After a challenging 2022, the stock market experienced a significant rally in 2023, with the S&P 500 surging by approximately 24%. This resurgence has continued into the early part of 2024. Global markets have also made impressive gains, as evidenced by the FTSE All World Ex U.S. index’s 16.2% increase in 2023.
In a March 2024 note, Goldman Sachs highlighted that the recent rally has pushed valuations of certain stocks to levels reminiscent of the euphoric heights seen in 2021. Despite this, and the environment of higher yields, the concentration of these “extremely high valuations” is notably less widespread than what we saw in 2021.
The Role of Disinflation and the Importance of Valuation
Goldman Sachs anticipates a more aggressive pace of disinflation than the forecasts of the European Central Bank (ECB). Consequently, their outlook includes five consecutive interest rate cuts by the ECB in 2024, followed by two more in 2025. This divergence in outlook suggests that European equities could have room for further growth as interest rates ease.
While the positive market trends are encouraging, investors need to exercise caution when it comes to valuations. Overpaying for a stock, even one with promising fundamentals, can lead to disappointing returns in the long run.
Finding Opportunity in the Current Market
For investors keen to capitalize on the market’s momentum, thorough analysis is critical. CNBC Pro, in collaboration with Goldman Sachs, has identified a list of stocks that not only delivered notable gains in 2023, but also retain a significant upside potential exceeding 30% in 2024, as per Goldman Sachs’ price targets.
Let’s dive into some key considerations and strategies as we explore this list together:
Sectoral Shifts: The current market environment might favor undervalued sectors that may have been overlooked during the previous year’s rally. Look for cyclical stocks that tend to outperform during economic expansions or sectors likely to benefit from easing central bank policies.
Earnings Growth and Margins: A company’s ability to sustain earnings growth and maintain healthy profit margins is crucial, especially in the context of decelerating inflation and potential economic headwinds.
Technical Analysis: Pay attention to key technical indicators like support and resistance levels to help inform your entry and exit points, supplementing your fundamental analysis.
Diversification: Even with promising prospects, always remember the golden rule – diversification. Spread your investments across different sectors and asset classes to mitigate risk and enhance your portfolio’s resilience.
