These 9 investments will perform best in 2024 as plummeting inflation and falling interest rates help the US avoid a recession, according to the top minds at Ameriprise Financial

• According to Ameriprise Financial, investors expecting a recession will have to wait a while.
• The US economy will have a soft landing as inflation falls and growth remains stable.
• Here’s how investors can maximize stock and bond gains in 2024.

According to the brain trust at $1.3 trillion Ameriprise Financial, even the market’s most serious risks are unlikely to derail the economy.

Barring an unexpected shock, the firm’s base case remains that the United States will avoid a recession. Despite the recent outbreak of war between Israel and Hamas, which has taken a devastating human toll and threatens to destabilize the entire region.

In a recent interview with Insider, Ameriprise’s chief economist, Russell Price, stated that neither inflamed geopolitical conflicts nor a spike in oil prices will precipitate a long-feared recession.

“If conditions in the Middle East become more problematic and that pushes up crude oil prices, that likely could reduce economic activity to a very modest negative pace for a short period of time — most likely,” Price was quoted as saying. “I don’t see that — if that were to happen — as having a significant upward influence on the unemployment rate.”

There’s plenty of evidence to back up Price’s optimistic view of the labor market and economy. On Thursday, weekly jobless claims were lower than expected, just a few days after retail sales grew at more than twice the expected rate and industrial production exceeded expectations.

Simultaneously, persistently high inflation has dropped dramatically and is now stable. Price predicted that price growth would return to the Federal Reserve’s 2% target by the middle of next year, and that the US central bank would be able to cut interest rates twice in 2024.

According to the economy chief, robust economic data, a resilient labor market, and more normal inflation levels indicate that the Fed will likely pull off a soft landing after all. And, while corporate profits may slow in the fourth quarter following a remarkably strong third quarter, he remains bullish on stocks.

Earnings will drive stock prices higher in 2024.

According to Ameriprise’s Anthony Saglimbene and Justin Burgin, the firm’s chief market strategist and vice president of equity research, investors should expect solid stock returns in 2024 based on that glass-half-full outlook.

If earnings grow as expected, the S&P 500 should gain in the mid- to high-single-digits next year, according to Saglimbene. Markets are currently expecting relatively flat profits in 2023 before a sizable 12% increase the following year, which would easily be the largest increase since 2021.

“A lot is contingent on how corporate profits develop in 2024,” Saglimbene said. “Analyst estimates are quite high, especially if we do experience a recession.” So there is some risk that valuations will have to come in, and the path of interest rates is critical.”

Earnings exceeded expectations early in the third quarter, according to Burgin. After the first week, Bank of America reported that the S&P 500 was on track to outperform estimates by 9%, thanks to surprisingly strong earnings and revenue results from large banks.

Artificial intelligence is one increasingly important catalyst for earnings, though Wall Street believes it will primarily be a tailwind for tech companies in the near term. Investors in AI pioneers have had a fantastic year, and Saglimbene believes that those companies still have a lot of room to grow.

“There’s been a reset in expectations around AI that justify some of the price appreciation that we’ve seen in some of these stocks like Alphabet, like Nvidia,” he said. “They are the drivers of AI, they will continue to be the drivers of AI, and it adds a level of productivity and profitability for these companies.”

9 smart places to invest your money

If the United States avoids a recession, Ameriprise recommends investing in stocks in economically sensitive sectors and holding fixed income.

According to Saglimbene, some of next year’s biggest winners will be companies in three cyclical sectors that have been in the middle of the pack year to date: financials, industrials, and materials. Investors will gravitate toward those sectors to catch up after communication services and technology outperformed in 2023, according to the strategy chief.

According to Saglimbene, small caps and European equities can also recover after a period of poor performance due to economic concerns. The Russell 2000, which focuses on small-cap stocks, is down 2% for the year, while the STOXX Europe 600 is up only 3.5%, trailing the S&P 500’s 11.6% gain.

Investors should prioritize quality companies even in a stronger economy, according to Saglimbene and Burgin. Balance sheets are especially important when interest rates are high, the pair noted, with Saglimbene adding that profit visibility and healthy cash flow are also important. Ameriprise, according to Burgin, likes large caps to hold up despite their success this year.

While Ameriprise’s stock experts were not authorized to share specific investment ideas, those interested in these sectors can gain exposure to them through exchange-traded funds (ETFs) such as the Financial Select Sector SPDR Fund (XLF), the Industrial Select Sector SPDR Fund (XLI), and the Materials Select Sector SPDR Fund (XLB).

Popular small-cap ETFs include the iShares Core S&P Small-Cap ETF (IJR) and the Schwab US Small-Cap ETF (SCHA), while the Vanguard European Stock Index Fund ETF (VGK) and WisdomTree Europe Small-Cap Dividend ETF (DFE) may also fit Ameriprise’s forecast. Those looking for quality stocks should look through Insider’s quality stock lists, while those looking for large-caps should look into the Vanguard Large-Cap ETF (VV) or other index funds.

Ameriprise is bullish on bonds, specifically US government debt and investment-grade coupons, in addition to equities. The asset class has been crushed since the Fed began raising interest rates, but the strategists believe it will enjoy a rare rally once rate hikes end.

“I think 2024 will be a year where we’ll have more stable fixed income pricing,” he said. “At the same time, yields will be at some of the highest levels seen since the financial crisis.” You’re going to see a lot of investors who aren’t looking at fixed income right now start looking at it more seriously.”