One of Europe’s largest banks predicts the U.S. stock market will flirt with record highs early in 2024, but the rest of the year won't be smooth sailing.

According to the Paris-based Societe Generale, or SocGen, the S&P 500 will hit 4,750 in the first quarter of 2024. That’s a more than 5% jump from current levels and 15% higher than the October low. It’s also a hair beneath the last all-time high of 4,796 in January 2022.

That’s when they think the roller coaster will begin.

The bank predicts that after a brief stint near record highs, the S&P 500 will retreat 12% to 4,200 by mid-year as the U.S. enters a mild recession. The Fed, in turn, will intervene by cutting interest rates, sending the S&P 500 back to 4,750 in the final quarter of the year.

“The S&P 500 should be in ‘buy-the-dip’ territory” next year, said Manish Kabra, SocGen’s head of U.S. equity strategy.

In addition to the Fed’s boost, stocks are poised to rally because company profits are improving, Kabra said.

Data from financial research firm FactSet supports this outlook. After a year of declining profits, S&P 500 corporate earnings were up 4.3% annually in the third quarter of 2023.

Corporate profits expected to rise

Wall Street expects the good times to continue heading into next year. According to Morgan Stanley, the consensus view is that corporate profits will rise by 12% next year—even as the economy loses steam.

A declining economy usually reduces consumer spending, which is bad for corporate profits and business conditions in general. But there’s a reason why analysts think profits will continue to grow in such adverse conditions.

Declining interest rates and corporate cost-cutting will help companies recover in 2024, according to Bank of America analyst Savita Subramanian. A continued Bidenomics spending spree should also help earnings rebound.

“Earnings are likely to outpace the economy in 2024, as the earnings downturn began earlier than the economic downturn this cycle,” Subramanian explained in a research note earlier this year.

“Earnings also tend to recover stronger than they fall, as downturns usually remove excess capacity, resulting in leaner cost structure and improved margin profiles,” she said.

A difficult few years for investors

Since the S&P 500 last set all-time highs nearly two years ago, markets have been difficult to navigate. In 2022, the S&P 500 declined by roughly 18%, marking its worst fall since the 2008 financial crisis.

The bond market fared much worse. According to McQuarrie, long-dated U.S. Treasuries lost 39.2% in 2022, a record low dating back to 1754.

Financial conditions have improved in 2023, with bond markets stabilizing and the S&P 500 rebounding 18% so far this year.

Analysts say the path to stability in portfolios rests with the Fed, which recently signaled that it was done raising interest rates.