by Chris Guinther, Senior Investment Strategist
Through 9/30/24, returns for the various indices are as follows:
U.S. economic momentum has remained strong through 9/30/24, supported by resilient consumer spending. There are few excesses in the cyclical sectors of the economy, the risk of some endogenous shock causing a recession seems low and our forecasts are that even moderate consumer spending should support trend-like growth into 2025. That said, with the U.S. election just over a month away, monetary policy at a critical turning point and geopolitical tensions still elevated, external risks to the current expansion remain. Investors need to account for these risks in their asset allocation.
After a bumpy start to the year, recent data have given the Federal Reserve greater confidence that inflation is on a steady path lower. While price gains in certain categories like shelter and auto insurance remain elevated, more broad real-time pricing data continue to point to easing price pressures ahead. We’re convinced that the broader disinflationary tailwinds, such as easing wage pressures and fuller supply chains, suggest that inflation is on a sustainable path back to 2% like was the case in the 2010’s.
With lower expected inflation, fewer Fed rate cuts are expected: During the June FOMC meeting, the U.S. Federal Reserve bumped up its inflation forecast and reduced its outlook for 2024 to one cut from three. Historically, asset prices rally during the period between the last hike and the first cut, then tend to follow a more uncertain path for stocks after the Fed cuts began. But so far this time, stocks and bonds have posted positive returns since the last Fed hike, with stock performance at the upper end of its historical range. This may be due to the Fed’s new communication strategy whereby they ‘advertise’ moves well before they make them. While we study history and use it as a gauge to predict future market changes, the past 4 years have been anything but predictable. For this reason, we’ve learned to be careful with our investment confidence and ensure clients are well diversified.
Earnings: Investors continued their optimism for 2024 earnings, increasing expectations consistently through the third quarter. After contracting modestly in 2023, investors expect a double-digit rebound for corporate earnings growth in 2024 and beyond. Falling just a little from record-high levels, profit margins have stabilized. We expect margins to remain elevated, but the ability of companies to maintain pricing power will be key in 2025. We’re in the camp that the economy, now driven significantly by technology and therefore being far less cyclical than in past decades, can probably sustain margins, cash flow and profits with less volatility going forward….and if so, valuations may remain at high levels relative to history. With that thesis, we still think it will pay to own equities here and into 2025, with at least average allocations relative to personal objectives and targets. Additionally, and positively, the resilient economic activity and earnings growth that is north of 10% now has extended to a broader cohort of stocks in Q3. The earnings growth, outside of the most dominant mega-cap companies that have been leading the U.S. stock market for several years, inflected positively in the quarter…which adds to our bullish stance.
We are into the home stretch of the U.S. election cycle with very competitive races for president and control of Congress. Fortunately, the democratic system of government in the U.S. which features checks and balances across the executive, legislative and judicial branches, makes it hard for any individual or political party to enact sweeping change. As a result, and over many decades, the impact of politics on U.S. markets has been limited. Fortunately for investors, markets have trended higher no matter which political party has held office. Diversified, 60/40 portfolios have delivered positive returns in most presidential-election years—something we expect is on track again in 2024.
Equities are not cheap. Corporate fundamentals are strong but that is well understood and generally ‘priced-in’ already….but risks of a recession appear below average so taking everything into account, we continue to recommend solid allocations to U.S. equities. Oh, and AI continues to stay on track as one of the most exciting and likely rewarding themes to be invested in.…with no new indications in Q3 that growth there will not continue into 2025 and beyond.
The information provided is for illustration purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed. MONTAG employees do not provide legal or tax advice. For specific legal or tax matters, you should consult with your own legal and/or tax advisors. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible.
