How the S&P 500 Can Gain Another 20% in 2024

All that could continue, but it might well fail to boost stocks much. Historically, gains of more than 20% for the index have rarely been followed by another such performance. While there have been 26 years with at least a 20% rally, according to Dow Jones Market Data, there have been only nine stretches with consecutive gains of that size, according to DataTrek Research. 

A point to note is that one of those favorable moments occurred in 1982 and 1983. Rates were falling in 1982 and the market was anticipating what turned out to be a growing economy in 1983.  

That is similar to what the market is expecting today. The Federal Reserve is likely to cut rates, which will keep the economy expanding.

Here is what could happen if everything goes right. If gross domestic product increases at percentages in the low single digits for each of the next two years, it would make sense for S&P 500 companies to post aggregate sales growth at more or less the same rate.

Companies likely would be able to leverage that into some increase in profit margins because inflation is declining, putting less pressure on costs. Assuming continued stock buybacks, earnings per share could rise by a double-digit percentage each year.

By the end of 2024, the market could reflect expectations that aggregate EPS for the index will rise to $274 at the end of 2025, up from $218 today.

That could allow the S&P 500 to rise 20% to 5719 from its current 4766, assuming investors are willing to pay 20.8 times expected 2025 EPS, up from a current forward multiple of just over 19 times. It sounds like a stretch, but it could happen if interest rates fall a bit, as they are expected to. Lower rates boost the current, discounted value of future profits.

The internet boom of the late 1990s, a phase of optimism similar to today’s AI fervor, also offers reason for another gain of 20% or more next year. The S&P 500 had annual gains of more than 20% from 1995 through 1999.

Right now, though, the index’s tech sector is expected to see 16% EPS growth in 2025, while aggregate earnings for the remaining sectors will grow less rapidly. That means that for the index to rise 20% in 2024, valuations would have to leap, or profits from either tech or the rest of the market would have to rise much more than expected.

Overall, “one could argue that we have a ‘baby’ version of the 1980s/late 1990s storylines in play just now,” wrote Nicholas Colas, founder of DataTrek. “Another +20 percent year for the S&P 500 can definitely occur, but it requires that everything go exactly right.”

Write to Jacob Sonenshine at [email protected]