With 2023 in the rear-view mirror, global capital markets open a new chapter in 2024 with a mix of possibilities and uncertainties. Here, FactSet experts share their views on what to watch across U.S. earnings, artificial intelligence, banks, interest rates, M&A, major economies, ETFs, the utilities sector, and South Africa.
John Butters, Vice President and Senior Earnings Analyst
Despite concerns about a possible recession, analysts expect the S&P 500 to report double-digit earnings growth in CY 2024. The estimated (year-over-year) earnings growth rate for CY 2024 is 11.7%, which is above the trailing 10-year average (annual) earnings growth rate of 8.4% (2013 – 2022).
On a quarterly basis, analysts are expecting the highest earnings growth to occur in Q4 2024. For Q1 2024 through Q3 2024, analysts are projecting earnings growth of 6.6%, 10.7%, and 9.0%, respectively. For Q4 2024, analysts are projecting earnings growth of 18.4%.
All 11 sectors are predicted to report year-over-year earnings growth in CY 2024. Five of these sectors are projected to report double-digit growth led by the Health Care, Communication Services, and Information Technology sectors.
Analysts also expect the S&P 500 will report single-digit revenue growth in CY 2024. The estimated (year-over-year) revenue growth rate for CY 2024 is 5.5%, which is above the trailing 10-year average (annual) revenue growth rate of 5.0% (2013 – 2022).
Again, analysts expect the highest revenue growth in Q4 2024. The estimated revenue growth rates for Q1 2024 through Q4 2024 are 4.4%, 5.2%, 5.3%, and 5.7%, respectively.
All 11 sectors are projected to report year-over-year growth in revenues, led by the Information Technology, Communication Services, and Consumer Discretionary (7.2%) sectors.
Lucy Tancredi, Senior Vice President, Strategic Initiatives – Technology
In 2024, AI will become increasingly integrated into daily operations across multiple sectors. Initial applications will leverage generative AI’s language skills for meeting summaries, content brainstorming, and software development. But continued technological advancements throughout the year will allow the fastest-moving businesses to find new efficiencies and opportunities with AI augmenting human efforts. Large Language Models will become more capable and commoditized, with multiple commercial and open-source options tailored to a variety of cost/performance needs. Here are some key trends to watch:
AI copilots
In the workplace, expect AI to act as a partner rather than a replacement for knowledge workers. While certain tasks will be enhanced or automated, it will be less common for entire roles to be eliminated. This collaborative model will impact multiple industries—media, finance, software, healthcare, education, and more—delivering more efficient workflows, client service, and decision support. Enterprise vendors releasing generative AI assistants (like Microsoft’s Copilot, Google’s Duet, and Salesforce’s Einstein GPT) will make the technology permeate throughout not just large but also small and medium businesses, educational institutions, and other organizations.
Multi-modal AI
A big trend in 2024 will be more prevalent and advanced multi-modal AI systems. These systems will seamlessly integrate text, graphics, video, and audio for more intuitive and versatile user interactions. They will also enable more natural and advanced real-time language translation, more effective hands-free interactions (e.g., in vehicles and smart speakers), and break down barriers for those with vision, hearing, or speech impairments. Advanced video generation and analysis will have implications for social media misinformation, policing/surveillance, healthcare diagnostics, creative fields, and autonomous vehicles.
AI litigation and regulation
We expect both AI lawsuits and regulations to grow, with the courts, governments, and big tech being asked to weigh in on complex issues surrounding intellectual property, ethical concerns, accountability, and transparency. Governments globally will continue to work with industry experts to try to implement reasonable and effective guardrails, while societal impacts (e.g., the actors’ strike, author lawsuits, the rise in social media disinformation, bias in decision-making) continue to enter the mainstream.
Sean Ryan, VP/Director of Banking and Specialty Finance Sectors
While higher interest rates were the dominant factor driving bank results in 2023, in 2024 the impact of interest rates is apt to be more mixed, and the make-or-break issue is likely to be credit quality.
Fed funds futures suggest moderate Fed easing in 2024, which would mitigate pressure on deposit costs, but even if rates begin coming down, a return to the status quo ante 2022 seems unlikely, so the repricing and refinancing of illiquid assets such as real estate will weigh on credit quality even if the economy enjoys the much hoped for soft landing.
While we may well get a soft landing, it must be acknowledged that it would be unusual if we do. That macro uncertainty is mirrored by uncertainty about the magnitude of bank credit costs. Commercial real estate and subprime consumer credit are remarkably weak even with historically low unemployment. In the event of a recession, they may remain the weakest pockets of credit quality, but the deterioration will broaden out across loan portfolios, driving estimates (and bank stocks) materially lower and likely occasioning another round of bank failures.
On the mortgage front, the gulf between the current 10-year rate and that of the COVID era means that nuclear winter in mortgage originations likely persists. In such environments we often see “creative” solutions to bring marginal buyers into the market by enabling lower down payments, or higher LTVs, or longer maturities. We don’t guarantee that these will end in misery, we merely note that, historically, they have.
The focus on expense control that has become increasingly common in the second half of 2023 is likely to become more aggressive in 2024, mitigated by upward pressure on compliance and technology costs over which banks enjoy limited discretion. The caveat here is that if a soft landing comes into view and recession worries more fully dissipate, then hiring will, at some point, begin trending up in areas like capital markets.
With respect to bank industry M&A, predictions of higher M&A in the new year are something of an annual tradition, but while they may well prove directionally correct in 2024, credit concerns and regulatory resistance are likely to remain significant headwinds. Bank - credit union tie ups will not become common, but they are a good bet to continue becoming less rare.
Pat Reilly, Senior Vice President, Senior Director, Americas Analytics
I’m joining the Fed prognosticators for my 2024 prediction submission. After throwing spaghetti against the wall, two strands stuck, and both result in lower rates. The path to get there will be unique.
In one strand, the Fed does remain higher for longer, offering several token rate cuts beginning over the summer such that the Fed Funds Rate ends 2024 a mere 75-100 bps lower than today (writing on 12/21). After all, slightly elevated rates following a generation of ZIRP is not entirely a bad thing for risk assets or investors. The consumer remains broadly healthy, nominal growth moderates, geopolitical events are benign, and election season passes uneventfully. The ECB follows the Fed while the PBOC is eventually empowered to stimulate the world’s second largest economy.
In another strand, the Fed sees a slowdown in the tea leaves and cuts dramatically in the first half of the calendar year before pausing to avoid politicization during election season, adding a massive 75 bps cut in December to bring the Fed Funds Rate down 200-250 bps from today’s highs. The consumer deteriorates rapidly following a lackluster 2023, nominal growth slumps to zero, continued geopolitical upheaval expands to new shores, and the election season…um, happens. The ECB lags the Fed, pushing the Eurozone into a deepening recession and the PBOC remains restricted, further dampening global growth.
I’m hoping for the first strand, praying to avoid the second strand, and rationalizing that we’ll end up somewhere in between. Happy New Year!
Tom Abrams, Associate Director, Deep Sector Content
With deal volume and counts down sharply in 2023, it is easy to be optimistic about rising M&A activity in 2024. 2023 was a weak year for M&A both in count and dollar amounts because of recessions fears, rising inflation and interest rates, and global trade and military conflicts. And this weakness was despite reserves in private capital pools and new large government spending programs. Maximum negativity seemed to have been in the first quarter with some bottoming and stability in the rest of the year. Though perceptions of an interest rate peak have helped sentiment in the past couple months, rates may remain higher than recent history, and geopolitical tensions and lingering recession fears should remain headwinds for M&A activity.
While meaningful headwinds are still in place, market comfort is improving and significant change on many fronts should drive strategic needs. Businesses are seemingly faced with an extraordinary set of major shifts in the markets which those companies must respond to. Economic uncertainty and in some cases relatively high leverage may lead to some becoming sellers, perhaps not of entire companies but of divisions and assets. These types of transactions would continue the recent trend of smaller deals and would also fit in the themes of buyers strengthening their stronger areas and sellers focusing their operations by jettisoning weaker areas.
Global trade, geopolitical tensions, supply chain security, and even varying regional carbon policies are each reason to on-shore production, friend-shore production, or secure resource supply chains. Some may focus on bolstering or repositioning domestic operations while others may add international operations to reduce dependency on others. Either way, they could all drive M&A activity as firms adjust their positioning.
Efforts to decarbonize operations could also drive some M&A to access lower carbon energy or other technologies. In these cases, joint ventures and other structures rather than traditional M&A may also be a result. Changing up the mix of a company’s businesses with additional concentration and divestment could be the result of “carbon” decisions.
Continued digitalization and AI are possible M&A drivers as well while companies wrestle with how to leverage new technologies. Machine learning with ever more powerful algorithms and more data could benefit—and give re-direction to—many hard asset companies. Controls, greater resource and supply processing ownership could be targeted areas to optimize businesses further for growth and efficiency.
Sara B. Potter, Senior Manager, Deep Sector Client Solutions
The big economic story in 2024 will be the path of interest rates in the U.S. and other major economies and the impact on economic growth.
Throughout 2022 and 2023 we saw the Federal Reserve, the Bank of England (BoE), and the European Central Bank (ECB) raise interest rates sharply as inflation rates soared. However, in December 2023 these three major global central banks all voted to hold their respective policy rates at current levels.
Inflation rates in all three areas have now fallen back to two-year lows, raising hopes for aggressive rate cuts in 2024. While the Fed’s December rate forecast (dot plot) indicates three 25bp rate cuts in 2024, market participants are optimistically counting on at least 100bp in cuts by the end of Q3 according to fed funds futures prices. Analysts surveyed by FactSet expect the Fed to cut rates by 100bp by the end of 2024, while the BoE and ECB are each expected to cut rates by 75bp by year end.
While the U.S. economy has continued to experience solid growth starting in the second half of 2022, growth in the Eurozone and UK has stagnated. In 2023, the U.S. is expected to grow by 2.4% while both the Eurozone and UK expand by just 0.5%. In 2024, U.S. growth is projected to slow to 1.2%, UK growth to 0.4%, while Eurozone growth accelerates to 0.7%.
In the U.S., confidence is high that the Fed will be able to orchestrate the elusive “soft landing,” slowing growth enough to tame inflation without triggering a recession. Whether this can be achieved is largely dependent on the American consumer. Personal consumption expenditures have shown solid growth for six consecutive quarters due to healthy job and wage gains.
The Eurozone economy appears to be in recession, with both manufacturing and services PMIs in contractionary territory. At the same time, consumer sentiment continues to fall. The bright spot is that the ECB has managed to bring inflation back below 2.5% year-over-year. Meanwhile, in the UK inflation is proving to be much more persistent, suggesting that the BoE will need to keep rates higher for longer in 2024, further suppressing growth.
There are still a lot of unknowns in the outlook for the next six to nine months, but it doesn’t appear likely that we will be returning to a world of zero or near-zero interest rates any time soon.
Elisabeth Kashner, Vice President, Director of Funds Research and Analytics
US ETF fee compression slowed in 2023 as asset managers tested their pricing power. Fee hikes outnumbered cuts by almost 2:1, reversing a decade-long race to the bottom. Asset managers with market power—such as segment dominance, stellar recent returns, or an investor base constrained by unrealized gains—may experiment with imposing higher costs in 2024.
Those without market power will likely continue to struggle. 2023’s ETF closures topped 8% (based on Dec ’22 count), a level previously reserved for extreme bear markets.
Jim Kahler, Head of Utilities and Regulation
Many of the issues the utility sector contended with in 2023 will continue into 2024, principally: capital investment needs, a more challenging financing environment, and regulatory risk.
Increasing utility investment is being driven both by demands for decarbonization and an accelerating load growth environment, requiring greater spending on generation and transmission. While replacing older fossil generation with lower-carbon resources has been a theme for several years, load growth at levels not seen since the 1990s is now a compounding factor.
The higher interest rate environment has made financing utility-scale investments more expensive. Utilities will have to navigate these cost increases while preserving the health of their balance sheets. Movements in the 10-year Treasury yield will play a role in the utility sector’s ability to meet its ambitious growth targets.
Greater need for capital investment and increased financing costs will require increases in utility rates, necessitating approval from regulators. Regulators will scrutinize these rate increases both based on the prudence of the plans presented by utilities and by evaluating customers’ ability to absorb the higher rates.
Raksha Gosai, Account Executive, UK Global Accounts
Overall, while there are signs of marginal economic recovery and potential improvements, South Africa is still burdened by material headwinds. Here is a high-level overview of the country's outlook for 2024:
Economic growth: The real GDP growth rate for CY24 is projected around 1.2% vs 0.6% in CY23. The growth will be mainly from trade, tourism, mining, and manufacturing.
Unemployment: There is little optimism the current unemployment rate of 31.9% will decline this year. That poses a significant challenge for the government in creating sufficient job opportunities.
Government debt: South Africa will continue to grapple with high government debt levels, with projections of around 76% of GDP this year, and 79% in 2025. The government's ability to manage and reduce debt will be crucial for sustaining economic stability and investor confidence. It will require disciplined fiscal policies, including effective spending control measures and strategies to increase revenue.
Rating agencies: Moody's and Fitch maintain negative outlooks on the country's creditworthiness. South Africa's previous downgrades and ongoing challenges, including low trend growth and high inequality, continue to complicate rating sensitivities.
Monetary policy: The South African Reserve Bank (SARB) is likely to maintain a cautious approach to monetary policy. The current repo rate is expected to remain unchanged to support the fragile economic recovery and manage inflationary pressures. The central bank will closely monitor ongoing challenges—including high government debt and the country's sovereign risk profile—before considering adjustments.
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