The S&P 500 Just Did Something It Has Never Done Before. Wall Street Says the Stock Market Will Move Higher This Year.

The S&P 500 (^GSPC -0.48%) is designed to track the entire U.S. stock market. Specifically, the index measures the performance of 500 large U.S. companies that together account for a substantial portion of domestic equities as measured by market capitalization.

The S&P 500 soared 24% last year as recession fears diminished, and it has advanced another 5% so far this year. Those gains carried the index above 5,000 points (the S&P 500 is measured in points, not dollars) for the first time last week. Very few investors would have predicted that rebound when the S&P 500 cratered at 3,577 in October 2022. But signs of economic resilience and excitement about artificial intelligence have been powerful tailwinds.

There is nothing special about 5,000 points, per se, apart from the new record high. But Wall Street analysts see about 9% upside in the next 12 months. The S&P 500 carries a “bottom-up” target estimate of 5,452 points over the next 12 months, according to FactSet. That figure aggregates the median target price on every stock in the index, so it’s based on about 11,500 different ratings. In other words, it starts at company-level estimates (the bottom) and moves up to build a target estimate for the entire index. But whether the stock market rises or falls in 2024 depends on a great many factors.

Here’s what investors should know.

Wall Street expects S&P 500 revenue and earnings growth to accelerate in 2024

The S&P 500 suffered three consecutive declines in quarterly earnings between the fourth quarter of 2022 and the second quarter of 2023. To elaborate, the sum of profits across the index divided by total shares outstanding provides an earnings per share figure for the entire index. That figure declined in three consecutive quarters. But profits rebounded in the second half of the year amid strong economic growth, and Wall Street expects that trend to continue in 2024.

In fact, analysts project an acceleration in S&P 500 revenue and earnings growth this year, driven by particularly strong momentum across the technology and communication services sectors. The chart below compares actual growth in 2023 to projected growth in 2024 for S&P 500 ompanies.

Data source: FactSet Research. Growth percentages for 2024 are projections.

If those consensus estimates prove correct, the acceleration in S&P 500 revenue and earnings growth could boost sentiment and send the stock market higher.

However, analysts frequently revise their forecasts based on a constellation of microeconomic and macroeconomic factors. Indeed, first-quarter estimates have already been revised downward to some degree, but FactSet Research says those cuts have been smaller than average. In any case, investors should keep tabs on the companies in their portfolios, while also monitoring the broader economic backdrop.

The U.S. economy gained steam in 2023, but momentum could slow in 2024

The Federal Reserve has raised interest rates to their highest level since 2001 to stamp out inflation. The rapid pace of those rate hikes drew recession warnings from economists last year, but the U.S. economy actually gained steam. Inflation cooled without a material uptick in unemployment, and gross domestic product (GDP) increased 2.5% in 2023, up from 1.9% in 2022.

However, that acceleration in GDP was driven by government spending. Consumer spending and business investments actually decelerated last year, and both are expected to decelerate further this year. The World Bank estimates that U.S. economic growth will slow to 1.6% in 2024. Should economic expansion decelerate more sharply than anticipated, it would likely hamper corporate financial results, potentially putting downward pressure on the stock market.

That said, economic growth could also come in above expectations if the Federal Reserve cuts interest rates in a meaningful way. The latest projections from policymakers imply three 25-basis-point rate cuts this year. But CME Group‘s FedWatch tool — which uses pricing data from futures contracts to forecast monetary policy decisions — shows a 50% chance that the Federal Reserve will implement at least five 25-basis-point rate cuts in 2024.

In that latter scenario, business investments may increase more quickly than forecast, especially where technologies like cybersecurity and artificial intelligence are concerned. That could lead to more robust economic growth, which could send the stock market higher. Even if that doesn’t happen, the secular tailwinds behind cybersecurity and artificial intelligence should create value for well-positioned investors over the long term.

Patient investors have historically been well rewarded

Ultimately, whether the S&P 500 increases or decreases this year depends on market sentiment, which itself is governed by variables like corporate financial results and economic growth. Not even the smartest Wall Street analysts can predict those variables with absolute certainty, so investors should treat short-term forecasts with skepticism.

A long-term mindset is the more prudent strategy. History makes it clear that patient investors are well rewarded over time. The S&P 500 has returned 1,800% over the last three decades, compounding at 10.3% annually. That period encompasses enough different market conditions that similar returns are likely over the next three decades. That does not mean the S&P 500 always goes up. The index has gone down and will continue to go down in certain years. But if growth during the last three decades was spread evenly across that 30-year period, the index would have increased at 10.3% annually.

In that context, long-term investors can confidently put money into the stock market today. But they should always research companies before buying shares, and they should prioritize stocks that trade at reasonable valuations in the context of future growth prospects. Alternatively, making regular contributions to an S&P 500 index fund has historically been a winning strategy.