Stock market forecast for the next six months

Key points

• The tech sector has led the stock market to impressive gains in 2023.
• Analysts are generally optimistic about the outlook for stock prices.
• Inflation and geopolitical conflicts remain risks for investors.

The stock market is entering the end of 2023 with major positive momentum, including an eight-day winning streak for the S&P 500 in early November. 

Technology and growth stocks have outperformed in 2023, and analysts expect S&P 500 earnings growth to rebound in 2024. That said, economists expect that lagging impacts of rising interest rates will weigh on U.S. economic growth in the coming quarters, and the economy is already showing signs of potential trouble ahead. 

Current stock market performance

Fears over a possible hard landing for the U.S. economy have subsided throughout the year.  

The S&P 500 has gained 19% year to date in 2023, but many of those gains have been concentrated in the technology and communication services sectors. 

The Technology Select Sector SPDR Fund (XLK) is up 50% and the Communication Services Select Sector SPDR Fund (XLC) is up 45% in 2023. The other stock market sectors that have produced year-to-date gains include consumer discretionary, industrials and materials.

The tech-heavy Nasdaq has significantly outperformed the S&P 500 this year, gaining 37% heading into the year’s closing weeks. Meanwhile, the blue-chip Dow Jones Industrial Average has lagged substantially in 2023, gaining around 7% overall. Investors have largely shunned value stocks and rotated back into growth stocks, which has weighed on the Dow’s returns.

Artificial intelligence and cryptocurrency have been key investment themes that have propelled top market performers in 2023. AI chipmaker Nvidia has been the top performer in the S&P 500 by a wide margin in 2023. 

Shares of bitcoin investor Microstrategy are up more than 240% year to date, while bitcoin mining technology company Cipher Mining is up more than 310%.

The S&P 500 entered correction territory in late October after dropping 10% from its 2023 highs. 

Fortunately, the index is back on solid footing following an eight-day winning streak in early November. Moody’s spooked the market by downgrading its U.S. credit rating from stable to negative, highlighting the nation’s “very large” fiscal deficits and partisan gridlock in Congress. For now, Moody’s has maintained a rating of AAA for the U.S., but fellow ratings agencies Standard & Poor’s and Fitch have already cut their ratings to AA+.

Stock market forecast for the next six months

According to a report by First Trust Portfolios analyzing S&P 500 total returns during presidential election years, the average return during an election year is roughly 11%. 

While past performance does not guarantee future returns, the S&P 500 has gained ground in most U.S. presidential reelection years, dating back to 1928. 

So analysts are generally optimistic about the outlook for stocks heading into 2024.

S&P 500 forecast 

Wall Street analysts are projecting S&P 500 earnings will continue to improve in the coming quarters despite ongoing pressures from elevated interest rates. Analysts estimate S&P 500 earnings were up about 4.1% year over year in the third quarter of 2023 and will grow 3.2% in the fourth quarter. 

Analysts are also optimistic that the S&P 500 will continue to march higher next year. The average analyst price target for the S&P 500 is currently 5,038.15, suggesting additional upside in the next 12 months.

Analysts see the energy sector moving forward and project 21.6% average upside from energy stocks. Analysts see the least upside for the utilities sector at just 12.3%. 

Dow Jones forecast

If the appetite for growth stocks and tech stocks continues in 2024, the Dow Jones Industrial Average will likely lag. But investors may seek safety in blue chip stocks if the U.S. economy dips into a recession. 

The Dow’s top-performing stocks of 2023 have all been technology stocks, including Salesforce, Microsoft and Intel. 

Related: Best online brokers.

Inflation and the stock market

Inflation has been a primary concern for investors since early 2022. While the Federal Reserve has made significant progress on the inflation front, inflation remains well above historical norms.

The personal consumption expenditures price index increased 3.4% year over year in September for the third consecutive month. Core PCE, which excludes volatile food and energy prices and is the Fed’s preferred inflation measure, was up 3.7% in September, far exceeding the Fed’s target of 2%. 

In a speech to the International Monetary Fund in early November, Fed Chair Jerome Powell said he is “not confident” the Fed has done enough to get inflation back on a long-term trajectory to 2%.

Elevated inflation remains a concern, and Federal Reserve officials have warned investors that interest rates may remain higher for longer until the central bank is convinced it has tightened monetary policy enough to keep inflation down.

But while inflation concerns have eased throughout the year, a fresh batch of new concerns have popped up in the second half of 2023 that threaten the market’s momentum. 

The war in Ukraine is dragging on, and a new conflict in the Middle East between Israel and Hamas has destabilized the region. 

In the U.S., mounting government debt coupled with a potential government shutdown and general political dysfunction triggered Moody’s to cut its credit outlook on the U.S. government to “negative.” Political uncertainty will likely continue to ramp up heading into a U.S. election year in which both leading candidates are extremely unpopular with the electorate.

The Federal Open Market Committee has raised its fed fund target range between 5.25% and 5.50%, with a series of hikes since March 2022. Higher interest rates increase consumer and company borrowing costs, eating into profit margins and weighing on economic growth. The FOMC expects U.S. GDP growth will slow from 4.9% in the third quarter of 2023 to just 1.5% in 2024. 

Plus, investors should also keep an eye on inflation and geopolitical headlines over the next six months.

“The ongoing wars in Ukraine and the Middle East could be more disruptive than markets now expect, and domestic politics remain a concern. But with the fundamentals reasonably healthy and the macro picture stabilizing, many of the economic fears that pulled markets back in recent months may be subsiding,” said Brad McMillan, chief investment officer for Commonwealth Financial Network.

How to navigate the stock market in 2024

The risk of a hard landing subsided in 2023, but the economy is not out of the woods just yet. The New York Fed’s recession probability model estimates there is still a 46.1% chance of a U.S. recession within the next 12 months. 

And it may be difficult for the S&P 500 to maintain its positive momentum until 10-year Treasury yields have definitively peaked.

LPL Financial recently downgraded developed international equities to “neutral” and upgraded U.S. equities based on solid economic numbers and an improving corporate profit outlook.

“LPL’s Strategic and Tactical Asset Allocation Committee recommends a neutral tactical allocation to equities, with a modest overweight to fixed income funded from cash,” said Adam Turnquist, chief technical strategist for LPL Financial. “The STAAC recommends being largely neutral on style, with a slight bias toward growth over value, favors large caps over small, and maintains energy and industrials as top sector picks.” 

In fact, S&P 500 companies are expecting record profits in the next 12 months, so that means the current bull market still has legs.

“You know what tends to happen when profits are at a record? Stocks tend to follow, something we expect to see in 2024,” said Ryan Detrick, chief market strategist at Carson Group.

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