May 2024 Stock Market Forecast (2024)

The 2024 stock market rally has run out of steam as investors anticipate the Federal Reserve may still not be close to a pivot to interest rate cuts.

The S&P 500 dropped 4.1% in April amid recent economic data indicating the Fed still has work to do in its battle against inflation. And although U.S. economic growth slowed sharply in the first quarter, fueling fears the economy could slip into stagflation, the S&P 500 remains up 6.0% year-to-date through April while investors remain hopeful the Fed can issue multiple interest rate cuts before the end of 2024.

Positive inflation data could help the S&P 500 regain its mojo in May, a month that has historically been one of the weakest of the year for the stock market.

Rate Cuts Delayed?

The two key market catalysts that have moved stock prices in the past two years are widely expected to remain in the forefront of investors’ attention in May: interest rates and U.S. inflation.

The Federal Open Market Committee opted to maintain interest rates at 23-year highs at their most recent meeting that concluded on May 1. The FOMC has guided for three rate cuts before the end of the year, but the bond market is pricing in a 56.5% chance the Fed will issue no more than one cut in 2024.

The consumer price index—one key measure of inflation—gained 3.5% year-over-year in March. That was down from recent peak inflation levels of 9.1% in June 2022, but still well above the Federal Reserve’s 2% long-term target.

The U.S. personal savings rate dropped to just 3.2% in March, down from 5.2% a year ago. That’s a potential sign that inflation and elevated interest rates are making it harder for consumers to save.

In addition, the Commerce Department estimates U.S. gross domestic product grew just 1.6% in the first quarter, missing consensus economist expectations of 2.5% growth.

The combination of the hotter-than-expected inflation rate and the surprisingly weak GDP pace spooked the market, stoking fears that the extended period of elevated interest rates will hinder the U.S. economy in coming months.

However, Jeffrey Buchbinder, chief equity strategist at LPL Financial, says the underlying numbers in the GDP report weren’t as bad as the headline number seemed at first glance.

“Consumer spending continued to hold up well with an annualized increase for the quarter of 2.5%, though that was shy of expectations near 3%,” Buchbinder says.

“Capital investment rose at a solid 2.9% annualized pace, while residential investment contributed to growth as demand for housing was strong.”

U.S. Recession Watch

Many investors believe the Fed is reaching a critical point in its battle against inflation. And the next couple of months are widely expected to determine whether the Fed can navigate a so-called soft landing for the U.S. economy without tipping it into a recession.

In addition to slowing GDP growth, the U.S. Treasury yield curve has been inverted since mid-2022, a historically strong recession indicator. The New York Fed’s recession probability model suggests a 58.3% chance of a U.S. recession within the next 12 months.

So far, the most convincing argument that a soft landing is still possible has been the strong U.S. labor market:

• The Labor Department reported the U.S. economy added 303,000 jobs in March, far exceeding economist estimates of 200,000 new jobs.
• U.S. wages and benefits were up 4.2% year-over-year.
• The unemployment rate remains historically low at just 3.8%.

Bill Adams, chief economist for Comerica Bank, says fears about U.S. stagflation are premature at this point. Adams says the government will likely revise its March 2024 U.S. consumer saving rate estimate higher as it gathers more accurate data.

“Ordinarily, the big drop in the household savings rate over the last few months would be a warning sign of stress on household finances,” Adams says.

“But there is good evidence that the government’s statistical system is undercounting employment and income among recent immigrants to the U.S., meaning recent personal income growth is stronger than the numbers show and that the true saving rate is higher than they show.”

Jamie Cox, managing partner for Harris Financial Group, says the economy is still strong enough for the Federal Reserve to begin tapering the monthly runoff of its balance sheet as soon as June.

“The inflation data clearly are not cooperating right now. The good news is that the Fed has communicated to markets that rates will not change in the first half, so the market has had ample time to digest the pause in progress on the inflation front,” Cox says.

Earnings Rebound

Elevated interest rates and a slowdown in economic growth are a bad combination for earnings.

First-quarter earnings season has been mixed so far, with S&P 500 companies reporting 3.5% year-over-year earnings growth.

The S&P 500 just registered its first month of negative total return since October, but the index’s constituents are on track to report their third consecutive quarter of positive earnings growth. Analysts are projecting S&P 500 earnings growth will accelerate to 9.7% in the second quarter and S&P 500 companies will report an impressive 10.8% earnings growth for the full calendar year in 2024.

High interest rates and tight credit markets are impacting some market sectors more than others:

• Communication services earnings are up 34.4% and utilities sector earnings are up 23.9% in the first quarter compared to a year ago.
• On the other end of the spectrum, healthcare sector earnings are down 28.1% and energy earnings have dropped 25.5% in the quarter.
• Technology sector earnings are up 22.2% overall in the first quarter, but investors have punished several major tech stocks for not reaching the market’s high bar of expectations.

Shares of semiconductor giant Intel (INTC) initially declined 8% after it reported a quarterly earnings beat but missed expectations with its revenue and guidance. Shares of Facebook parent company Meta Platforms (META) initially dropped 16% on weak guidance and ongoing losses from the company’s Reality Labs metaverse technology unit.

How To Invest in May

While investors are hoping improved inflation data will rekindle the stock market rally, there are also reasons for investors to be cautious in May and beyond.

A popular Wall Street adage “sell in May and go away” reflects the fact that the six-month period from May through October has historically been a relatively weak stretch for the market. In fact, since 1990, the S&P 500 has averaged only about a 2% annual gain from May through October compared to a 7% annual gain from November through April.

High interest rates have a negative impact on discounted cash flow valuations, which can hurt high-growth stocks. Value stocks have historically outperformed growth stocks when interest rates are high, but that trend has reversed in the past year.

In the past 12 months, the Vanguard Value ETF (VTV) has generated a total return of just 15.8%, while the Vanguard Growth ETF (VUG) has generated a total return of 34.1%.

Investors concerned about stagflation or seasonal equity market weakness can take a more defensive approach to investing and boost their financial flexibility by dialing back exposure to stocks and increasing their cash holdings in the portion of their portfolio they expect to tap to pay for expenditures in the next two or so years.

Investors can already earn 5% or higher in high-yield savings accounts heading into May, and those interest rates likely won’t change much until the Fed finally pulls the trigger on its first rate cut.

Clark Bellin, president and chief investment officer at Bellwether Wealth, says interest rate cuts would be helpful but are not necessary for the S&P 500 to rebound to new all-time highs in 2024.

“Investors should continue to be on the lookout for opportunities in the market and consider taking advantage of the stock market’s recent pullback, where many quality stocks went on sale,” Bellin says.

“The overall trend of the market is to the upside, and the declines in recent weeks are part of a broader market correction, which is very common in bull markets.”