US stock market outlook 2024: sectors to own in the year ahead

British investors looking to expand their portfolios abroad tend to eye the United States as the first port of call. That looks to be the most promising attitude to take as 2023 draws to a close. It is now hard to believe that this time last year some economists were predicting an imminent recession for the US.

The American economy has held up remarkably well in the face of post-pandemic trauma, sluggish world trade, volatile energy prices and myriad other setbacks. It is also defying sharply raised interest rates.

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Latest figures, for the third quarter, showed the US economy growing more strongly than expected at an annualised rate to 5.2%. Investors should note that the US calculates each quarter’s growth over the previous quarter then multiplies by roughly four, rather than comparing the quarter against the same quarter each year. The US method tends to exaggerate the volatility of economic performance.

This was a revised figure – revised upwards that is – showing higher consumer and business spending, a sure sign of domestic confidence. Admittedly, the performance was also boosted by government subsidies for green industries, but it did represent a big step forward from the 2.1% growth recorded in the second quarter.

Meanwhile, the labour market remains in fine fettle, although it is sending conflicting signals. Job vacancies fell from 9.35 million to 8.73 million in October, the lowest figure for two and a half years, indicating that the surge in demand for workers last year is truly over. Unsurprisingly, the number of workers quitting their jobs for better offers elsewhere has started to subside.

This will take pressure off companies that have had to ramp up wages to attract sufficient workers. It will also ease inflationary pressures within the economy. Some economists are still concerned that average hourly pay edged up 0.4%, taking the annual rise to 4%, but that is not an alarming figure when you take into account levels of inflation over the past couple of years.

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On the other hand, jobs growth has been persistently strong. In November, when 199,000 jobs were added, the jobless rate was only 3.7%, and while the ending of strikes in Hollywood and in the car industry undeniably helped to get people back in work, there was also recruitment in healthcare, manufacturing and the public sector to more than offset falling numbers in retail, warehousing and transport. On average, 240,000 jobs have been added every month over the past year.

Expectations for the US economy have this year begun to swing sharply as economists pour over the nuances of each set of figures and every pronouncement. Ahead of the third-quarter revised economic growth figures, foreign exchange traders were driving down the dollar on the assumption that interest rates would start to fall in the New Year. Now they are not so sure.

However, the long, aggressive rise in interest rates by the Federal Reserve Bank, from near zero to 5.25-5.5%, is surely over. The Fed is traditionally reluctant to move interest rates in a presidential election year, especially upwards, for fear of appearing to be trying to influence voters on the state of the US economy.

Barring an unexpected economic shock, it has therefore almost certainly completed its ratcheting up of rates. Any movement is likely to be downwards, although the scope for interest rate cuts looks limited in the near term. Changes take time to work their way through the economy and the Fed will surely be reluctant to change tack dramatically before its members are satisfied that inflation is fully under control.

The strength of the US economy argues against hasty action. The continuing fighting in Ukraine and the Middle East are further reasons to err on the side of caution.

Should rate cuts happen nonetheless, they would mean a weakening of the US dollar after several years of increasing strength, making American products cheaper on the world stage but possibly recreating domestic inflation. However, such an impact would be limited, since oil, gold and other commodities are priced wholly or mainly in US dollars.

Meanwhile, the two New York stock exchanges end the year in good spirits, with justifiable hopes that 2024 will provide more of the same. Those hopes are certainly higher than at this stage 12 months ago, but profits have grown, albeit often quite modestly across many sectors. An estimated four out of five companies included in the S&P 500 index have beaten profit expectations in 2023.

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Strong fundamentals are admittedly being driven mainly by the largest companies, leaving most medium and smaller companies with work to do. However, one key factor is that profits are generally rising faster than revenue, which means that profit margins are expanding in the face of tough trading conditions.

The Organisation for Economic Cooperation and Development estimates that the US economy will have grown 2.4% this year and will grow 1.5% in 2024, beating other developed countries. It has to be said that such forecasts are notoriously unreliable and are subject to periodic revisions as the year progresses, but the likelihood is for an upward rather than downward adjustment in due course.  

Nonetheless, we come back to the point that the US remains the most promising spot for British investors looking to expand their portfolios in overseas markets. Look for sectors that have shown resilience in tough conditions.

One is technology, which is looking to take another big leap forward with the surge in artificial intelligence. Healthcare services are not dependent on the economic cycle and will continue to be in demand as populations continue to age in the US and other developed countries.

The finance sector will benefit from higher interest rates, although the effect will be mitigated as the impact of costly borrowing causes defaults among less prudent individuals and companies.

Retailers are likely to struggle as consumers increasingly feel the pinch. The strong will survive and, in the longer term, flourish as weaker rivals go to the wall.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.