US is 'leading the way' into 2024, BofA says

Growth, innovation, enthusiasm and uncertainty were some of the key takeaways used to describe what the financial markets are likely to look like in the U.S. next year, according to executives speaking at a Bank of America roundtable on Thursday.

Chris Hyzy, chief investment officer at BofA, led the call with some thoughts about market volatility.

“When the economy is going to grow, at nominal basis 4½, real basis, 1½ to 2, and start the year below trend, it's very difficult to grow corporate earnings three times the level of economic growth, unless you have margin expansion,” Hyzy said.

“The key question is going to be: Was the second quarter of '23 the trough for earnings, or is there another one coming? That's all going to be dependent on jobs,” he added. “It's all going to be dependent on consumer spending and the resiliency of the consumer, which in our case, we believe that the distortions coming out of the pandemic have yet to fully normalize. Excess savings is not completely wiped away yet.”

Marci McGregor, head of portfolio strategy at BofA, said small-cap stocks have the potential to lead of the next cycle and potentially, the next decade. However, she said that there needs to be a little more stabilization on the earnings front.

“For now, the small-cap, that's one area that would tend to get me more positive,” McGregor said. “Lower and raised rates are going to be really sensitive, especially to short rates as well. Once we start to see those moves there, I think this could tee up an extended outperformance in small cap. I just think we're a little early.”

McGregor said she thinks next year will be one in which investors can be invested.

“When I think about 2024 on the equity side for long-term growth and on the fixed-income side for attractive real yield, that's where it's important,” she said. “I want to be diversified, not just stocks, bonds, cash, maybe alternatives for clients, where it's appropriate, but also across industries, across size and style as well.”

Executives brought up issues elsewhere in the world, like Japan and China amid the multidecade lows of the dollar earlier this year, and how that can affect the U.S. market.

“My real question, because of how much China is in the emerging markets indices, is going to be what is the trajectory for growth in China? How much are they using? And how sustainable is that? I think we need to see a little bit more of a pivot there to get us more positive on the EM side,” McGregor said.

With the deglobalization and reconfiguration of supply chains that has weighed heavily on market sentiment regarding China, companies are carefully looking at where the next investment dollar is going to go, said Joe Quinlan, head of CIO market strategy at BofA.  “With the incentives here in the United States, the U.S. is a very attractive place for that foreign dollar to be invested next, and that's exactly what's happening.”

McGregor added that trying to time the market is truly a fool's errand.

“It's about being invested for the long term, especially for the growth and innovation that's happening in our economy. It’s frankly only accelerating with all of the events so far in this decade,” she said.

With a presidential election next fall, the new theme leading into 2024 is uncertainty.

“That uncertainty is both political uncertainty and tax uncertainty,” said Mitchell Drossman, head of national wealth strategies at BofA's private bank. “When election year has started out, there's a lot of political uncertainty. Along with that comes the bare minimum of a legislative perspective.”

He added that there are likely to be several surprises for taxpayers. For instance, if taxpayers have any excess money in their 529s, there will be an opportunity to put all that money into a Roth IRA.

While Drossman said that he doesn’t expect any surprises on the tax side going into an election year, there is one surprise that affects the tax community: the Corporate Transparency Act.

“If you form an organization this year, you have all of next year to make that filing, whereas if you form the entity early next year, you only have 90 days from the date of formation,” he said.

While there is always some level of uncertainty in going into a new year, at least there seems to be growing enthusiasm globally about the U.S. market.

“Europe is clearly in a recession, China's struggling to come out of the post-COVID downturn, and the U.S. is leading the way. It still looks like all roads, for now, lead to the U.S.,” Quinlan said.