention to.
On the date of publication, Matthew Farley did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
