In 2023 it’s safe to say that the biggest investing trends were artificial intelligence (AI) stocks and the “Magnificent Seven.” You could probably retire if you bet on all seven tech stocks in the past year. But now it’s time to look ahead to what the top investing trends in 2024 will be.

There’s no question that interest rates will affect what investing trends play out next year. “Central banks will have to get the balance correct between tightening just enough and easing quickly enough,” says Serena Tang, Chief Global Cross-Asset Strategist at Morgan Stanley Research. “For investors, 2024 should be all about threading the needle and looking for small openings in markets that can generate positive returns.”

While it’s always hard to know what will pop and when, keeping a finger on the pulse is the first step in making smart investments throughout the year. With that being said, here are three 2024 investing trends that investors should be paying attention to.

Small Caps Make a Comeback

The Russell 2000 is the most popular of the small-cap stock indexes. Approximately 81% of $1.67 trillion in institutional assets use the index as their benchmark. In 2023, the Russell 2000 is up just over 3%, about one-sixth the performance of the S&P 500.

Over the past decade, small-cap stocks have been the top-performing asset class on just two occasions (2013 and 2016). However, when they perform, they perform well, which is why small caps are the second-best performing asset of the past decade through the end of 2022. 

Small cap stocks have failed to lead all of the major asset classes every year since 2016, but it’s time for them to return to the head of the table in 2024. Reversion to the mean is just around the corner. 

“As LSEG I/B/E/S estimates show, the estimated earnings growth rate for the Russell 2000 is expected to improve from -11% in 2023 to +31% in 2024; one reason there may be attractive opportunities in the small-cap universe,” states Charles Schwab’s 2024 U.S. outlook.  

Schwab also points out that the Russell 2000’s forward price-to-earnings (P/E) ratio is 21.4, 370 basis points ahead of its current trailing P/E. 

The iShares Russell 2000 ETF (NYSEARCA:IWM) is an excellent way to take advantage of potential small cap growth in 2024.

Sustainable Investing Takes Off

A CNN Business article from Oct. 23 said that environmental, social and corporate governance (ESG) investing was “fundamentally broken” and dying on Wall Street.

“In the U.S., assets under management in ESG funds declined from $339 billion in the second quarter to $315 billion by the end of September,” CNN Business reported. But to paint ESG investing with such a negative broad stroke is likely to be off the mark for 2024. ESG investing has been badly hurt in the past 12 to 18 months from institutional investors, and full acceptance by institutional and retail investors will take much longer than initially thought. But there is no turning back and Barenberg Bank believes a big theme in ESG in 2024 will be “transition investing.”

While much of the sustainable investing focus up until this point has been on overtly sustainable organizations, companies considered part of the transition investing market have a plan for decarbonization that they intend to stick to. The focus for transition investing is more on companies that will be making positive changes versus ones that were already there. For example, Occidental Petroleum (NYSE:OXY) is one stock to consider under transition investing as it is doing more than most oil and gas producers regarding carbon capture and storage.

Non-U.S. Investments Get Investor Love

Vanguard’s 2024 outlook suggests U.S. equities are overvalued compared to those outside the country. 

“Valuations are most stretched in the U.S. As a result, we have downgraded our U.S. equity return expectations to an annualized 4.2%–6.2% over the next 10 years from 4.4%–6.4% heading into 2023,” Vanguard states. 

It goes on to suggest that the best opportunities in equities in 2024 exist outside the U.S. “U.S. equities have continued to outperform their international peers. The key drivers of this performance gap over the last two years have been valuation expansion and U.S. dollar strength beyond our fair-value estimates, both of which are likely to reverse. … We project 10-year annualized returns of 7.0%–9.0% for non-U.S. developed markets and 6.6%–8.6% for emerging markets.”

The Vanguard FTSE All-World ex-US ETF (NYSEARCA:VEU), which owns approximately 2,200 stocks outside the U.S., generated a cumulative five-year return of 21%, less than half the S&P Composite 1500. When you consider how badly non-U.S. stocks have performed over the past five years, it makes sense that they should outperform over the next 5-10 years. When looking to implement this top investing trend for 2024, investors should look at VEU or other broad-based non-U.S. equity ETFs.      

On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.