Quarterly Market Update

Market summary: Falling bond yields propel equities and broad asset gains.

Fourth Quarter 2024

Market summary: Falling bond yields spark a broad rally for most asset classes.

A rally for equities continued in the third quarter of 2024, with the leadership seized by previously lagging stock categories, including real estate stocks, US value stocks, and US small cap stocks.

See our interactive chart presentation for an in-depth analysis.

Following a sudden and notable spike in volatility at the beginning of August, the implied volatility of the large cap US stock market declined rapidly and ended Q3 below the average of historical election cycles. Equity markets then rallied in September, adding to double-digit year-to-date percentage gains for most domestic stock categories.

Other asset classes, including gold, investment-grade bonds, and high-yield bonds, rallied as well, supported by a decline in real rates in the US and a trend toward global monetary easing.

A leadership pause for growth stocks: Prices of the top 7 stocks in the S&P 500 index by market capitalization also advanced in Q3 but lagged the S&P 500 index without those 7 constituents for the first time in 2024.

Gains for the S&P 500 outside the top 7 stocks occurred due to valuation multiple expansion, as opposed to earnings growth. With valuations near historic highs, earnings growth may be the key determinant for whether smaller companies can sustainably seize the leadership position in the quarters ahead.

Rate cuts shaped the market: Global markets continue to enjoy favorable momentum and easier financial conditions during the quarter. The US Federal Reserve and the Bank of England cut policy rates for the first time this economic cycle.

Nominal 10-year US Treasury bond yields dropped more than 60 basis points during Q3, finishing at 3.8%. A fall in real yields—the inflation-adjusted cost of borrowing—drove the nominal-rate decline, as investors priced in greater expectations of Fed easing. Inflation expectations remained in their average range over the past decade, while real yields remained toward the higher end of their range.

Economy/macro: A strong business cycle continued

The US labor market has exhibited signs of cooling this year with rising unemployment, fewer job postings, and weakening consumer sentiment about job conditions. The ratio of job openings per unemployed worker has fallen significantly but remained historically high, suggesting labor markets have normalized, but not shifted into recessionary territory.

Despite pockets of weakness in lower-income segments, the US consumer remains supported by positive real wage gains and strong balance sheets.

Strength in most geographies: Major global economies demonstrated persistent expansion amid improved global financial conditions and stable employment dynamics, despite some softening in manufacturing. The US and several large developing economies—India, Mexico, and Brazil—showed signs of mid-cycle dynamics, while the US still also displayed significant late-cycle characteristics. Canada experienced increasing recession risks relative to other developed markets.

China announced a flurry of new policies toward the end of Q3 that boosted stock prices, partly due to measures to provide liquidity to the equity markets. However, it remains uncertain whether new policy measures will spark an economic reacceleration amid China’s structural imbalances and gloomy consumer sentiment.

Global manufacturing activity decelerated in Q3 but was offset by positive momentum in global services activity and generally stable employment across both developed and emerging markets.

Will inflation reappear? Global disinflation trends continued, as core inflation fell across most major developed and emerging economies. The combination of lower core inflation, falling energy and food costs, and recent cuts in policy rates across most major central banks, all support household real incomes and consumer spending.

Services and shelter inflation, however, remain elevated, possibly due to supply-related constraints in labor and housing. Historically, there have been several episodes in the postwar era in which inflation exceeded 5%, decelerated, and then exhibited a second wave over the next two years. Absent a more significant economic slowdown, persistent core inflationary pressures still pose a risk to the outlook.

Profits still look strong: Corporate earnings growth for 2024 was revised lower in Q3 to a still-healthy 9% growth rate. Profit margins have ticked up this year and stabilized well above pre-pandemic levels, and they are expected to inflect higher across all sizes of companies in 2025.

The largest 7 companies have been the biggest contributors to earnings growth in recent years, and the market expects these companies to maintain elevated margins and strong relative earnings power in 2025.

Looking ahead to November: November election outcomes will shape the economic policy debate in 2025, and their overall impact is highly uncertain and dependent on details and implementation next year. Examples of proposals from the Republican party include investor-friendly corporate tax cuts and less regulation of some industries, but also higher tariffs and tighter immigration restrictions that have the potential to be inflationary. Democratic party proposals include a greater emphasis on raising taxes to fund public spending.

No matter who wins, the fiscal deficit is expected to remain large over the next several years (6%–7% of GDP), and interest payments are set to grab an even larger share of the federal budget. Lastly, the election will determine who decides how to deal with the more than $4 trillion of 2017 personal income tax cuts that expire at the end of 2025. With neither political party indicating an intention to address the projected rise in government debt, investors and particularly bond markets may watch the fiscal situation closely in 2025.

Asset markets: Q3 2024 shows mixed results by category

Interest-rate-sensitive assets, such as utilities stocks, real-estate equities, and long-duration bonds, led widespread Q3 gains across almost all asset categories and sectors.

Stock prices: During Q3, the year-to-date laggards such as value (+9.5%), small caps (+9.3%), and non-US developed-country equities (+7.3%) outperformed the large technology and communications growth stocks that remained ahead on a year-to-date basis for 2024. By S&P 500 index sector, utilities (+19.4%), real estate (+17.2%), and industrials (+11.6%) led the way, whereas energy (-2.3%) and information technology (+1.6%) lagged the large cap index return of 5.9%.

Outside the US, Canada (+12.0%) and EAFE Small Cap (+10.5) posted a double-digit return. Conversely, Latin America (+3.7%) lagged most international regions.

Valuations became somewhat more expensive in Q3, especially for the US. The trailing one-year price-to-earnings (PE) ratio for US stocks remained well above its long-term average. Emerging markets trailing valuations are slightly above their long-term average, while DM finished below its long-term average.

Fixed income: Fixed income categories benefited from the decline in bond yields. Despite the fall in Treasury rates, most fixed income categories ended the quarter with yields near their long-term historical averages. Credit spreads tightened, ending the quarter toward the lower end of most bond categories’ historical range.

Long-term government & credit (+8.0%) led the way in Q3, reversing what had been a decline for the first half of 2024. Emerging-market debt (+6.2%) and high-yield bonds (5.3%) also produced a strong gain, although leveraged loans advanced just 2.0%.

Earnings: Corporate earnings growth has reaccelerated across all regions, and for the first time in more than a year, earnings-per-share growth in non-US markets is even with or surpassing the pace in the US.

During Q3, corporate earnings growth for 2024 was revised lower to a still-healthy 9% growth rate, and 2025 expectations rose above 15%. Profit margins have ticked up this year and stabilized well above pre-pandemic levels, and they are expected to inflect higher across all sizes of companies in 2025.

The largest 7 companies in the S&P 500 index have contributed the most to earnings growth in recent years, and the market expects these companies to maintain elevated margins and strong relative earnings power in 2025.

Currencies: The dollar weakened during Q3, driven partly by a moderate softening in business cycle conditions relative to major developed markets. In addition to improving growth conditions, many major non-US currencies benefited from narrowing interest-rate differentials and appreciated toward their fair values.

Most currencies, particularly the Japanese yen, remain undervalued, and may provide diversification benefits to US investors.