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October 2024



Market Update: Fundamentals Remain Supportive Heading into Q4



As we head into the final stretch of 2024, the global economic outlook remains largely positive, with the U.S. economy showing resilience amid some moderation. Market indicators from the City National Rochdale (CNR) Speedometers® highlight steady economic and financial trends, including recent upgrades to our monetary policy and consumer sentiment dials. Projections for U.S. GDP growth range between 1.75% and 2.25% in 2024. Corporate profits are anticipated to rise 9%-12%, with inflation moderating to around 2.5%-3%, even as Federal Reserve rate cuts start to take effect. While some concerns linger, the broader market appears to be well-supported.

With election year uncertainty in focus, market patterns tend to shift as volatility rises before Election Day. Historically, stock prices may experience a dip of around 3% between August and November, but this is often followed by a strong rebound once election results are clear. Markets typically rise over November and December as uncertainty lifts. Although political events can introduce some noise, they are generally less impactful on market direction than core fundamentals like corporate profits, interest rates and monetary policy. There is also no notable correlation between party control and returns. The stock market is not partisan.

 

Chart 1:  Financial Conditions Impulse on Growth Index
 

Source:  Federal Board of Reserve, as of September 2024.

Information is subject to change and is not a guarantee of future results.

 

In terms of sectors, technology has been a star performer, driving much of the market’s gains, but there have been questions around valuation and narrow leadership. Still, AI is likely to continue its robust adoption and growth. The first half of 2023 saw AI-related investments reach $120 billion, with forecasts suggesting that figure could grow to $160 billion by 2025. AI’s transformative potential is significant, with an expected contribution of $2.6 trillion to $4.4 trillion annually across industries such as marketing, healthcare and software development. 

Globally, markets have experienced a mixed year, with pockets of outperformance in Europe and emerging markets. However, the U.S. has consistently outperformed, rising more than 5% over international markets since July1. While international markets have shown promise at times, opportunities have often been fleeting, as regional conflicts, higher inflation and lower growth prospects have dampened performance.

Despite the difficulty in the international investment landscape, the world economy remains on track. The services sector has been the engine of global growth, while manufacturing has struggled to keep pace, even experiencing contraction in some areas. However, the outlook is positive that any slowdown in growth will be countered by over half of the world’s central banks embracing easing cycles. And, while the Chinese economic outlook remains highly uncertain, China’s recent stimulus measures are expected to bolster global growth in the upcoming year, providing another source of upside potential.

Turning back to the U.S., financial conditions have improved notably, easing some of the tightening from earlier in the year. The Federal Reserve’s shift toward an easing cycle has benefited the credit markets, which remain healthy. Corporate earnings are solid, and bond issuance has increased compared to last year. This more supportive backdrop from the Fed could act as a tailwind for continued market stability, lowering the risk of significant market disruptions. Should this easing trend persist, the Fed may well achieve its goal of a soft landing without the need for drastic economic adjustments.

The economic landscape is further supported by a resilient U.S. labor market. September saw nonfarm payroll growth that exceeded expectations, and revisions to previous months’ data indicate a stronger job creation trend than initially thought. The unemployment rate has declined to 4.1%2, and household employment is on the rise. While some concerns about labor market momentum remain, anticipated rate cuts should help support further job growth and bolster consumer confidence as we approach year-end. 

Real consumer spending has also remained robust, ticking up in recent months and projected to grow by 2.4% in 2024 and 1.9% in 20253. The underlying strength in consumer demand, particularly in retail, suggests a positive trend for continued economic growth. Consumer credit conditions remain stable, despite increases in delinquencies in lower income quartiles, household debt service levels are near historical lows, and wealth has increased across all income groups. Although credit card balances recently topped $1 trillion, when adjusted for inflation, this rise has been minimal over the past 25 years. Even in the housing sector, where limited inventory has driven up prices, conditions appear poised to improve as rates ease.

Financial markets are another beneficiary of Federal Reserve rate cuts. In fixed income, short-term Treasury yields are beginning to decline, and the yield curve is gradually normalizing. Credit spreads in corporate bonds remain stable, reflecting strong demand from investors and solid credit fundamentals. On the equity side, Fed rate cut expectations have supported a rotation in market leadership, which has broadened YTD returns away from tech stocks.  

Equity market performance has also been bolstered by strong earnings growth across multiple sectors. Q2 earnings demonstrated broad-based improvement, with 9 out of 11 sectors showing year-over-year gains (see chart 2). Initially, technology stocks led the rally in 2023, but more recently, earnings estimates have begun to accelerate across a broader market spectrum. 

Chart 2: S&P 500 Y/Y Earnings Growth

Source: FactSet, as of September 2024. Information is subject to change and is not a guarantee of future results.

Past performance is not a guarantee of future results.

The broadening of market leadership is a promising signal for future equity gains, indicating that other sectors are beginning to contribute meaningfully to overall performance. In the U.S., sectors like utilities and real estate have performed well in the third quarter, demonstrating gains while more traditional growth sectors have taken a breather. Utilities, in particular, have seen an unusual surge, outperforming during an up market — a pattern typically associated with market declines. Meanwhile, value sectors are showing signs of strength, indicating a potential rotation as we close out the year.

Looking forward, the combination of easing financial conditions, strong corporate earnings and ongoing economic growth paints an optimistic backdrop for market returns as we head into the final months of 2024. While election uncertainties may introduce some short-term volatility, history suggests a quick recovery. With strong AI investment trends, a stable credit landscape and solid labor market conditions, the outlook is set for a strong conclusion to the year and a promising start to 2025.

 

1Data as of the S&P 500; MSCI EAFE, as of October, 2024

2Data as of The Bureau of Labor Statistics (BLS), as of September, 2024.

3Data as of the Bloomberg consensus estimates, as of October, 2024.

 


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