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Market analysis
December 9, 2024
Number of the week:
8.2%
The increase in earnings for S&P 500 companies in the third quarter compared to a year earlier.
Term of the week:
Consumer sentiment
A statistical measure of the overall health of the economy as determined by consumer opinion. It takes into account people's feelings toward their current financial health, the health of the economy in the short-term and the prospects for longer-term economic growth, and is widely considered to be a useful economic indicator.
Quote of the week:
Consumer sentiment improved in December in the University of Michigan Consumer Sentiment Index to the highest reading since April, the fifth consecutive month of progress. Year-ahead inflation expectations jumped to 2.9% (highest reading in six months) from prior month's 2.6%. The index is still low and below pre-pandemic levels, perhaps reflecting ongoing concerns about elevated prices.
― Robert Haworth, CFA, Senior Vice President, Senior Investment Strategy Director, U.S. Bank
Global economy
Quick take: U.S. payrolls rebounded in November, and consumer sentiment improved but remains below pre-pandemic levels. Global purchasing manager surveys affirmed strength in services but ongoing stagnation in manufacturing.
Our view: Growth in the United States and India remains exceptional while other major economies, including China, Europe, Japan and the United Kingdom, demonstrate modest but positive economic expansion despite elevated interest rates.
- U.S. jobs rebounded in November from the weather- and strike-related slowdown in October. Payrolls added 227,000 new jobs and the prior two months saw positive revisions of a net 56,000 jobs. Average hourly wages remain strong, growing 4% year-over-year, the same as October. The unemployment rate ticked up to 4.2% due to falling employment and a growing number of jobseekers. The data indicate a solid but softening labor market.
- Consumer sentiment improved in December in the University of Michigan Consumer Sentiment Index to the highest reading since April, the fifth consecutive month of progress. Year-ahead inflation expectations jumped to 2.9% (highest reading in six months) from prior month's 2.6%. The index is still low and below pre-pandemic levels, perhaps reflecting ongoing concerns about elevated prices.
- U.S. manufacturing activity continued to stagnate in November’s Institute of Supply Management Purchasing Manager Indexes. Services businesses are expanding, though at a more modest rate than October. New manufacturing orders accelerated into expansion, ending seven months of contraction, but most other components of the index continued to contract. The softening in services reflected weakness in new export orders, inventories and a fall in the backlog of orders.
- Foreign purchasing manager surveys from S&P Global indicated still-positive global growth in November, with ongoing risks in the eurozone, soft activity in Japan and the United Kingdom, a slight improvement in China and ongoing strength in India. Services remain the primary driver of the growth while manufacturing activity was relatively flat.
- India's gross domestic product grew 5.4% year-over-year in the third quarter, the slowest in seven quarters. The Reserve Bank of India maintained the repo rate constant last week, reflecting concerns for elevated inflation relative to slower growth. The November purchasing manager survey remained solid, indicating growth is only slowing modestly despite elevated inflation and interest rates.
Equity markets
Quick take: U.S. equity performance remains superb and broad based as holiday shopping shifts into high gear.
Our view: The fundamental backdrop remains supportive of a risk-on (aggressive) bias. Inflation is waning, interest rate cuts are in motion and earnings are trending higher, all bolstering sentiment and providing valuation support. Near term, price volatility is likely to be more the norm, with new administration policies emerging, the holiday selling season in full motion and geopolitical tensions heightened.
- Superb and broad-based equity returns reflect underlying economic strength and positive investor sentiment. As of Friday’s close, the S&P 500 is up 27.7% year-to-date, with all 11 sectors in positive territory, six of which are up 22% or more. Leading sector performance are Communication Services (39.7%), Information Technology (38.7%), Consumer Discretionary (33.6%) and Financials (33.6%).
- The third quarter results were modestly above expectations. As of Friday’s close, 99% of S&P 500 companies have released results, effectively marking the end of the third quarter reporting period. Sales gained 5.1% compared to a year ago and earnings are up 8.2%.
- Analysts forecast S&P 500 earnings of approximately $240 per share for full-year 2024 and $273 for 2025, according to Bloomberg, FactSet and S&P Cap IQ, reflecting respective 8.8% and 13.5% year-over-year growth. At current price levels, the S&P 500 trades at approximately 25 times the 2024 estimate and 22 times 2025 projections, at the high side of its 35-year historical average, though short of extreme valuations. Company guidance following fourth quarter releases, beginning in mid-January, should improve earnings visibility for 2025. We anticipate companies will continue to temper forward guidance given uncertainty around policy outcomes.
- Volatility is likely to be the norm as we move toward year-end and into 2025. Debt ceiling negotiations, tax cut promises, regulation and immigration reform and fluid foreign trade policies while keeping inflation at bay and avoiding a recession are among challenges facing President-elect Trump that could impact future equity prices. Positive earnings growth and lower interest rates would likely accompany policy decisions that restrain inflation while stimulating economic growth, supporting elevated valuations and boosting equity prices. Policies reaccelerating inflation and slowing growth would likely have the opposite effect, impairing investor sentiment and challenging equity returns.
Bond markets
Quick take: Short-term Treasury yields fell last week, reflecting greater confidence that the Federal Reserve (Fed) will cut interest rates December 18.
Our view: Fundamental and technical tailwinds from resilient economic growth, constructive corporate balance sheet health and strong investor demand create opportunities in higher yielding but slightly riskier bonds.
- Investors expect the Fed’s gradual return to a neutral policy setting likely includes a December rate cut. Fed officials’ have consistently messaged for gradual rate cuts until reaching a more neutral policy stance, including in comments last week. The Fed’s Beige Book, a collection of regional business condition anecdotes, summarizes the steady growth and moderate inflation environment that gives the Fed flexibility to patiently adjust policy. Nine of 12 regional Fed districts reported some improvement in economic activity. Inflation was modest, with business contacts reporting they expect the current pace of price growth to persist. Steady growth with stable but slightly above-target inflation merits a gradual unwind of the Fed’s restrictive rate policy. Bond yields reflect 90% odds that the Fed cuts rates at its December meeting. Treasury yields around 4% across maturities adequately compensate for inflation risks to the Fed’s rate policy guidance and create opportunities to generate meaningful yield across the fixed income market.
- Dual tailwinds from solid fundamentals and strong investor demand support corporate and municipal bond valuations. Corporations and municipalities took advantage of strong investor demand to issue high amounts of debt over the past few months. Favorable financial conditions allowed issuers to refinance debt and push maturities further into the future. High corporate bond valuations reflect investor confidence in issuers’ credit fundamentals. Though high valuations limit the potential for corporate bond price gains to outpace Treasuries, the extra income can still generate meaningful returns over time. Less tax-sensitive investors could consider structured credit, such as non-agency mortgages and highly rated collateralized loan obligations to find compelling valuations, solid fundamentals and appealing current income opportunities. Highly taxed investors can find opportunity to meaningfully increase yield in lower-quality and slightly longer-term municipal bonds. Reinsurance also provides important portfolio diversification along with current income opportunities above 10%, creating a strong cushion against potential credit losses.
Real assets
Quick take: Prices fell across many real asset categories last week, including publicly traded real estate, global infrastructure and commodities. For real estate and global infrastructure, the decline was small in comparison to strong returns over the past year.
Our view: Publicly traded real estate provides investors a meaningful and steady source of income with continued economic expansion supporting fundamentals. Real asset exposures can also diversify portfolios by helping protect against inflation risks.
- Publicly traded real estate prices fell last week despite slight decreases in Treasury yields. Typically, Real Estate performs well when Treasury yields decline because it lowers borrowing costs for real estate companies, and investors find the income generated off real estate more compelling. However, all Real Estate sectors delivered negative returns last week. Broad publicly traded real estate exposure dropped more than 2%. Retail properties fell more than 1%, residential lost nearly 3% and industrial companies were down nearly 4%. The disconnect in Real Estate price moves from Treasury yield changes suggest the category’s weakness may simply relate to dampened investor interest after returns this year pushed valuations above historical norms. However, the fundamental backdrop remains solid; the economy continues to expand and Treasury yields reflect expectations for Fed interest rate cuts in 2025. Office properties, which remain challenged in many markets, comprise only a small proportion of most Real Estate indices.
- Global infrastructure declined more than 1% last week but is still near recent highs. The loss was small in the context of making new highs the week prior. Subcategories of infrastructure investments, including utilities and pipelines, fell but remain strong performers this year. Utilities fell nearly 4% but are up close to 30% for the year. Oil and gas pipelines dropped more than 3% but have also returned nearly 30% in 2024. Like publicly traded real estate, global infrastructure can provide a meaningful source of income that adjusts higher over time with inflation. Including real assets in portfolios to protect against inflation helps diversify stock and bond allocations over the long run, though prices can temporarily fluctuate as investor sentiment shifts.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. 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. The S&P Global Purchasing Managers' Index data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies. The Institute of Supply Management Manufacturing Index, also called the Purchasing Manager's Index, measures manufacturing activity based on a monthly survey, conducted by the Institute for Supply Management, of purchasing managers at more than 300 manufacturing firms. The Michigan Consumer Sentiment Index is a monthly survey of consumer confidence levels in the United States conducted by the University of Michigan. The survey is based on telephone interviews that gather information on consumer expectations for the economy.
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