Is a market correction coming?

With 2024’s fourth quarter underway, U.S. stocks continue gaining, with major indices like the Dow Jones Industrial Average and S&P 500 repeatedly hitting all-time highs. While technology stocks continue to dominate equity markets, momentum is spreading to other sectors.

“Investors appear encouraged by initial third quarter earnings reports,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “There are questions and uncertainties as earnings season continues, but on balance, it looks to be moving in a positive direction.” So far in 2024, the S&P 500 suffered only one month of negative returns in April.¹

A notable mid-September event was the Federal Reserve’s (Fed’s) decision, for the first time in more than four years, to cut the federal funds target rate (a key interest rate banks charge each other for overnight lending that tends to influence rates on such items as consumer credit cards, automobile loans and mortgages). The Fed’s 0.50% rate cut appeared to assure investors of the Fed’s determination to shift gears from a tighter monetary policy to a more neutral interest rate stance. This brought the fed funds rate to a range of 4.75% to 5.00%.

A look ahead to 2024’s closing months and beyond, economic data, corporate earnings and monetary policy will likely remain top-of-mind as investors monitor market momentum.

Favorable economic underpinnings

The U.S. economy continues to grow. Second quarter Gross Domestic Product (GDP) growth of 3% (annualized) nearly doubled the first quarter’s growth rate.² The first estimate of third quarter GDP is released in late October, but most signs are positive. “If you look at the strength of economic data, it tells us that real (GDP) growth plus inflation is higher than the market initially anticipated,” says Haworth. “It indicates the Fed succeeded and can reduce the fed funds rate while still generating a better future economic growth story.”

However, in the third quarter, the S&P 500 exhibited heightened volatility, with a higher number of days with daily price changes in excess of 1% compared to the first two quarters combined.

Large stocks retain their advantage

Investors have been waiting for the market’s gains, concentrated to this point on large-cap stocks, to extend to mid-cap and small-cap issues. After smaller stocks rallied in July, the rotation to smaller-cap stocks was sidetracked in August, as the S&P 500 again outperformed mid-cap and small-cap stocks. Since then, small-, mid- and large-cap stocks have generally been on a similar path.³

Technology cedes its leadership position

A major third-quarter shift occurred within the S&P 500. The once dominant technology sectors (information technology and communication services), which far outpaced other sectors in 2023 and in 2024’s first half, began underperforming the broader market. With signs of an easing interest rate environment, investors shifted their focus. The biggest post-June beneficiaries are utilities and real estate stocks. Only financials and utilities stocks appear on top five lists for both the first two quarters and since June 30.¹

Source: S&P Dow Jones Indices, LLC. As of October 14, 2024.

“Technology is still an important, long-term economic contributor,” says Haworth. “But there is some room for the rest of the market to catch up to technology stocks.” He believes if the economy continues to prove resilient, core cyclical stocks (those that benefit from an improving economy) could see their fortunes improve.

Potential headwinds

“Markets often climb a ‘wall of worry,’” says Haworth. In the current environment, a variety of external issues lurk in the background. “The market does not show much concern with the coming election, which looks too close to call, but pricing may adjust once there’s more clarity about the outcome.” The impact of global tensions highlighted by the Israel-Hamas conflict and the Russia-Ukraine war is another potential concern. The pace and trajectory of future Fed rate cuts could also have a bearing on investor sentiment going forward, according to Haworth.

Equities still offer opportunity

Haworth recommends that investors consider maintaining a neutral allocation across equities, fixed income and real assets. “Historically, November and December tend to be solid equity performance months,” says Haworth. “It appears even though stocks have risen significantly for two years in a row, more upside potential remains.”

“We still think it’s a great time to be invested and for those with money in cash, it represents an opportunity to put capital to work in longer-term assets,” says Eric Freedman, chief investment officer with U.S. Bank Asset Management. He encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman.

This is an important time to check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.

The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.