We See Continued Upside for Quality-Oriented Growth Stocks in 2024

Matt Freund, CFA, Michael Kassab, CFA

Summary Points:

• Although returns are likely to be more modest after 2023’s outsized gains, we see continued opportunities for growth stocks in 2024.
• We believe Calamos Growth Fund will be well served by its focus on what we consider to be quality growth companies, including its positions in leading technology companies and health care innovators with strong cash flow generation.

There is a Wall Street saying that “attitude follows price.” This can clearly be seen in the actions of the market in 2023. The year started on a cautious note, with the Federal Reserve in the midst of its hiking campaign and equities well off their all-time highs. Fears peaked in March when a banking crisis was considered all but certain to push a softening economy into recession.

Long-term investors were well rewarded for ignoring this wall of worry. The economy proved to be much more resilient than most economists expected. Jobs remained plentiful, and the US consumer continued to spend despite higher interest rates. At the same time, inflation continued to moderate (although still remaining above the Fed’s 2% target), and falling energy prices provided relief. By the end of the year, growth stocks recovered all of their 2022 losses, driven by two significant trends: the emergence of artificial intelligence (“AI”) and the mainstream launch of revolutionary weight loss drugs.

Much of this year’s turnaround came on the back of a handful of established technology powerhouses that demonstrated they could still be innovation leaders—and massive cash flow generators—all these years later. While the “Magnificent Seven” fueled strong returns in the US equity market for much of the year, the final three months of 2023 saw a significant broadening of the rally as expectations of a Fed pause and eventual rate cuts took hold.

Within the health care sector, one theme was particularly noteworthy: the emergence of breakthrough therapeutics in the battle against obesity. These medicines, known as GLP-1s, have the potential to change the landscape of health care overall and provide substantial long-term benefits to patients. Investors were quick to speculate on widescale implications for the broader economy and questioned what a world with less obesity would mean for diabetes treatments, medical devices, and fast-food restaurants.

Looking ahead, we believe easing financial conditions and a soft-but-still-positive macroeconomic environment should provide a constructive backdrop for growth stocks. The fundamentals for the technology sector remain strong, with enterprise spending in the early phase of recovery and the semiconductor inventory correction entering its latter stages.

Given the recent surge in stocks and valuations that are almost back to early 2022 levels, we believe it is reasonable to expect more muted returns ahead. Ultimately, we expect the new year to be more of a stock picker’s market, with individual stock price appreciation driven by company-specific factors. Although growth leadership will likely continue to broaden, Calamos Growth Fund maintains its emphasis on profitable companies with strong balance sheets and self-funding business plans.

As the past year has shown, being a successful growth investor requires a long-term orientation, a discipled approach to risk management, and the ability to see past the ever-present wall of worry. We believe our approach meets these criteria. Whatever the new year brings, growth equities have earned their place in a well-diversified portfolio.