Originally Published: 12 JAN 24 10:31 ET

By Krystal Hur, CNN

New York (CNN) — Markets were anything but predictable last year. Investors aren’t looking to get caught flat-footed again.

Stocks ended on a high note last year, but were tested by the Federal Reserve’s interest rate hikes, banking turmoil, debt ceiling worries and war in the Middle East.

Many early-year consensus predictions about what 2023 would bring — including a recession and several rate cuts — didn’t pan out.

CNN spoke with five investors about the biggest lessons they learned and how they’ve helped shape their 2024 outlooks.

Don’t underestimate the American consumer

Americans shelled out on everything from summer vacations to concert tours featuring Taylor Swift and Beyoncé last year. That helped keep the economy, and, in turn, the market, resilient even as the Fed raised rates to a 22-year high.

David Kelly, chief global strategist at JPMorgan Asset Management, says he expects Americans to continue spending robustly, despite the continued drain on savings accumulated during the height of the Covid-19 pandemic.

“American consumers don’t pull back when they should, they pull back when they’ve got no choice,” said Kelly.

History isn’t a guide to the future

In 2022, the yield on the 10-year US Treasury note fell below that of the 2-year, a phenomenon that has historically preceded recessions. Many traders and economists pointed to the yield curve inversion as a sign that the economy could downturn in 2023. That didn’t happen.

“Why would we expect this one-factor model to still hold in a world where we just had three or four unprecedented things take place in the last year?” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. Still, a recession isn’t completely off the table for 2024.

Don’t fight the Fed

George Cipolloni, portfolio manager at Penn Mutual Asset Management, says he’s sticking with one of Wall Street’s favorite adages when it comes to the central bank’s influence on markets.

The saying proved apt in 2023. Investors, for example, had anticipated in the spring that the Fed would cut rates several times in the latter half of the year, despite the central bank’s warnings of potential further hikes.

Hot inflation data derailed those expectations. Stocks entered a months-long rout and bond yields spiked. The pain eased after the Fed projected three rate cuts for 2024.

Diversify beyond the ‘Magnificent Seven’

Leslie Thompson, chief investment officer at Spectrum Wealth Management, says she recommends that investors don’t get swept up in fear of missing out and instead take a longer time horizon to maintain a diversified portfolio.

While the “Magnificent Seven” tech stocks — Nvidia, Microsoft, Apple, Amazon, Tesla, Alphabet and Meta Platforms — took home the lion’s share of the market’s gains last year, for example, they weren’t the only winners. The end of 2023 ushered in an “everything” rally that saw beaten-down assets from small-caps to energy to financials run higher.

Thompson expects the rally to continue broadening out and says she’s eyeing industrials and dividend-payers.

Fundamentals have to start mattering

The S&P 500 index gained 24% last year despite an earnings recession, often defined as at least two straight quarters of corporate profit losses. Companies in the S&P 500 reported 4.9% earnings growth during the third quarter of 2023, breaking a streak of losses since the fourth quarter of 2022, according to FactSet.

Fourth-quarter earnings, which kick off on Friday with results from big banks, are expected to grow about 1% in the fourth quarter of 2023.

The “Magnificent Seven,” which trade at roughly 31 times expected earnings, in particular have gotten expensive, says Amanda Agati, chief financial officer at PNC Asset Management Group.

“The market has behaved sort of erratically and emotionally … since the 2022 bottom,” but company earnings will have to justify valuations this year, said Agati.

The-CNN-Wire