As we reflect on the third quarter of 2024, we are pleased to share our insights and perspectives on the market’s performance and Haverford’s economic outlook. The S&P 500 experienced a notable gain of 5.9% during this period, driven by a broadening of the rally beyond the Magnificent 7 and rotation into cyclical and interest rate-sensitive companies. This shift was largely influenced by the Federal Reserve’s commencement of rate cuts and the prospects for further easing
Source: Factset, Sept 30, 2024.
From a fixed income perspective, Chairman Powell expressed confidence in the strength of the economy, framing the 50-basis point rate cut as preventative maintenance. Moving forward, the strength of the labor market should be the primary factor in determining the pace of Fed cuts. Further escalation of conflict in the Middle East could add some inflationary pressure to the mix. All eyes will be focused on the election in the coming quarter with both candidates proposing policies which include additional fiscal stimulus. While not making predictions of the future, we do not expect the strong bond market returns over the past 12 months to be repeated in the 12 months upcoming. Treasury rates hit their highs of this Fed hiking cycle in October of 2023. The return of the 10-year Treasury from its October high to the end of Q3 was just over 14%. To get anywhere near a repeat performance over the next 12 months would require the 10-year Treasury yield to be nearing 2%, which we see as a highly unlikely scenario. We will continue to value quality and liquidity in the portfolio.
Equity Market Performance and Economic Outlook
Third quarter stock market rotation was encouraging, and we anticipate wider market participation to continue as growth extends across various sectors. Earnings visibility is improving, supported by ongoing disinflation, a healthy jobs market, easing interest rates, and robust corporate earnings.
Starting earlier this year, S&P 500 earnings growth began to accelerate. Earnings Per Share (EPS) increased by 11% in the second quarter of 2024, the best growth rate since the fourth quarter of 2021. For 2024, consensus estimates are for EPS growth of 10%, with an expected increase to 15% in 2025.
The acceleration is an inflection from 2022 and 2023. Amid post-pandemic supply chain disruptions, labor shortages, and inflationary pressures, investors turned to Mega Cap Tech and companies with exposure to AI for assured growth, leading to a highly concentrated stock market and rich valuations. However, with improving and broader earnings visibility and rate cuts, other sectors have started to catch up. In the most recent quarter, interest rate-sensitive and cyclical stocks, including Utilities, Real Estate, Industrials, and Financials, have been the best performers.
Source: Factset, Sept 30, 2024.
We believe the rotation has room to continue. Following outperformance by a narrow group of stocks, the broader market is showing promising signs and those largest stocks or Top 10 by market capitalization are trading at a premium. At the end of the third quarter 2024, the Top 10 stocks were trading at an average PE of 27.6x, compared to the S&P 500 trading at 21.5x and the remaining 490 stocks at 19.2x.
Consumer Spending and Sector Performance
From a sector perspective, a number of tailwinds will support corporate earnings and the broader stock market. The overall outlook for consumer spending is positive. While inflationary pressures remain a significant headwind, forcing many consumers to “trade down” to less expensive items, employment has been resilient, and we expect easing inflation and lower rates to support spending growth in coming quarters.
Source: Factset, Sept 30, 2024.
AI and investment to support its development has spurred spending in semiconductors and infrastructure as well as data centers. We expect this ongoing investment to extend to other areas within tech and industrials. It is also driving demand for power to support the infrastructure buildout. The adoption of artificial intelligence should eventually boost demand and productivity across a wide array of industries, enhancing S&P 500 earnings growth in the years ahead.
Equity Market Facing Tailwinds, Headwinds
Equity markets will continue to benefit from several tailwinds including a healthy jobs market, easing interest rates, and good corporate earnings. Ongoing market rotation is also a positive sign. We are watching a number of headwinds and potential sources of disruption such as geopolitical events and election related headlines. Our focus remains on underlying economic and corporate earnings fundamentals. In 2025, U.S. fiscal policy will be a greater focus, which reinforces our commitment to owning quality companies with strong earnings predictability and financial strength.
Please feel free to reach out with any questions or to discuss your investment strategy further.
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