3 strategies for stock selection in 2024

Justin Burgin, Vice President of Equity Research – Ameriprise Financial

Jan. 15, 2024

Although we anticipate a more “normal” backdrop for stocks in 2024, markets are unlikely to take a linear path higher due to macro challenges such as slower economic growth, a presidential election year and inflation.

As you evaluate your approach to equities for the year ahead, here are three investing strategies to consider in consultation with your Ameriprise financial advisor:

1. A more panoramic 2024

One of the key market themes for 2023 was the seemingly relentless investor enthusiasm for anything related to artificial intelligence (AI) in large-cap technology stocks. The result was an extremely narrow — and eye-popping — leadership for the S&P 500 Index in 2023. As we enter 2024, we anticipate the market’s headwinds to recede (with lower interest rates and a soft economic landing), potentially benefiting a broader set of companies and sectors, resulting in a more panoramic market leadership theme.

Broadening stock participation in 2024 could include areas of the market that were overshadowed by the AI tech rally last year, including bond proxy sectors (consumer staples, utilities and real estate) and small-cap stocks.

Bottom line: In a more “normal” economic environment, consider last year’s laggards, such as bond proxy sectors with solid valuations and attractive dividend yields, as well as the small-cap space for potential outperformance in 2024.

2. Dividend growth means more in 2024

Dividend strategies struggled in 2023 as cash investments offered an attractive, risk-free opportunity. However, we believe the prospects of a Fed rate cut and lingering inflationary pressures could reinforce the benefits of dividend-paying stocks in 2024. Historically, when equity market returns are modest, dividends are a more meaningful contributor to full-year total returns.

But remember, not all dividend-paying stocks are the same. We recommend focusing on dividend growth stocks rather than searching for higher yields. Focus on dividend growth companies with resilient business models supported by recurring revenues, significant economies of scale and solid free cash flow generation.

Bottom line: As the economy heads toward a “soft landing” and the equity market is potentially poised for a modest return, falling rates and rising dividend income streams could bode well for 2024 total returns.

3. Quality…with a twist

Given our expectations for lower interest rates and a slower-growth economy in 2024, focus on quality stocks (companies with high profitability, stable earnings and low debt) with the added ‘twist’ of recurring revenue or expected earnings rebound.

Recurring revenue: Companies with subscription-based or recurring revenue business models can generate relatively predictable growth and financial stability even during a slower economic expansion. Moreover, when volatility spikes, companies with recurring revenue can outperform their peers as more reliable cash flows offer stability amid market turbulence.

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Earnings rebound: The unprecedented economic and market shocks of the past few years caused significant, albeit temporary, earnings instability across the entire economy, even among many high-quality companies. With consistency a cornerstone of quality, some companies fell out of favor despite maintaining leadership in other areas like competitive positioning and profitability. However, as the economic backdrop is expected to normalize after multiple years of significant distortion, we believe many of these firms are primed to display a resurgence in earnings power.

Bottom line: Two themes could drive outperformance in quality stocks in 2024: Recurring revenue and rebounding earnings. In a more “normal” economic environment, stocks with high recurring revenue may provide greater earnings predictability, while stocks that deliver above-market earnings per share (EPS) growth (in an environment where growth is scarce) could also provide solid returns.

Put these insights into action

Reach out to your Ameriprise financial advisor for guidance on how these themes for stock selection can help inform your investment strategy for 2024.

This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned. The information is not intended to be used as the primary basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please consult with your financial advisor regarding your specific financial situation.

Past performance is not a guarantee of future results.

The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall US equity market. Over 70% of all US equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.

The products of technology companies may be subject to severe competition and rapid obsolescence, and their stocks may be subject to greater price fluctuations.

Investments in a narrowly focused sector may exhibit higher volatility than investments with broader objectives.

Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

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