Bull market to roar again in 2024, though a bumpy ride awaits  

Australian shares are forecast to rise for a second consecutive year in 2024, although the recent epic bull run has left the market vulnerable to an early correction.

Traders work on the floor of the New York Stock Exchange on the last day of trading for the year. Picture: Spencer Platt/Getty Images

Australian equities are forecast to climb for a second consecutive year in 2024, although at a slower pace, as the epic bull run in recent weeks has left the market vulnerable to a correction early in the new year.

Bets that the fastest interest rate hikes in generations are achieving their desired economic slowdown and lowering inflation drove the best December rally in three decades and a 12 per cent jump in the ASX 200 benchmark over the past two months.

The late-year rally erased earlier losses and pushed the market 38 points off its all-time high for yearly gains of 7.8 per cent. Technical indicators suggest the market might be due for a breather after its late-year climb, but sentiment remains decidedly positive.

“There is a risk of pullback, but the likelihood is there is still more upside to go,” AMP chief strategist Shane Oliver said, as inflation continues to ease and central banks turn progressively more supportive of growth.

Indeed, Dr Oliver is upgrading AMP’s 12-month target for the S&P/ASX 200 index to 7900 points by the end of the new year, up from 7800 previously.

After closing 2023 at 7590.80 points, the forecast is equivalent to a capital gain of 4.1 per cent, which added to dividend returns and franking credits means investors could see returns of about 9 per cent, he said.

This would be down from the 14 per cent total return delivered by the market in 2023, which assumes dividends are reinvested into company shares, according to Bloomberg data.

“My 7800 forecast for the end of 2024 is proving to be too conservative. I will revise that year end target to 7900 but it’s still going to be a softer year than what we saw (in 2023),” he said.

According to Bloomberg data, consensus forecasts estimate the Australian benchmark index to end the year 0.3 per cent higher at 7612.02, while the MSCI world index is expected to see gains of 8.4 per cent, after booking a 21.7 per cent gain in 2023.

This is even when sell side analysts expect falls of between 3 and 6 per cent in earnings in the 2023/2024 financial year.

“I think we’ll see another rollercoaster ride this year… But the bigger correction may come earlier,” Dr Oliver said. Investors are factoring in a Goldilocks scenario where an overheated economy slows but does not fall into a recession.

They are counting in lower bond yields that improves valuations, while also expecting stronger economic growth through 2024 and 2025.

“Of course the risk to all that is that we get a run of bad economic data and the market starts to focus more on weak near-term economic activity and the risk of a recession,” Dr Oliver said.

“That’s how you can get a correction.”

Geopolitical tremors will also feature high on investor radars in 2024, fuelled by a string of elections in key economies throughout the year – including hotly-contested presidential races in Taiwan and the US – and simmering conflicts like the Israel-Gaza and Russia-Ukraine wars, both ripe for escalation.

Despite recessionary whispers, Australian investors exude cautious confidence, with many anticipating a soft landing even if the economy enters a shallow dip.

“Where we sit, we are quite excited about the prospects into 2024, given the backdrop that we are seeing, which is interest rates potentially easing or at least not rising anymore,” said Shih Thin Wong, chief investment officer at Prime Value Asset Management.

A key factor for the subdued earnings forecasts is the “base effect” of high commodity prices – including iron ore, which starts the year at an 18-month high of $US140 a tonne – that could normalise, he said.

Nonetheless, 2024 will feature “a stockpicker’s market”, he said, identifying explosive manufacturer Orica and insurer QBE Group as examples of those with “reasonable” valuations and earnings prospects.

Investors could bag up to 21.5 per cent gains on QBE shares in 2024, analysts say, while Orica’s price is also tipped to climb 14 per cent, according to a Bloomberg poll.

Chalice Mining and Star Entertainment, two of the biggest decliners of 2023, are predicted to reverse their fortunes with expected share price gains of 63 per cent and 54 per cent respectively, according to the data.

“I would not discount weakness in the first half (in the market as a whole),” Mr Wong said. “Only on the basis that we’ve had a pull forward of expectations in the December quarter about rates coming off.

“The real test will come in February and March, where the markets will have to see robust earnings to support valuations.”

A market correction could sting hardest for recent high-flyers like plumbing parts manufacturer Reece, iron ore miner Fortescue Metals or the nation’s largest lender Commonwealth Bank, all of which could fall by at least 20 per cent by year end, according to analysts’ forecasts.