Making Sense: January Q&A

Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. Today is January 9th, 2024. I'm joined by our Chief Investment Officer, Brent Ciliano, and Director of Market and Economic Research, Phil Neuhart.

Each month, we come to you with questions we're hearing most often from clients. And if you'd like to submit a question, please visit firstcitizens.com/wealth. As a reminder, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only.

So, Phil, 2024 came out of the gate with some really interesting data. We always keep a close eye on the employment report. What were some of your takeaways from December's report?

Phil: Yeah, it was an interesting report. The headline number of 216,000 net new jobs was better than expected. So the initial read on the report was positive, but if you look in the details, there were some downward revisions to prior months. And in the household survey, which is an interesting survey that the Department of Labor uses to calculate unemployment, actually shows some deterioration in employment and the size of the labor force. So a good report, but maybe not as strong as initially assessed.

One number we were really focused on, though, was wages. So annual wage gain 4.1%—that was above expectations and is problematic. So the positive, of course, is that that means people are earning more money. That's good for the consumer. But when wages are too high, right, too far above inflation—those wages can find their way into consumer prices. So the Fed does have to keep an eye on wages.

We were a bit surprised to see that the Fed fund futures did not move down as much as you might expect in terms of expectations around Fed cuts.

Brent: Yep.

Phil: Because this was a pretty robust wage number.

Brent: For sure.

Amy: So, Phil, 2023 just ended and Q4 earnings are about to kick off. What are some things you're looking at?

Phil: Yeah, so if you look at bottom-up consensus—so company-level analysts—their expectations for earnings growth in the fourth quarter are between 1 and 2%, year on year. So pretty low earnings growth. But that number has been revised down quite a lot. As of September 30th of last year, fourth quarter earnings growth expectation was 8%.

Brent: Yeah, that's some material downward movement.

Phil: So we've gone from 8% to 1 to 2%. It is a tradition as old as time that companies tend to beat that downwardly revised numbers. We would expect that. I think what might be more important, though, is looking ahead to 2024. Consensus bottom-up still expects over 11% earnings growth.

Brent: Yeah, very stout earnings growth year over year.

Phil: 11% year-over-year earnings growth—that is a robust number. We expect earnings to grow with 2024, but certainly not that sort of dramatic growth in earnings.

Brent: Yeah, certainly somewhere between the long-term average, you know, of about 6 to 7% percent and the almost 11.4% that they have full year. $244 a share is a pretty significant number.

Amy: Phil, what are you interested in hearing from management teams during earnings calls?

Phil: Yeah, so sometimes what you hear during earnings calls is more interesting than the actual report. And what do we want to hear?

So one, what's happening in terms of underlying economic and business activity—not just domestically, but internationally, right? To what extent is the world slowing outside of the US? What are companies saying in terms of labor availability? Something we've heard a lot of certainly from our clients. What about pricing power? What about profit margins? Those are really the things we are most interested in.

Brent: Yeah, especially when you're chatting about the fact that wage growth has accelerated from 4% to 4.1%, which is great for the consumer, and as you mentioned, Amy, good for spending. But when it comes to operating margins and earnings, obviously, as we pay a vast majority of consumers' wages through corporations—that would be a drag on operating earnings and margins if wage growth were to stay high through much of 2024.

Amy: So, Brent, 2023 was a pretty remarkable year for markets and the economy. What are you seeing looking into 2024 as we get going?

Brent: Yeah, before we get into what we see for 2024, to your point, Amy, 2023 was just truly remarkable. We did 26% return for the full year for US equities—about 15.5% for international, 5.5% for taxable bonds, 6.5% for municipal bonds. So if you told anybody, "Hey, this is what returns were for the year." They would say, "Wow, that's just an incredible year."

But if you really get underneath the hood, it was a very bifurcated way of getting to those numbers. From January to Halloween, the US equity market was only up 9.4%. Taxable and municipal bonds were actually negative 2-and-change percent. So you really had the last 2 months of the year drove a significant amount of the returns for both US and international stocks and certainly flipped the tables as it related to bonds—both taxable and municipal—from a negative sign to a positive sign, which is a pretty remarkable movement.

Phil: Yeah, you had a real realization in the marketplace that the Fed might be more dovish this year than expected, and that pushed down yields. Yields go down, price go up on bonds. And stocks have been worried about interest rates all year. So, when interest rates fell, of course, you did see stock market rally. So really just an incredible last 2 months of the year.

Brent: Yeah, so that sort of takes us to the heart of your question, Amy, which is "What are we forecasting for 2024?" As Phil and I highlighted in our outlook, our expectation for 12-months forward for the S&P 500 is about 4,850—which at the time we did it, which was right around, you know, the 13th of December—at that time, it was probably a mid-single digit price movement from what we forecasted at that time to where the S&P 500 was.

As we just said, the equity markets have moved, but if you think about where we are relative to the broad consensus, right now, the min-max on consensus is low of 4,200 for fiscal 2024 for the S&P 500, all the way up to 5,200. So pretty wide range between min and max expectations.

Median and average is right around 4,850. So we did that forecast before the consensus came out, so we just didn't cherry-pick the mean and the median there. But by and large, even if you were to hit the 5,200 optimistic number—that's still only about 9% above where we are today. So I think 2024 should be a decent year for equities—and we also think fixed income—but we're not going to see the ridiculous double-digit returns that we saw in 2023 permeate into 2024. In the fourth quarter of the year, we pulled forward a lot of the returns that we expected in 2024 into 2023. So on that, the balance should be a little bit more muted in 2024, but decent.

Amy: Thanks for watching. We hope you found this information helpful. For more information, visit firstcitizens.com/wealth.

Making Sense Outro Slide

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