Quarterly Market Update: 2024 Q4

Market Summary

Equity markets continued to move higher and set new all-time highs in the third quarter, despite an initial spike in volatility in July. The Federal Reserve’s highly anticipated rate cut finally transpired in September with a 50 basis point move as expected. Geopolitical tensions stayed elevated as more countries were pulled into the existing conflicts in Eastern Europe and the Middle East.

As we enter the final stretch of 2024, we’re facing a confluence of economic, market, and political factors that have the potential to impact financial markets and our financial strategies. With the presidential election just days away, investors are closely watching the candidates’ positions on fiscal policy, regulation, and trade. Historically, markets have shown volatility around election cycles, especially when there is potential for significant policy shifts. Fortunately, the stock market has shown resilience over the long term, regardless of the party in power. We continue to emphasize a long-term approach and diversification to help manage potential volatility associated with election cycles.

The chart above shows the S&P 500’s forward price-earnings (P/E) ratio at 21.52x as of September 30th. This is a slight uptick compared to June 30th’s forward P/E of 21.01x. Although it remains elevated compared to the long-term average, it’s still below the highs of 2021 and the Dotcom boom.

One of the common themes in the market update over the past few years is that the broader market is highly concentrated in the top 10 stocks. As of September 30th, the top 10 stocks represented 35.8% of the S&P 500. Their performance has been the driving force behind the market growth, but it put us in a precarious position relying on a small number of companies to generate earnings growth. The chart below shows the price-earnings ratio for the top 10 stocks compared to the remaining stocks in the S&P 500. The top 10 stocks’ P/E ratio of 30.5x is 149% of its long-term average compared the the remaining stocks’ P/E of 18.4x being only 117% of their average. So while the top 10 stocks can be deemed significantly overvalued, the rest of the market doesn’t seem as overly inflated.

Presidential Elections and the Market

Uncertainty is the enemy of investors, and a presidential election year offers plenty of that. However, the markets have shrugged off election news to make new record highs this year, as the economy continues to grow at a modest pace. Inflation has moderated quite well with the consumer price index rising just 2.4% in September for the prior 12 months. Meanwhile, the Fed’s preferred personal consumption expenditures price index grew at just 2.1% for the same timeframe. These key inflation numbers along with a normalizing unemployment number led the Federal Reserve to be comfortable with their first rate cut in over 4 years.

The table above looks back on prior presidential election years to assess the market return in the following year. The only negative year was 2001 when the S&P 500 lost 11.89%. This loss can be attributed to the Dotcom bubble bursting and causing a U.S. recession that year. Looking back at past data can help investors calm their nerves knowing that the stock market didn’t care too much about which party occupied the White House. Any major policy change will take some time to make its way through Congress before becoming law.

The Rise of Artificial Intelligence Fraud

In the third quarter 2023 market update, I wrote about the rise of artificial intelligence (AI) in relation to the economy and investments. Unfortunately, AI is fast becoming a popular tool for criminals who look to commit nefarious acts. Fraudsters are leveraging AI to craft highly convincing voice or video messages that can easily fool people into providing sensitive financial information or worse, transferring money. Using information gathered from data breaches, these criminals can persuade people, especially the elderly, to believe a family member is in distress and require financial assistance.

Some common tactics that these fraudsters use include:

• Spoofing an e-mail address or phone number to appear like it’s from a known person
• Creating a sense of urgency to send money
• Requesting small amounts of money initially before asking for larger sums
• Asking you to not alert the authorities or other family members

Should you ever find yourself in a questionable situation, the first thing to do is stay calm and don’t panic. Many people who’ve been defrauded admit they knew something didn’t seem right, but felt trapped by the time they realized the truth. Next, contact a family member, friend, or a trusted professional to explain the situation. It’s also a best practice to directly call the person or company that’s being impersonated, using a number you already have or found by yourself, rather than the number that appears on your phone’s caller ID.

1. Price-to-earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months as provided by IBES since March 1994 and by FactSet since January 2022. Average P/E and standard deviations are calculated using 30 years of history. Shiller’s P/E uses trailing 10-years of inflation-adjusted earnings as reported by companies. Dividend yield is calculated as the next 12-months consensus dividend divided by most recent price. Price-to-book ratio is the price divided by book value per share. Price-to-cash flow is price divided by NTM cash flow. EY minus Baa yield is the forward earnings yield (consensus analyst estimates of EPS over the next 12 months divided by price) minus the Moody’s Baa seasoned corporate bond yield. Std. dev. over-/under-valued is calculated using the average and standard deviation over 30 years for each measure. *Averages and standard deviations for dividend yield and P/CF are since November 1995 due to data availability. Data are as of September 30, 2024. ↩︎
2. The top 10 S&P 500 companies are based on the 10 largest index constituents at the beginning of each month. As of 9/30/2024, the top 10 companies in the index were AAPL (7.1%), MSFT (6.5%), NVDA (6.1%), AMZN (3.6%), GOOGL/GOOG (3.6%), META (2.5%), BRK.B (1.7%), AVGO (1.7%), TSLA (1.5%) and LLY (1.4%).The remaining stocks represent the rest of the 492 companies in the S&P 500. U.S. Data are as of September 30, 2024. ↩︎