Developed-market equities: 2024 outlook

We believe nominal GDP growth remains the main driver of sales growth. Even if the correlation is not perfect, it is good enough in our view to use for our sales forecasts for developed-market stocks. With this in mind, our forecast is for low- to mid-single digit growth in revenues in 2024 as nominal GDP growth is expected to remain positive.

While they dropped somewhat in 2023, corporate margins have actually proved quite resilient and are expected to remain fairly resilient as long as inflation decreases in an orderly way. Tech-related sectors and the advance taken by US companies in exploiting artificial intelligence offer the US a competitive advantage over the rest of the world. As a result, we expect flat margins for US equity indexes in 2024 and a small contraction in Europe and Japan.

Buyback activity in the US and Europe has declined since the peak reached at the beginning at 2022, but remains at a fairly high level. We expect the buyback yield in Japan to increase to a level (1%) not seen before, thanks to stock market reforms designed to encourage companies to boost their price-to-book value. After including buybacks, we expect earnings per share in the mid-single digits across developed markets as a whole in 2024.

Equity valuations could remain rich (in absolute terms and relative to fixed income), especially in the US, as earnings momentum is not expected to plummet and tighter refinancing conditions will bite only gradually. Calculations of the equity risk premium usually focus on the spot yield for sovereign bonds or credit. But such an approach overlooks the fact that companies (especially big ones) managed to lock in low financing costs during covid, with only a small proportion of this due to be refinanced over the next two years.

Overall, our forecast of mid-single digit earnings per share growth for developed-market equites in 2024 is more conservative than consensus.  We can easily accommodate rich equity valuation in this scenario, with the share rally at the end of 2023 already making valuations look less daunting. Cash returns to shareholders will remain attractive—more so in Europe and Japan than in the US. Indeed, we see European stocks as providing substantially higher cash returns (dividends and buybacks combined) than US one. Dividend yields on Japanese stocks should outpace those in the US.