2023 was a bit of an odd year for growth stocks. Outside of the ‘Magnificent 7’ (the US large-cap tech companies), performance wasn’t that great for most of the year. However, this changed in the last quarter of the year, with growth shares leading the charge to close out the year. I think that bodes well for 2024 for several reasons.
Why 2023 ended well for growth companies
One of the main drivers that sparked a rally in growth businesses in the last quarter was the global pivot by central banks. Led by the US Federal Reserve, the rhetoric changed at key meetings away from raising interest rates. Rather, many decided to leave rates on hold, including the Bank of England. That came after global inflation levels eased. This put less pressure on central bankers to keep hiking up rates to try and stop inflation from rising.
This overall shift in sentiment was positive for the stock market as the end was in sight of peak interest rates. After all, stocks tend to perform better when rates aren’t high. It makes borrowing cheaper, something that’s important for growth stocks.
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Young, fast-growing firms tend to load up on debt because often their businesses aren’t yet profitable. Borrowing money can help them to expand quickly.
Carrying momentum forward
As I sit here in January, we’re now actively discussing rate cuts around the world. The first cut in the UK is expected in May, but in the US it could come as soon as March.
Should this happen, I think growth shares could see another sharp move higher. For some investors that were reluctant to get involved, confirmed rate cuts (likely supported by economic growth) could be the catalyst for more investor confidence. An inflow of new money could boost share prices even further.
Let’s not forget that this year is the biggest on record for the number of people that will go to vote in key elections around the world. This has the potential to give a boost to stocks, with all political parties keen to show voters that their manifestos will be good for their economies.
Of course, stocks aren’t guaranteed to go higher. Elections pose a risk of uncertainty, which many investors don’t like. Further, if we see inflation start to move higher, it could throw a spanner in the works.
Stocks I like
I’m mostly focused on UK stocks, even though my thinking is global. Most FTSE 100 constituents trade around the world, so it’s not really a problem.
I’m looking at stocks that have already started to rally, as it’s these firms that could keep going on the basis of further good news. To that end, I’ve got Rolls-Royce, Carnival, Hilton Food Group and Sage Group on my watchlist.
As with any share, I need to do my own research on the individual company. But I certainly feel that growth stocks as a class could be in for a strong year ahead.
