Stocks: Growth comes at a price

Moderate economic growth, declining inflation, and the prospect of interest rate cuts by the central banks – the economic environment for the stock markets in the year ahead looks benign, not least because history shows that company profits decline only very rarely outside periods of recession.

Although it will not necessarily be easy for companies to carry the good earnings of recent months into 2024 as the economy is expected to slow, we are convinced that it should indeed be possible for the most part. In 2024 we expect 10% EPS growth globally, low double-digit EPS growth in the U.S. and high single-digit EPS growth in Europe. This still puts our forecasts slightly below those of the global analyst community.

•  10% earnings growth expected globally for 2024, Europe slightly lower.
•  In the longer term, high rates for longer should limit valuation increases.
•  U.S. equities dominant, Europe and Japan worth a closer look, India for the long run.

Looking at the performance of the major benchmark indices, it is noticeable that share prices in many regions have not yet returned to the record highs seen at the end of 2021. This applies to both the S&P 500 in the U.S. and the Stoxx Europe 600 in Europe. Due to the tangible increase in corporate earnings expectations since then, share valuations there have fallen accordingly. The latter also applies to the MSCI China and, to a lesser extent, to the MSCI Japan. 

There is no general indication that the stock markets are overheating. On the contrary: we continue to see interesting share price potential in the major markets in 2024. However, given our expectation that interest rates will remain elevated for the foreseeable future in the U.S. and Europe, valuations are unlikely to increase significantly, which means that the share price potential at index level should develop roughly in line with the respective corporate earnings expectations. 

There is no general indication that the stock markets are overheating. On the contrary: We continue to see interesting share price potential in the major regions in 2024.

In regional terms, the U.S. appears the most interesting market for equity investors despite high valuations, especially as we expect the U.S. economy to avoid a recession (soft landing). The market offers unique exposure to seminal themes such as artificial intelligence, digitisation, and cloud computing.

We believe that the European equity market is worth a closer look, also due to comparatively low valuations, especially as China – an important trading partner – seems to have got back on track economically.

For investors looking for exposure to Asia, Japan particularly alongside China, where we expect high earnings growth in 2024 in an environment of favourable valuations, is a promising option. However, we also see a high degree of sensitivity to geopolitical risks in the latter.

India remains an option for investors with a long-term investment horizon. Although share valuations there are very high, so too are the growth prospects – in part due to the strong domestic market.