Stocks won't match last year's dazzling rally in 2024, Morgan Stanley Wealth Management says

• Stocks surged last year, powered higher by the AI investing craze and resilient growth.
• But they'll struggle to rack up similar gains in 2024, according to Morgan Stanley Wealth Management.
• "When investors have such lofty expectations, there's little room for error," CIO Lisa Shalett said.

Investors shouldn't expect stocks to rack up double-digit gains in 2024 – last year's surprise rally means the market now looks overvalued, according to Morgan Stanley Wealth Management CIO Lisa Shalett.

The AI investing craze and resilient growth powered equities higher in 2023, with the S&P 500 rallying 24% and the tech-heavy Nasdaq 100 soaring 54%. But a repeat performance looks unlikely, Shalett warned in a research note published Wednesday.

"The market's exuberant rally at the end of 2023 has left stocks overvalued, with investors especially emboldened by the Federal Reserve's December indication that rate cuts are on the horizon," she wrote. "When investors have such lofty expectations, there's little room for error."

"Investors should have a more measured outlook, with 2024 more likely to be an average year for markets than another double-digit winner," Shalett added, flagging sky-high valuations, weaker earnings, central-bank hawkishness, and high interest rates as four threats to stocks.

Shalett's gloomy outlook comes after stocks' recent rally stalled over the first week of 2024. Investors are fretting about a potential slowdown in Big Tech earnings and grappling with the idea that the Fed might take a cautious approach than previously expected to cutting borrowing costs, with the US jobs market still looking strong.

Her views fall in line with the Wall Street consensus that this will be a so-so year for equities.

Bank of America's Savita Subramanian, Deutsche Bank's Binky Chadha, and Goldman Sachs' David Kostin all expect the S&P 500 to post single-digit gains in 2024, although even that would be enough to lift the benchmark index to a new all-time high.

Shalett's colleague Mike Wilson, who is Morgan Stanley's CIO and chief US equity strategist, is even more dour. He expects the gauge to finish the year trading at 4,500 points, implying a 6% drop from its level as of Wednesday's closing bell.