Outlook 2024: What to expect from financial markets in the new year

By Niladri Mukherjee Chief Investment Officer, TIAA Wealth Management

Last year showed why we urge investors to avoid overreacting to the latest headlines and to stick with their long-term investment strategies.

Coming into 2023, there was widespread fear the U.S. economy was headed for recession—or at least a significant slowdown. The outlook for stocks was gloomy too. The Federal Reserve had raised interest rates seven times in 2022 and would do so four more in 2023—bringing rates to their highest levels since 2001. The rate hikes had made it more expensive for corporations to borrow, for consumers to pay off credit card bills and for homebuyers to take out mortgages. All this was sure to put a crimp in corporate profits and a dent in U.S. GDP growth. Right?

Wrong. The U.S. economy accelerated in 2023, posting 2.4% (projected) GDP growth, up from 2022’s 1.9%.¹ The stock market shook off early-year bank failures, higher interest rates and geopolitical events such as the war in the Middle East. Investors focused instead on better-than-expected corporate earnings and on the growing enthusiasm around artificial intelligence (AI). End result: The Standard & Poor’s 500 Index soared 23% through December 12.²

Keep this recent history in mind as you read our full 2024 Outlook for Financial Markets reportOpens pdf, prepared by TIAA’s wealth management team. We have identified key themes and trends likely to influence the economy and the markets in 2024. We offer ideas on how to take advantage. What we have not done, however, is recommend wholesale changes to asset allocation models. The prudent course is still to maintain a balance of different asset classes that can help mitigate swings driven by ongoing uncertainty.

Here are some highlights and predictions from our 2024 Outlook:

• Economic growth in the United States will decelerate. Demand for labor should cool along with wage growth, leading to an increase in unemployment from today’s historic lows. Consumer spending may slow due to higher borrowing costs, rising delinquencies, tighter credit conditions, and slowing wage gains. Less affluent consumers will become more cautious, pulling back on discretionary categories and dipping further into savings. Higher interest rates will be a headwind for business, with corporate earnings growth falling to mid-single digits.
• Inflation will continue to decline. Over the course of 2024–2025, we expect inflation, now 4%, to cover “the last mile” toward the Fed’s 2% target. Absent a major economic downturn, however, the Fed should remain vigilant and keep rates at elevated levels for some time, eventually cutting rates in a measured fashion to support growth. 
• High quality bonds—especially those with intermediate and long maturities—are attractive from a total return perspective. Interest rates should trend lower, which will be good for bond prices. Investment-grade corporate bonds will likely perform better than high-yield bonds as they are more insulated from tighter financial conditions. Municipal bonds also look favorable due to their high credit quality and notable tax-adjusted yields.

• Expect volatility in the stock market. That said, investors should be ready to rebalance into U.S. equities, which are better positioned for long-term growth than non-U.S. counterparts. In Europe, we expect economic struggles to continue. In China, recent stimulus measures have failed thus far to reinvigorate the world’s second-largest economy. Emerging markets could be a bright spot though. Tailwinds provided by AI, favorable demographics and growing economies should benefit emerging-market equities in the near and medium terms. 
• Beware election-year noise. Investors should not construct portfolios based the likelihood of one party or one candidate winning in November. Research shows there’s little correlation between market returns and election outcomes.