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The Risks Did Not Materialize

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Headwinds in the form of rising geopolitical tensions did not prevent US inflows in 2023 from breaking all-time records and pushing indices to all-time highs.

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Against the backdrop of Santa’s rally, stable energy prices and cooling inflation, analysts began to upgrade their equity forecasts for the coming years.

Specifically, Yardeni now expects the S&P 500 to reach 6,000 points in 2025, thanks to stronger economic growth and AI development.

Fundstrat believes a record amount of “out-of-market” cash will drive upside in 2024, and Goldman Sachs revised its 2024 target for the S&P 500 from 4700 to 5100.

What can go wrong?

The first risk to watch out for next year would be geopolitics or, to be more precise, new conflicts in Europe, Central Asia and, of course, the Middle East.

As for the latter, if the US and its allies tire of the constant attacks on ships in the Red Sea or if Tehran finally decides to close the Strait of Hormuz, we could see another major war.

In the long run, this could lead to bottlenecks in the supply chain, bringing back the inflation problem and forcing central banks to postpone a change in monetary policy.

On the other hand, even if the worst does not happen and prices continue to fall, the prospects for a soft landing of the economy could remain elusive.

Yes, things look stable for now, but a tight monetary policy will eventually have economic consequences. On average, we can expect to see the full impact in 3-4 quarters.

That said, rising interest rates will be fully felt in 2024, dampening demand and business activity, which could lead to disruptions in the financial system.

What can we expect in the coming months?

The rally we saw at the end of this year could turn into a correction, albeit a short-term one. Still, if the outlook remains unchanged, risk assets still look attractive in the long term.

What investors should probably have is a plan B in case things go as usual in the wrong direction, for example, if a war against Iran starts, such as owning some allocation to gold (XAUUSD).

 

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