Market analysts are increasintly optimism that 2024 will bring double-digit earnings growth for both the S&P 500 and Russell 2000. But Charles Schwab's investment strategists aren’t among them.

“We have some skepticism about the lofty expectations; and indeed, excitement waned a bit as third quarter 2023 earnings season came to a close," Liz Ann Sonders, Schwab's chief investment strategist, and Kevin Gordon, the company's senior investment strategist, said in their 2024 annual investment outlook. "While 2024 estimates have been lowered ... an actual economic contraction would mean estimates are still too high.”

Despite tamping down expectations, small caps should still be enticing, they said.

They noted that the London Stock Exchange Group’s Institutional Brokers' Estimate System reported the estimated earnings growth rate for the Russell 2000 is expected to improve from a loss of 11% in 2023 to a gain of 31% in 2024.

Overall, look for the interest rates and bond yields to be in the “driver’s seat” when it comes to the performance of equities in 2024, the investment strategists said.

“Economic pain is likely, but that doesn’t mean stocks will struggle all year, especially if there is a continuation of the rolling recessions that have hit the economy,” they added.

In the duo’s best-case scenario for the economy in 2024, rolling recessions, which sectors such as consumer goods and housing have been experiencing, will “morph” into more durable rolling recoveries.

“Once the economic path is clearer, we expect less bifurcation within the market and less violent swings in leadership as the year unfolds. That should bode well for groups that have failed to participate in the advance since the bear market low in October 2022,” Sonders and Gordon said.

While Sonders and Gordon see “some runway to the upside to equities,” they also believe there will be near-term economic pain, as the Federal Reserve lessens its grip on monetary policy and potentially begins trimming interest rates.

“[I]t may be the case that if the Fed is cutting rates by mid-2024, it's because of further deterioration in the economy—specifically the labor market. In fact, one of our key expectations for the year to come is that the Fed will begin to shift its focus from the inflation side of its dual mandate to the employment side,” they said.

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