The Scottish Mortgage Investment Trust (LSE: SMT) share price rose 12.75% in November as growth stocks came back into vogue. This was actually ahead of both the S&P 500 and Nasdaq.
However, at 719p, the share price remains some 52% lower than its all-time high of 1,528p reached back in late 2021. That means it would have to more than double to reach such a peak again.
While that’s unlikely to happen any time soon, I do think the conditions are ripe for Scottish Mortgage to outperform next year. Here’s why.
A more dovish Fed
Higher interest rates have hit the valuations of most of the unlisted growth stocks held in the Scottish Mortgage portfolio.
However, it’s now widely expected that the US central bank, the Federal Reserve (or Fed), will cut rates by 100 basis points next year.
If this happens, which isn’t certain, it would help lift a dark cloud that has been hanging over riskier assets for two years.
Cautious UK policymakers
For the share price to boom, though, it would probably need both the Fed and the Bank of England (BoE) to start cutting rates.
But it’s not certain this will happen. BoE governor Andrew Bailey warned just last week that interest rates are unlikely to be reduced in the “foreseeable future“.
It’s worth remembering that the bank’s role is to get inflation to 2%, and that certainly hasn’t happened yet.
Therefore, if the Fed cuts rates but the BoE doesn’t, we might see a strange situation where US growth stocks boom (like this year) but Scottish Mortgage shares don’t. This is a risk.
IPO market return
Looking ahead, a key development could be the long-overdue thawing of the initial public offering (IPO) market in the US.
We’ve seen ARM Holdings (a former Scottish Mortgage holding) successfully re-float this year. The stock soared 24% in November.
Shein, the world’s largest fashion brand by sales, has also reportedly filed for an IPO. While not a Scottish Mortgage holding, this may tempt TikTok parent ByteDance (which is) to do the same in late 2024.
Meanwhile, Swedish battery maker Northvolt is said to be gearing up for a public offering next year. And there are reports SpaceX could spin off its satellite Starlink business and list in 2025.
Payments processor Stripe might also join the party at some point in the near future.
Importantly, these IPOs would provide certainty around how much the trust’s large stakes are actually worth. And they’d significantly reduce its private equity exposure, taking it well beneath the self-imposed 30% limit.
Again, more dark clouds hanging over the stock may be about to dissipate.
A new bull market?
Data going back over half a century shows that S&P 500 bear markets have lasted an average of about 282 calendar days. In contrast to this, bull markets have gone on for an average of 1,011 days!
After rising 20% this year, and defying most analyst predictions, the S&P 500 is now just 4% off setting a new record.
Breaking past this point could trigger the start of a new bull market in 2024.
If so, I’d expect Scottish Mortgage shares to outperform. And I’d be loading up on the shares at £7 if I didn’t already have a large holding.
