The ongoing rally in US stocks and government bonds could stretch well into 2024 as the Federal Reserve moves to ease monetary policy and a resilient economy continues to fend off a recession.

After falling more than 19.4% in 2022, the S&P 500 ended the year up more than 24.2%, just shy of reaching the large-cap index's all-time high. Expectations of rate cuts from the Fed have already driven much of the ongoing rally in bonds, with the benchmark 10-year Treasury yield falling to 3.88% at the end of December, 119 basis points lower than its peak in October. Bond yields fall as prices rise.

Whether stocks and bonds continue to rally may hinge on the Federal Reserve, which will likely begin lowering rates this year after boosting the benchmark federal funds rate to the highest level since 2001 to curb skyrocketing inflation. The path for markets this year is not expected to be a straight line and could change course multiple times depending on the state of inflation, jobs, consumer health and a Fed that could hold interest rates at relatively high levels for longer than currently anticipated.

"Bonds and stocks could have another weird year ahead of them," said Callie Cox, a US investment analyst at eToro.

Stocks gain in 2023

Beyond the S&P 500, stocks largely rose during the year. For example, the Nasdaq composite index climbed 43.4% in 2023 after falling 33.1% in 2022, as leaps in artificial intelligence boosted tech stocks.

"The AI trade will probably be with us for many years into the future," said Todd Walsh, CEO and chief technical analyst of Alpha Cubed Investments. "But it is a mistake to assume this sector will go straight up. It won't."

There will likely be some consolidation in many of the tech stocks that saw huge moves in 2023, and the sector will probably see volatility this year, Walsh said.

A potential further boost to stocks would be rate cuts. With inflation growth now moving toward the central bank's 2% target, the futures market is expecting rate cuts to begin as soon as March.

"The Fed's flexibility has drummed up confidence, and lower rates could eventually support growth in an incredibly resilient economy," said Cox with eToro. "Of course, there are still risks to consider. It's still a tough operating environment for companies, so you have to be picky."

Hitting new highs

With the job market still robust and consumer demand still relatively strong despite high interest rates, many of the sectors that saw the biggest gains in 2023 — including information technology, communication services, and consumer discretionary — could run up further this year.

"If we can avoid a recession, I'd expect to see some interest in beaten-down cyclicals as we move into the back half of the year," Cox said. "Big tech could lead at first, but it may eventually cede its leadership to groups like small caps and banks."

The S&P 500 will likely hit new highs in 2024, with about 11% to 13% gains throughout the year, said Sonu Varghese, a global macro strategist with Carson Group. The rally will almost exclusively depend on where the economy heads this year, however.

"That includes a strong consumer, but the main difference with 2023 is that easing interest rates will potentially boost cyclical activity, including housing and manufacturing," Varghese said. "This should keep nominal GDP relatively high, which means profits will continue to grow."

Bonds rally

Meanwhile, the benchmark 10-year Treasury yield likely has further to fall and could end 2024 at 3%, after nearly reaching 5% in 2023, according to Gennadiy Goldberg, head of US rates strategy at TD Securities.

"This is driven by our ongoing expectation for a harder landing, with the Fed starting cuts in May 2024 and cutting rates 250 [basis points] by early 2025," Goldberg said.

But like stocks, the path forward for bond yields is "unlikely to be a straight line" and yields for shorter-term bond yields could rise in the near term.

"Equities appear to be expecting a softer landing as rates decline while the Treasury market appears to be rallying due to expectations of weaker growth and inflation momentum," Goldberg said. "Eventually, one of these markets will prove to be correct, but I expect lots of choppiness ahead as we find equilibrium."

As the Fed's policy plans emerge and investors get a better idea of whether the economy will head into a recession, the market could begin to normalize later this year, said Walsh with Alpha Cubed.

Still, risks and unknowns remain, Walsh cautioned, pointing to the upcoming US presidential election as one major factor that could drastically move markets.

"The market, and investors, hate uncertainty and this election promises to serve up large doses of extreme uncertainty," Walsh said. "We may be looking at a choppy summer season into the actual election."