I think 2024 is shaping up to be a good year for growth stocks. While I also see potential for dividend shares to do well, it looks to me like the companies aiming to boost their earning power will do best.
There are a few reasons for this. One is what I see as the major investing themes of this year and another is the macroeconomic environment.
Investing themes
I think there are two obvious investing themes for 2024. One is artificial intelligence (AI) and the other is renewable energy.
Companies focused on these two sectors are in the process of building, designing, and engineering new products to push their revenues higher. In other words, they’re focusing on growth.
This is especially true of AI. Even the businesses that might look like mature companies, such as Microsoft and Alphabet, are looking at artificial intelligence as a way of boosting revenue and profits.
In the renewable energy space, companies like BP are investing heavily in building out infrastructure like offshore wind farms. The ambition with this is long-term growth, rather than short-term returns.
Interest rates
All of this costs money. Whether it’s research and development or materials and labour, businesses need to finance their expansion projects one way or another.
Borrowing money is one way of generating the relevant cash. And higher interest rates over the last couple of years have made this much more expensive, restricting the viability of growth opportunities.
Interest rate increases started to tail off in 2023 as inflation began to come down in the UK and the US. And rates are set to fall as a result, making borrowing less expensive.
That should be a big boost for companies that are looking to invest for growth. By contrast, businesses looking to distribute excess cash as dividends don’t stand to benefit in the same way.
Dividend shares
To be clear, I don’t believe either of the above considerations count as actively bad news for dividend shares. Falling interest rates could well provide a boost to share prices in general, including income stocks.
Companies like National Grid – an obvious example of a dividend stock – could also benefit from being able to refinance their debt at lower rates. But I think growth companies stand to benefit more.
The biggest risk to the thesis here is that interest rates won’t come down as fast as the market is expecting them to. And there are some pretty optimistic assumptions at the moment.
In my view though, the market is right in thinking that the next move for interest rates this year is likely to be lower. And regardless of when that comes, I expect it to be good news for growth stocks.
Time to buy?
Over the long term, I don’t have a particularly strong bias one way or another. I tend to think about investing in terms of specific businesses and opportunities, rather than categories or styles.
I’m expecting 2024 to be a year in which growth stocks outperform income shares. In general, though, I’m looking for stocks to buy from either category.
