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The outlook for U.S. stocks in 2024 is very bright primarily as a result of the likely decrease in interest rates by the Federal Reserve throughout the year as the rate of inflation (CPI) has declined from 9.1% to 3.1% over the past 18 months. In its Economic Projections released by the Federal Reserve Board on December 13, 2023, its preferred measure of inflation, core PCE, was projected to reject to 3.2% at yearend 2023, and then to 2.4% at yearend 2024, 2.2% at yearend 2025, and reaching its goal of 2.0% at yearend 2026. The Federal Funds rate, currently at 5 ¼% – 5 ½%, is projected to be reduced to 4 ½% – 4 ¾% in 2024, representing three cuts in interest rates of ¼% each. As Warren Buffett has stated: “Interest rates are to asset prices, as gravity is to matter.” Therefore, lower interest rates should result in higher equity prices. Furthermore, the Federal Reserve’s projected unemployment rate of 3.8% at yearend 2023, is at historically low levels and is projected to boost to only 4.1% in 2023 and beyond.
Against this positive backdrop of declining interest rates, the outlook for equities both in the short term and the long run continues to be bright. The S&P 500 (with dividends included) has closed higher in 80% of the 80 years since 1942 while achieving an average annual return of 10%. The following 10 stocks are recommended for 2024:
Alphabet (GOOG): This tech giant reported strong results and growth in the third quarter in explore, YouTube and in Cloud. It is building and deploying Artificial Intelligence (AI). It introduced Bard, a conversational AI chatbot that is based on Large Language Models. With a forward P/E of only 23 (based on analyst consensus 2024 estimates), GOOG appears to be undervalued. (The forward P/E for the S&P 500 is 19.)
Amazon (AMZN): This dominant online retailer along with its large share in the cloud (Amazon Web Services) continues to create in numerous areas with large growth potential. Although its forward P/E equals 42, Amazon has stressed investing in future growth opportunities rather than maximizing short-term profits.
Apple (AAPL): Apple has an installed base of active devices of over two billion and has over one billion high margin paid subscriptions. It has a very large ongoing stock buyback program and is the largest single stock holding of Warren Buffett’s Berkshire Hathaway, representing about 50% of its equity portfolio. Its forward P/E of 29 appears reasonable with respect to its continuing outsized growth potential.
Berkshire Hathaway (BRK.B): This extremely well-managed conglomerate has substantially outperformed the market over its 57-year history, with a compounded annual return of 20% per year as compared to 10% for the S&P 500. Warren Buffett has recently been buying back its shares, indicating that he views these shares as being undervalued.
Meta Platforms (META): This company operates the world’s leading social network, Facebook, with 3 billion monthly active users out of a total world population of 8 billion. It also owns Instagram, WhatsApp, and Messenger. Strong growth in revenues and earnings is projected over the next few years. Its forward P/E is a relatively modest 23.
Microsoft (MSFT): This company is the largest independent maker of software. Its cloud services segment is very large and growing rapidly. Through its use of copilots, it is extending its reach in Artificial Intelligence (AI). Microsoft’s forward P/E is 33.
Nvidia (NVDA): This company is a leading developer of computing platforms that utilize its processing units and software for applications that include generative artificial intelligence (AI). It has a very high projected growth rate in revenues and profits. Its forward P/E ratio is 42.
Occidental Petroleum (OXY): Berkshire Hathaway has recently increased its stake in the company to 27% (33% if it exercises its warrants at $62.50 per share) and has received regulatory approval to acquire up to 50% of its shares. Warren Buffett is an admirer of CEO Vicki Hollub who has pledged to invest only in projects where their rates of return exceed their cost of capital, reduce the company’s debt, buy back its shares and pay a cash dividend. OXY’s forward P/E is below the market average at only 12.
Uber Technologies: (UBER): This company dominates ridesharing services in the U.S. and provides them in 70 countries. It has recently turned profitable and will be joining the S&P 500 Index on December 18, 2023. Its forward P/E equals 32.
Vanguard S&P 500 ETF (VOO): The S&P 500 (with dividends included) has closed higher in 80% of the 80 years since 1942 while achieving an average annual return of 10%. Only about 15% of actively managed mutual funds outperform the S&P 500 over a 5 – 10-year period. Warren Buffett has instructed the trustee of his wife’s inheritance to put 90% of it into a low-cost S&P 500 Index Fund (and the rest in short-term government bonds).
