2024 expectations for stock market and Fed rate cuts

The US consumer may not be as resilient as previously expected. Despite being on pace for record Cyber Weekend sales, consumers may be slowing down as the Fed keeps interest rates higher for longer heading into the holiday season.

Apollon Wealth Management CIO Eric Sterner joins Yahoo Finance to discuss new expectations for the US economy in 2024, predictions on whether the Fed can pull off a soft landing, and which stock sectors to lean into defensively.

"I really don't expect any cuts coming until the summer because, yes, we have made a lot of progress in inflation, but core inflation is still up 4% — more than double the Fed's target of 2%," Sterner says.

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

JOSH LIPTON: And so Eric, so some storm clouds you're pointing out for the consumer. What does that mean, Eric, for just, kind of, your broader outlook on the US economy as we roll into 2024? Obviously, you know, Eric, a lot of investors have been more comfortable with this idea that inflation is going to fall back down to the Fed's 2% target without an economic downturn, is that where you're at?

ERIC STERNER: I think it's possible that the Fed could execute a soft landing. There's certainly a lot of good news in the stock market between the bond yields dropping, some more welcome CPI and PPI reports. And we've seen corporate earnings break out of its recession producing positive results after three negative quarters.

But I just think there's a lot of good news priced in the market between the soft landing expectations of corporate profits being up 12% next year. And even now I'm seeing higher expectations of the Fed cutting rates. I think there's a 25% expectation in March and 60% in May. And I just don't see that.

I think the Fed-- last dot plot had predicted two cuts in 2024 and the earliest cut coming in the summer. And I really don't expect any cuts coming until the summer. Because, yes, we have made a lot of progress in inflation, but core inflation is still at 4%, more than double the Fed's target of 2%. So I think the Fed's going to keep these restrictive rates still and hold it higher for longer just as they've told us. So I think there's just a lot of-- some investors are getting ahead of themselves with this recent rally.

JULIE HYMAN: So that implies that maybe we're going to see stocks sell off at some point, right, Eric? I mean, I know it's tough to time the market here. But going into the new year, do you want to be defensive and if you're potentially looking for that sell off?

ERIC STERNER: I don't necessarily call for a sell off, but I think we're going to be cap bound. And I think we're at the upper cap right now, probably between 4,300 and 4,600, because the valuations had gotten a lot more attractive on the large caps towards the end of October. Because of that, market correction have fallen back down to their 25-year average.

But this recent rally erased that correction. So now we're still seeing S&P 500 valuations, the PEs, nearing 20. So I think we're just capped out right now. And even we're seeing in the third quarter earnings reports many companies have started to decrease their earnings per share estimates. In fact, we saw earnings per share estimates in the first month for October dropped 3.9%, which is more than double the drop over the past 10 years.

So I think we're hearing companies express this caution and that's just something investors should keep in mind. Yes, a lot of good news in the market. I would call myself a cautious bull because I think we've made a lot of progress. But I just don't think we're out of the woods yet.