JP Morgan Chase unveils financial and capital markets projections for 2024

In the second segment of its three-part 2024 outlook series, JP Morgan Chase explores financial and capital markets, offering insights into trends and forecasts across various sectors including interest rates, commodities, FX, and issuance volumes.

The financial landscape witnessed robust performance in 2023, driven primarily by mega-cap technology and communications equities, resulting in a surge of approximately 20% in the S&P 500 and 35% in the Nasdaq, reclaiming losses from the previous year. However, this rally was uneven, with mid- and small-cap equities lagging, and the KBW bank index experiencing a 19% decline.

Looking ahead to 2024, the outlook for corporate earnings remains cautious, with expectations of low single-digit growth. JP Morgan estimates the S&P 500 to conclude 2024 at 4200.

Volatility in the equity market has significantly decreased, with the VIX averaging 17 through November 2023, compared to 26 in 2022. This decline is viewed as a normalization following significant events in 2022, such as the Russia-Ukraine war and the steepest Fed hiking cycle in decades. The VIX is expected to average in the upper teens next year if the base case soft landing scenario materializes.

Forecasts anticipate a decompression in High Grade (HG) and High Yield (HY) bond spreads in 2024, with stable HG spreads around 125bp and a 50bp widening for HY spreads to 475bp. Despite projections for wider spreads, a slight decline in default rates across high-yield bonds and leveraged loans is expected in 2024.

The Federal Reserve's fastest hiking cycle is believed to have concluded, with an extended pause expected through mid-2024. A potential easing of policy rates by 25bp per meeting in 3Q24 is forecasted, bringing the Fed Funds range down by 100bp to end 2024 at 4.25-4.5%.

Rising concerns about slowing global growth are anticipated to bolster the US dollar in the first half of 2024, with strength against the euro and sterling expected, while the yen may receive support from tighter monetary policy in Japan. A modest decline of 2-3% in the dollar is forecasted by the end of 2024 as the focus shifts to potential Fed rate cuts in the second half of the year.

Commodities, after two consecutive years of double-digit returns, experienced a 6% drop through November 2023. Brent oil is expected to stabilize in 2024, averaging USD 83, and industrial metals may see low to mid-single-digit downside amid slowing global growth. Precious metals could extend their 2023 rally into 2024, serving as safe-haven assets amid uncertainty.

The capital markets landscape may become more favorable for issuers in 2024 with the prospect of lower interest rates. The Initial Public Offering (IPO) and Mergers and Acquisitions (M&A) markets, subdued in 2023, are expected to witness increased activity next year. Despite potential regulatory hurdles and ongoing macroeconomic uncertainties, the buildup in M&A deal pipelines, substantial financial sponsor dry powder, and IPO green shoots point towards a pickup in activity.

High Yield issuance is anticipated to increase in 2024, with a 25% year-over-year rise to USD 225 billion. Institutional loan issuance is expected to climb 10% year-over-year to USD 375 billion. Investment grade issuance is projected to remain flat at USD 1.2 trillion, with financial supply rising by 8% and non-financial supply declining by 7%. The issuance outlook reflects expectations of lower rates and a significant portion of leveraged credit coming due in the next three years.

As we navigate through the complexities of the financial landscape, these insights provide a comprehensive overview of what lies ahead in 2024, allowing investors and market participants to make informed decisions in a dynamic environment. The series will conclude next week with outlooks for major international economies.

(With input from ANI)