Market Forecast For the Week of December 26, 2023: A Slight Holiday Hangover Is Solved With More Bullishness

FORECAST: The S&P 500 consolidates early in the week before rallying to close out 2023 with a bang near its all-time highs at 4800. The bulls are betting the farm on improving profit margins driven by fiscal stimulus and an unquenchable consumer, but the odds of this happening are small and I expect 2024 to open with a major correction down at least 10% that puts 2023 firmly in the rear-view mirror.

For profit margins to rise materially there must be productivity growth arising either out of corporate efficiencies or the use of better capital. AI is still too narrowly focused on the IT sector and is in the early innings there, so effectively productivity depends on continued upgrades in technology (broadly speaking) and doing more with less. The notion that the labor market tightness is illusionary because job openings don’t get ever filled is the latest reason the bulls believe the year of efficiency extends into 2024. But this takes no account of worsening social trends that imply lower productivity. And while earnings estimates are rising for some firms the broader trend isn’t positive at all, as most stocks in the top tier of the S&P 500 see either no change in estimates or declines. Like the bifurcation between megacaps and the rest of the market, the gains from productivity are concentrated and that makes margin growth highly speculative. Expect the bulls to lose ebullience as the hoary arguments from 2023 lose freshness in the new year and valuations fall back to earth.

My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is partially hedged by an offsetting position in SPXU, which nets out to a long position in equities.