- The US economy will continue to expand this year since consumers are healthy and inflation is down.
- BNY Mellon Wealth Management’s chief investment officer explained why stocks have limited upside.
- Here are five parts of the market that investors can feel comfortable in now.
Sinead Colton Grant has hit the ground running in her new role as the chief investment officer at BNY Mellon Wealth Management.
The 28-year market veteran is no stranger to BNY Mellon, even though she’s only been in her position for about two weeks. She joined the $290 billion firm’s wealth management arm in mid-2020 as an equity head after spending nine years at subsidiaries of BNY Mellon, and she previously had stints at firms like BlackRock, Invesco, and JPMorgan Asset Management.
Throughout her career in markets, Colton Grant has seen her share of surprises. And while she’s prepared for anything, she’s optimistic about the year ahead.
“As we enter into a period where we should start to see rates being cut and a lot of investment opportunities that result, it’s a very exciting time to be a steward of our client’s portfolios,” Colton Grant said in a recent interview with Business Insider.
What to expect in the economy this year
The theme of BNY Mellon Wealth Management’s 2024 outlook report is “a healthy slowdown.” There’s only about a 30% chance of a recession in the US, Colton Grant said, and her firm expects GDP growth to slow to between 1% and 2% this year.
Many economists were shocked that the economic expansion continued in 2023, considering that interest rates rose by over 5 percentage points in a short span in response to rampant inflation. Just over a year ago, one model even assigned a 100% probability of a downturn.
When asked why growth defied consensus expectations, Colton Grant pointed to two factors: a 40% increase in aggregate wealth since March 2020, and a less-than-anticipated impact from debt service costs, which are well above their lows but are in line with pre-pandemic levels.
BNY Mellon Wealth Management
Consumer spending accounts for two-thirds of US GDP, Colton Grant noted, and reports suggest shopping continued at a healthy pace throughout the holiday season.
And although interest rates and mortgage rates have skyrocketed in the last two years, millions of people are already locked into fixed-rate mortgages, the investment chief said. So, while buying a house is incredibly expensive, those higher rates don’t affect property owners.
“When you take the two of those in combination — add to that a stronger labor market — and the consumer is feeling pretty good,” Colton Grant said.
However, Colton Grant acknowledged that there are serious discrepancies between how high- and low-income households experience the economy. Consumer sentiment was startlingly weak this fall, contradicting the relatively low unemployment rate and other indicators. Economists confused by that soft sentiment may be out of touch with everyday consumers.
Inflation hit multi-decade highs in 2022, which significantly squeezed households, though the rate of price growth has since receded and will end 2024 between 2.5% and 3.5%, Colton Grant said. That progress should allow the Federal Reserve to cut interest rates four times in 2024, starting in the second quarter. But that means prices are still rising — just at a slower pace.
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Wage growth has also improved to help offset those increases, but sticker shock at grocery stores is having an effect on shoppers, even if it only shows up in data on sentiment.
“While we talk about the consumer in aggregates, it’s a much more heterogeneous group,” Colton Grant said. “Because clearly in the lower income cohort, inflation really bites.”
David Kelly, the chief global strategist at JPMorgan Asset Management, would agree with Colton Grant’s assessment. He thinks a recession is unlikely since consumers broadly are fine, both due to the wealth effect and receding inflation, but he was quick to note the wealth gap.
“We estimate that nominal household net worth grew by more than $11 trillion last year, which is about an 8% gain,” Kelly said in a recent interview. “So that’s very good. But of course, that is very heavily concentrated.”
Kelly continued: “So I think if you’re talking by numbers, I think a lot of households do feel like they’re struggling. But if you’re talking about income and spending power, then the consumer sector overall is in pretty good shape.”
What to expect in the stock market this year
If the US economy continues to grow as expected, Colton Grant said that corporate earnings should as well. She’s calling for $235 to $245 worth of S&P 500 earnings next year, which would be roughly 7% to 11% growth. Artificial intelligence should boost productivity, she said.
“What we are looking for is how we start to see AI really come in and start to have a material effect on companies’ bottom lines,” Colton Grant said. “Last year, we had a huge amount of excitement. 2024 is the year where you want to see that start to really be deployed in companies.”
However, investors shouldn’t expect profit growth to translate to proportional gains in stocks.
Instead, Colton Grant thinks the S&P 500 will be stuck between the 4,600 and 5,000 levels this year, with a midpoint of 4,800. That would be barely above the current record close of 4,796, though it’s only inches from where the index sits now. Based on where stocks finished in 2023, that range implies downside of 3.5% or upside of 5%.
“Our concern at the end of last year was that there was such an acceleration following the Fed meeting in December that it concerned us that we were borrowing a little bit of this year’s return,” Colton Grant said. “And some of the price action that we’ve seen in the first week or so would tend to support that. So huge enthusiasm from the market, but maybe a little bit too much relative to where the Fed will actually end up.”
The investment chief later added: “You can’t expect double-digit returns every two months. That is not sustainable.”
While a double-digit return for the next 12 months may be off the table, the S&P 500 could get close. Colton Grant said that if there’s no recession and all goes well with earnings, the index could hit 5,200, which would be a gain of 9% — in line with its long-term average.
5 top places to invest now
BNY Mellon Wealth Management may be neutral on equities broadly, but it has a bullish overweight rating on US stocks. Within domestic markets, Colton Grant likes five investments.
One of Colton Grant’s strongest takes is that large-cap companies are better positioned than their small-cap peers. That position puts her in contrast with both Kelly and strategists at BMO Capital Markets. Large caps may not be cheaper, but she thinks they’re a stronger growth bet.
“We prefer large caps, and that is because we think they’re better poised to benefit from technology advancements, the deployment of AI, the history of adopting innovation,” Colton Grant said.
BNY Mellon Wealth Management
Financial conditions are also a consideration, she added, as many large companies are immune from high interest rates since they’re locked into lower borrowing costs. Though small caps can play catch-up as rates fall this year, Colton Grant is sticking with larger firms for now.
As far as factors go, Colton Grant said she likes a balance of growth and value stocks.
“We look at some of the names that have been a little bit more beaten down over the last 12 months or so, and there are some attractive opportunities within that, and we’d like to try and capitalize on them,” Colton Grant said.
Colton Grant continued: “We think it’s an environment where value can do better. But at the same time, you never want to count growth out. And it doesn’t feel to us like a point where you really want to lean heavily one way or the other.”
In terms of sectors, the investment chief sang the praises of financials and technology.
“The financial side tends to be more in the larger areas,” Colton Grant said. “We think that you’re seeing a lot of increased efficiency across the board, more capital strengths, et cetera. So that is attractive.”
As for tech, she noted: “Across the board, those firms, they’re becoming more efficient. They’re deploying technology more quickly, and their reach is expanding. Now, there are a couple of headwinds that we want to keep an eye on — particularly, for example, some of the export restrictions that are in place for some of the chips. But the sector overall, we think, is poised to continue to dominate.”
