View from the Observation Deck

Total assets invested in covered call strategies have grown rapidly over the past several years. Data from Morningstar Direct reveals that net assets in the “derivative income” category of ETFs increased by $33 billion in 2024 to a total of $97 billion for the calendar year. In a signal of continued interest, investors funneled $5.6 billion into the asset class in January 2025 alone.

Covered call strategies tend to be most beneficial when the stock market posts negative returns, or when returns range from 0%-10%.

The S&P 500 Index posted a negative total return just four times in the table above (including year-to-date). The CBOE BuyWrite Index outperformed the S&P 500 Index in three of those four years (missing the fourth year by 0.39 percentage points in 2018). For comparison, there are four years in the table where the S&P 500 Index posted returns between 0% and 10%. The CBOE BuyWrite Index outperformed the S&P 500 Index in three of the four years (missing the fourth year by 0.66 percentage points in 2005).

Covered call options can generate an attractive income stream and serve as a hedge against negative price movement, but they may limit the potential for capital appreciation.

There were 13 years in today’s table where the S&P 500 Index notched total returns of 10% or more. The CBOE BuyWrite Index underperformed the S&P 500 Index in every one of them, including last year when the S&P 500 Index increased by 25.00%, while the BuyWrite Index increased by 20.12%.

Takeaway: Covered call strategies may serve as a unique alternative to the S&P 500 Index. That said, while the income they provide has generally led to outperformance during negative or moderately positive periods, returns are often capped during times where the market is performing exceedingly well. As a recent example, the S&P 500 Index surged by 25.00% in 2024, outperforming the CBOE BuyWrite Index by 4.88 percentage points. The tables are turned so far this year (thru 3/5/25), with the CBOE BuyWrite Index outperforming the S&P 500 Index by 0.56 percentage points on a total return basis. Will heightened volatility from tariffs, geopolitical strife, and deteriorating economic data prompt investors to continue allocating assets to these strategies? We will report back as updates require!

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The CBOE S&P 500 BuyWrite Index (BXM) is designed to track a hypothetical buy-write strategy on the S&P 500. It is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (SPXSM) "covered" call option.

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View from the Observation Deck

We update this post on an ongoing basis to provide investors with insight regarding the earnings climate of the S&P 500 Index (“Index”). While quarterly earnings estimates are a useful indicator of a company’s financial performance, they are not guarantees. Equity analysts are continually adjusting these estimates as new information is obtained. As of 2/28/25, 484 of the 503 stocks that comprise the Index (96.2%) had reported Q4’24 earnings.

FactSet reported that the Q4’24 blended, year-over-year (y-o-y) earnings growth rate for the Index stood at 18.2% as of 2/28/25, marking the sixth consecutive quarter of y-o-y earnings growth for the Index. 

Should this hold, it will mark the highest y-o-y earnings growth rate for the Index since Q4’21 when it surged by 31.4%. What makes the current quarter’s earnings growth rate even more impressive is that Q4’21’s results reflect favorable comparisons due to the COVID-19 lockdowns.

The percentage of companies in the Index that reported higher than expected earnings in Q4’24 (74.2% as of 2/28/25) stands 2.8 percentage points below the 4-year average of 77.0%.

Per the chart, this is not unusual. The Index’s earnings beat rate exceeded the average in just six of the 17 quarters presented. More recently, the Index’s beat rate exceeded the average in just two of the past eight consecutive quarters.

The Index’s price-to-earnings ratio was 25.44 on 2/28/25, well above its 20-year average of 18.75.

At current levels, valuations appear stretched when compared to 20-year averages. That said, the Index’s 2024 earnings growth rate estimates trended persistently higher throughout much of the year, increasing from 8.99% on 3/29/24 to 11.66% on 2/28/25, lending support to higher prices.

As of 2/28/25, the sectors with the highest Q4’24 earnings beat rates and their percentages were as follows: Financials (86.1%); Information Technology (81.8%) and Industrials (78.2%), according to S&P Dow Jones Indices. Real 
Estate had the lowest beat rate at 46.7% as well as the highest earnings miss rate (40.0%) for Q4’24.

Takeaway: While earnings beats are generally viewed as positive for the overall market, they represent just one piece of an intricate puzzle. As today’s chart reveals, the earnings beat rate for the companies that comprise the S&P 500 Index has been below the average in most of the time frames presented (including the most recent quarter). That said, the Index stood at 5,881.63 at the close on 12/31/24, representing a price only increase of 56.59% over the period captured by today’s chart. As we see it, the Index’s current price level reflects surging actual and estimated earnings throughout much of 2024. With 96.2% of companies reporting, the Index’s fourth quarter earnings growth rate currently stands at 18.2%, the highest since Q4’21. Notably, analyst estimates for 2025 and 2026 imply continued earnings growth. The Index’s earnings per share are estimated to total a record $271.28 in 2025 and $308.88 in 2026, according to data from FactSet (as of 2/28/25). As always, these estimates are subject to change as new information is made available. We will continue to report on this topic as relevant data arises.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry.

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View from the Observation Deck

Today’s blog post offers a visual representation of trends in money market fund assets over time. As the chart reveals, investors tend to utilize money market funds during times of turmoil such as the financial crisis in 2008 – 2009 and the COVID-19 pandemic of 2020. Recently, however, investors have been piling cash into money market accounts (see chart) despite compelling returns in the U.S. equity markets and declining interest rates. A note about the chart: we use the federal funds target rate (upper bound) as a proxy for short-term interest rates, such as those offered by taxable money market funds and other savings vehicles. In our opinion, this proxy may offer insights into the potential effect of short-term rates on investor behavior.

• Net assets invested in U.S. money market funds totaled $6.91 trillion on 2/19/25 (most recent weekly data), an increase of 14.98% from $6.01 trillion on 2/14/24. The current tally rests just below the record of $6.92 trillion set on 2/12/25. For comparison, the S&P 500 Index increased by 24.55% on a total return basis over the same period (2/14/24 – 2/19/25).
• The Federal Reserve (“Fed”) announced three reductions to its federal funds target rate since September 2024, bringing the rate from 5.50% to 4.50% (upper bound) where it currently sits. Money market investors appear unfazed by these reductions, adding $0.61 trillion to money market funds from 9/18/24 (date the first cut was announced) to 2/19/25.
• Market expectations regarding the Fed’s policy rate continue to be volatile, which may explain continued inflows into money market funds despite declining interest rates. As of 2/25/25, the futures market revealed that investors expect the federal funds rate to settle at 3.75% by the close of 2025, up from an implied rate of 2.95% on 9/30/24.
• Inflation’s reacceleration offers a further explanation for increasing money market assets. The pace of inflation, as measured by the trailing 12-month rate of change in the Consumer Price Index (CPI), increased from 2.4% in September 2024 to 3.0% in January 2025. As we see it, stubbornly high inflation continues to pose a roadblock to falling interest rates, increasing the relative attractiveness of interest-bearing assets.

Takeaway: Today’s chart reveals a positive correlation between the recent surge in money market assets and elevated interest rates. Since the Fed’s initial rate hike on 3/16/22, total net assets invested in U.S. money market funds increased from $4.56 trillion to $6.91 trillion (51.65%), notching multiple records along the way. Notably, recent interest rate reductions have not slowed demand for these debt instruments. Net assets invested in money market funds increased by $0.61 trillion (9.7%) from the date of the Fed’s first interest rate cut on 9/18/24 to 2/19/25. From our perspective, disinflation’s reversal, stretched equity valuations, and the recent spate of weaker than expected economic data are acting as catalysts behind investors “risk-off” behavior. That said, while money market funds offer principal stability and income, their total return has lagged the S&P 500 Index, which surged by 25.00% on a total return basis in 2024. It remains our view that an allocation to equities will generate a higher return on capital than cash over time.

This chart is for illustrative purposes only and not indicative of any actual investment.

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View from the Observation Deck

Given their non-cyclical nature, defensive sectors may offer better performance than their counterparts during periods of heightened volatility. For today’s post (and the previous posts in this series), we set out to determine if that outperformance also exists during periods of elevated inflation. The table above begins in 1990 and includes calendar years where inflation, as measured by the Consumer Price Index (CPI), increased by 3.0% or more on a trailing 12-month basis. We chose 3.0% as our baseline because the rate of change in the CPI averaged 3.0% from 1926-2024, according to data from the Bureau of Labor Statistics. We then selected three defensive sectors (Health Care, Consumer Staples, and Utilities) and compared their total returns to those of the S&P 500 Index over those periods.

First, a word about last year.

In 2024, the pace of price increases (as measured by the 12-month change in the CPI) slowed from 3.5% at the end of March, to 2.4% in September before ending the year at 2.9%, just below our 3.0% target for this post. Inflation’s end-of-year reacceleration dampened expectations for steep rate cuts in 2025. As of 2/21/25, the federal funds rate futures market revealed that investors anticipate the federal funds rate will fall to just 4.32% in March 2025. On 9/30/24, the same futures market implied a 3.55% federal funds rate at the close of the same month. For comparison, the federal funds target rate (upper bound) currently stands at 4.50%.

The final observations for 2024 were as follows (December trailing 12-month CPI and calendar year total returns):

CPI Rate: 2.9%
S&P 500: 25.00%
S&P 500 Health Care: 2.58%
S&P 500 Consumer Staples: 14.87%
S&P 500 Utilities: 23.43%

Of the eleven time frames in the table where inflation increased by 3.0% or more on a trailing 12-month basis, there were only two (2021 and 2023) where the S&P 500 Index outperformed each of the Health Care, Consumer Staples, and Utilities sectors.

Don’t fight the Fed.

As mentioned above, it is unlikely that interest rates will decline as steeply as previously expected in 2025. With that in mind, the rapid deterioration in the implied probability of rate cuts, combined with the outperformance of the defensive sectors highlighted in today’s table begs the question: are investors beginning to hedge against rate hikes this year? We can’t know, but should the pace of rising prices continue upwards, the Fed may find itself grappling with that decision.

Takeaway: As today’s table reveals, the S&P 500 Health Care, Consumer Staples, and Utilities Indices each outperformed the broader S&P 500 Index year-to-date (YTD) thru 2/21/25. Inflation, as measured by the 12-month change in the CPI, regained momentum in Q4’24, increasing from its most recent low of 2.4% at the end of September 2024 to 3.0% by the end of January 2025. In response, investors appear to be positioning themselves defensively. Of the 11 sectors that comprise the broader S&P 500 Index, the Health Care, Consumer Staples, and Utilities Indices are the top performers YTD, with total returns of 6.53%, 6.50%, and 6.06%, respectively, thru 2/21. For comparison, the three worst sectors and their total returns over the period were as follows: Industrials (2.23%), Information Technology (-0.19%), and Consumer Discretionary (-3.35%). Notably, expectations surrounding rate cuts diminished significantly in recent months. Investors currently expect fewer than two rate cuts in 2025 (as of 2/21/24), down from more than seven on 9/30/24.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The respective S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.  

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View from the Observation Deck

Since 2009, the U.S. economic climate has generally been one of persistent growth, with Gross Domestic Product (GDP) expanding in 58 of the last 62 quarters. In fact, the period between July 2009 and February 2020 marked the longest period of economic expansion in U.S. history. This recent, extended period of economic growth is unusual, however. As today’s table shows, there were 12 recessions over the 75-year period ended December 2024 (or a recession every 6.25 years, on average). The “Great Recession”, which spanned a period of 18 months from December 2007 to June 2009, was the last significant recession to strike the U.S. economy (excluding the brief recession brought on by COVID lockdowns in 2020). This piqued our curiosity. What can investors glean from previous recessions and how can they apply that knowledge? Today’s table captures S&P 500 Index (“Index”) total returns over several time frames in each of the past 12 U.S. recessions. We included the following periods: the 6-months prior to the onset of each recession; the recessionary period itself; and the one-year, three-year, five-year, and ten-year returns beginning with the end of each recessionary period.

Investors fared the worst over the six-month period prior to each recession, with subsequent time frames generally reflecting increasingly positive returns.

The median S&P 500 Index total returns over the time frames in the table are as follows:

6 Months before recession: -2.41%
During recession: 3.52%
1-year post-recession: 20.00%
3-years post-recession: 53.09%
5-years post-recession: 98.08%
10-years post-recession: 284.21%

Over the past 11 recessions, the Index’s maximum drawdown totaled 30.6% (price-only) on average.

While this data is not presented in the table, it is noteworthy. Declining revenue during recessionary periods often leads to contracting equity prices. That said, the table shows that those drawdowns are short-lived. Remarkably, the Index posted positive returns during six of 12 recessionary periods presented.

Time in the market, not timing.

From our perspective, one thing stands out when reviewing this data and while it may seem elementary, it is worth stating: time in the market is far more powerful than trying to time the market. As the table reveals, the Index surged by 20.00% and 53.09% (median total returns) over the one-year and three-year periods following the end of the last 12 U.S. recessions. For a longer perspective, the Index increased by an average of 11.85% annually (total return) over the period stretching from 11/30/1948 (the start of the first recession in the table) to 2/18/2025.

Takeaway: While recessions are notoriously difficult to predict, they are a normal and expected part of the business cycle. There were 12 recessions over the period captured in today’s table. These recessions lasted 10.3 months, on average, and resulted in significant but temporary price fluctuations within the Index. Historically, these oscillations are short-lived, with eleven of the twelve time frames reflecting positive total returns in the year following the end of the recessionary period. The longer-term results prove even more compelling. The Index posted a positive total return in the three-years following the conclusion of each of the last 12 recessions. Median total returns are staggering. Those that remained invested enjoyed median total returns of 3.52%, 20.00%, and 53.09%, during, one-year following, and three-years following the past 12 recessions. We trust this information will serve as a guidepost when, not if, the next recession befalls the U.S. economy. 

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. Past performance is not a guarantee of future results.

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View from the Observation Deck

Tracking the direction of worldwide semiconductor sales can provide investors with additional insight into the potential demand for tech-oriented products and the overall climate for technology stocks, in our opinion. As evidenced by continued developments in artificial intelligence (AI) and robotics, as well as the vast market for smartphones, tablets, and wearables, we continue to find creative and innovative ways to integrate semiconductors into our everyday lives.

Semiconductor sales appear to lag fluctuations in the valuations of technology stocks.

As today’s chart reveals, changes in semiconductor sales typically occur after changes in the performance of the S&P 500 Technology Index. This phenomenon remains true as of today’s update to this post. Case in point, the S&P 500 Technology Index increased to its fifth consecutive quarterly all time high at the end of December 2024. By contrast, prior to Q3’24, semiconductor sales hadn’t eclipsed a quarterly record since Q4’21.

Worldwide sales of semiconductors totaled a record $170.9 billion in Q4’24, an increase of 17.1% from Q4’23.

Amidst unprecedented demand, the Semiconductor Industry Association reported that worldwide semiconductor sales totaled a record $574.1 billion in 2022 but had begun to stagnate in the second half of the year. In 2023, worldwide sales of semiconductors declined by 8.2% year-over-year to $526.8 billion. Semiconductor sales rebounded in 2024, with worldwide sales surging by 19.1% year-over-year to a record $627.6 billion.

Despite record semiconductor sales, technology stocks underperformed most of their peers in the latter half of 2024.

The promise of AI and an easing in the global chip shortage propelled the S&P 500 Information Technology Index (Information Technology Index) to total returns of 57.84% and 36.61% in 2023 and 2024, respectively. That said, these catalysts appear have weakened of late. The Information Technology Index increased by just 1.79% from 7/9/24 thru 12/31/24, ranking it eighth of the 11 sectors that comprise the broader S&P 500 Index over the period. We chose 7/9/24 as the starting point as it was the day Jerome Powell testified that the U.S. economy was no longer overheated.

Takeaway: It is nearly impossible to discuss semiconductors and technology stocks without mentioning developments in AI. One forecast suggests the global AI market could grow to nearly $600 billion by 2026 and $1.8 trillion by 2030, according to Ryan Issakainen, ETF Strategist at First Trust Portfolios L.P. These estimates, coupled with resilient U.S. consumer spending, and increasing demand for semiconductors served as potent catalysts to technology stocks over the past several years. Nevertheless, record semiconductor sales were unable to buoy the performance of technology stocks in the second half of 2024, with the sector increasing by 6.52% (total return) vs. 23.17% and 18.46% for the S&P 500 Consumer Discretionary and Financials Indices over the same period. This trend remains in 2025. While we do not have semiconductor sales figures for 2025 yet, we can report that the Information Technology Index increased by just 1.62% year-to-date thru 2/14/25. The S&P 500 Consumer Discretionary Index is the only sector fare worse over the period, posting a total return of 0.98%.

This chart is for illustrative purposes only and not indicative of any actual investment. There can be no assurance that any of the projections cited will occur. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Information Technology Index is capitalization-weighted and comprised of S&P 500 constituents representing the technology sector. The S&P 500 Communication Services Index is capitalization-weighted and comprised of S&P 500 constituents representing the communication services sector.

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View from the Observation Deck

For today’s post, we compare the delinquency rate on consumer loans issued by all U.S. commercial banks to the prices of the S&P 500 Consumer Discretionary Index, over time. We use data from the Board of Governors of the Federal Reserve System, retrieved from FRED, for the former set of observations. As the data is released on a lagging time frame, our current set of observations end in Q3’24.

At 30.14%, the S&P 500 Consumer Discretionary Index (Consumer Discretionary Index) boasted the fourth-highest total return of the 11 major sectors that comprise the S&P 500 Index in 2024. 
The Consumer Discretionary Index has not fared as well in 2025, posting a year-to-date (YTD) total return of -0.07% thru 2/11/25.

With a YTD total return of -0.46%, Information Technology is the only sector in the S&P 500 Index with a lower total return than consumer discretionary stocks. Notably, a similar scenario was playing out in our last post on this topic in June 2024 (click here). At that time, consumer discretionary stocks were on their way to a total return of just 5.66% (ranking them 9th of all 11 sectors) over the first six months of 2024. That said, the following six months saw a dramatic shift in investor confidence, with the Consumer Discretionary Index surging by 23.17%, making it the top performing sector over the period. From our perspective, the recent 100 basis point reduction in the federal funds target rate likely contributed to this reversal, with lower interest rates potentially offering investors a reprieve to surging delinquencies.

Despite declining interest rates, the consumer loan delinquency rate continues to increase. After falling to an all-time low of 1.53% in Q3’21, the consumer loan delinquency rate surged to 2.73% at the end of Q3’24. Loan delinquency rates among credit cards and auto loans increased as well.

One important aspect of overall consumer health is the rate at which they are defaulting on their debt obligations. Not all delinquencies will become defaults, but a spike in the number of payments that are past-due could be an indication that the U.S. consumer is under increasing financial duress. The loan delinquency rate for credit cards issued by all insured commercial banks surged to 3.24% at the end of Q2’24, its highest level since the close of Q4’11. Since then, the metric declined slightly, settling at 3.23% in Q3’24. In a signal of further stress, 4.6% of U.S. auto loans were delinquent by 90 days or more in Q3’24. For comparison, the metric’s record high of 5.3% was reached in Q4’10.

Takeaway: The delinquency rate on consumer loans issued by all U.S. commercial banks, stood at 2.73% at the end of Q3’24. At current readings, delinquency rates are well below their historical average of 3.06% and even further below their all-time high of 4.85%. That said, the surge in delinquencies is notable and coincides with a recent decline in consumer sentiment. The University of Michigan’s “Surveys of Consumers” revealed that consumer sentiment stood at a reading of 67.8 in February 2025, down from 76.9 the year before. Given their sizeable contribution to GDP, we maintain that a healthy U.S. consumer may play an integral role in the U.S. avoiding an economic recession. We will continue to monitor the delinquency rate among consumers and report on changes.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Consumer Discretionary Index is an unmanaged index which includes the stocks in the consumer discretionary sector of the S&P 500 Index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance. Consumer delinquency data is seasonally adjusted.

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View from the Observation Deck

We update today’s table on a regular basis to provide insight into the variability of sector performance by market capitalization. As of the close on 12/31/24, the S&P 500 Index stood at 5,881.63, 3.43% below its all-time high of 6,090.27 set on 12/6/24, according to data from Bloomberg. The S&P MidCap 400 and S&P SmallCap 600 Indices stood 7.94% and 8.84% below their respective all-time highs as of the same date.

• Large-cap stocks, as represented by the S&P 500 Index, posted total returns of 25.00% in 2024, outperforming the S&P MidCap 400 and S&P SmallCap 600 indices, with total returns of 13.89% and 8.64%, respectively, over the period (see table).
  
  
• Sector performance can vary widely by market cap and have a significant impact on overall index returns. Two of the more extreme cases in 2023 were the Communication Services and Technology sectors. The Communication Services, Information Technology, and Utilities sectors exhibited significant variability in performance across market capitalizations in 2024.
  
  
• Communication Services and Information Technology, the two top-performing sectors in the S&P 500 Index in 2024, represented 9.9% and 30.7%, respectively, of the weight of the S&P 500 Index on 1/31/25. By comparison, those sectors represented 1.4% and 11.2% of the S&P MidCap 400 Index, and 3.4% and 11.9% of the S&P SmallCap 600 Index, respectively, as of the same date.
  
  
• As of the close on 12/31/24, the trailing 12-month price-to-earnings (P/E) ratios of the three indices in today’s table were as follows: S&P 500 Index P/E: 24.82; S&P MidCap 400 Index P/E: 17.46; S&P SmallCap 600 Index P/E: 17.35.
  
  
• The year-to-date total returns for each of the Indices presented in today’s table (thru 2/7/25) were as follows: S&P 500: 2.55%, S&P MidCap 400: 2.82%, and S&P SmallCap 600: 1.72%.

Takeaway: As we see it, small and mid-sized companies make up a historically narrow portion of the broader U.S. equity market. Combined, the S&P MidCap 400 and SmallCap 600 Indices comprised just 8.00% of the total market capitalization of the S&P 1500 Index as of 1/31/25. For comparison, the metric averaged 10.51% over the previous 25-year period. Notably, the last time (pre-COVID) that small and mid-sized companies accounted for 8.00% or less of the S&P 1500 Index’s market capitalization was on 4/28/00. Since then, the S&P MidCap 400 and S&P SmallCap 600 Indices notched average annual total returns of 9.48% and 9.46%, respectively, (4/28/00 thru 2/7/25). For comparison, the average annual total return of the S&P 500 Index was 7.90% over the same period.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. The S&P 500 Equal Weighted Index is the equal-weight version of the S&P 500 Index. The 11 major sector indices are capitalization-weighted and comprised of S&P 500, S&P MidCap 400 and S&P SmallCap 600 constituents representing a specific sector.

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View from the Observation Deck

While companies have a number of ways in which to return capital to shareholders, stock dividends and share repurchases are two of the more customary ways to do so. Apart from Q2’23 and Q1’24, dividend distributions steadily increased over today’s set of observations. By contrast, share buybacks continue to account for a greater share of total capital disbursements despite greater variance.

• Combined, stock dividends and share buybacks totaled $1.535 trillion (preliminary data) over the trailing 12-month period ended September 2024, up from $1.367 trillion over the same period last year.
  
  
• Dividend distributions totaled $157.0 billion in Q3’24, up from $144.2 billion in Q3’23. In total, the companies that comprise the S&P 500 Index (“Index”) distributed a record $616.2 billion in dividend payments over the trailing 12-month period ended September 2024, up from $580.2 billion over the same period last year.
  
  
• Stock buybacks totaled $226.6 billion in Q3’24 (preliminary data), up from $185.6 billion in Q3’23. Stock buybacks totaled $918.4 billion over the trailing 12-month period ended September 2024, up from $787.3 billion over the same period last year.
                                                                       
• In Q3’24, the S&P 500 Index sectors that were most aggressive in repurchasing their stock were as follows (% of all stocks repurchased): Information Technology (28.2%); Financials (19.4%); and Communication Services (14.9%), according to data from S&P Dow Jones Indices.

Takeaway: Investors often view dividend increases and initiations as signs of financial strength, while cuts and suspensions can be viewed as signs of weakness. The Index saw 342 dividend increases and eight initiations in 2024, down from 348 increases and eleven initiations in 2023. Dividend cuts and suspensions also declined over the period. The Index saw 15 dividend cuts and two suspensions in 2024 compared to 26 cuts and four suspensions in 2023. Tellingly, the Index’s dividend distributions totaled a record $616.2 billion over the trailing 12-months ended September 2024. Buybacks declined during the quarter, totaling $226.6 billion compared to $235.9 billion in Q2’24. That said, Q3’24’s total buyback expenditures represent an increase of 22.1% year-over-year. When ranked by total buyback expenditures, the top 20 companies in the Index accounted for 53.2% of all share buybacks in Q3’24, up from 52.3% in the previous quarter. For comparison, the historical average for the metric is 47.6%.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The 11 major sector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.

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View from the Observation Deck

Much has changed since the last time we updated this post just over one year ago. While not in today’s table, perhaps the most notable change is the global easing of central bank policy rates, which began with the Swiss National Bank in March 2024. Since then, the central banks of all but two of the countries represented in today’s table lowered their policy rates. The only exceptions are Japan (policy rate increased by 0.60%) and Australia (unchanged). In the U.S., for example, the Federal Reserve (“Fed”) lowered the federal funds target rate three times, from 5.50% (upper bound) on 7/26/23, to 4.50% on 12/19/24.

The real yields (yield minus inflation) offered by 10-year government bonds increased across most of the globe.

As shown in the columns marked “12-Month Change (Basis Points)”, the yields on most of the longer term government bonds in today’s table increased over the past 12-months, providing ballast to real yields. In addition, many major economies saw disinflation over the period (discussed in more detail below). As of 2/3/25, eight of the ten countries represented in today’s table had a positive real yield on their 10-year note (up from five the last time we posted on this topic). The eight countries and their respective real yields are as follows: Italy (2.00%); U.K. (1.99%); Australia (1.88%); France (1.71%); U.S. (1.63%); China (1.52%); Canada (1.16%); and Germany (0.08%).

Headline inflation declined substantially since our last post but remains elevated in several of the world’s largest economies. 

While not presented in today’s table, the pace of inflation, which was the impetus for elevated policy rates, fell below the target rate in all but four countries (the U.S., the U.K., Japan, and Germany). In the U.S., inflation’s resilience sits at the forefront of the continued debate regarding the Fed’s path moving forward. In December 2024, inflation, as measured by the trailing 12-month rate of change in the consumer price index (CPI) stood at 2.9%, up 0.5 percentage points from its most recent low of 2.4% in September 2024. Notably, SuperCore inflation, a closely watched indicator touted by the Fed, increased at a faster rate in 2024 than it did in 2023, according to Brian Wesbury, Chief Economist at First Trust Portfolios, LP. 

The yield curve between the U.S. 10-Year Treasury Note (T-note) and the 2-Year T-note disinverted in 2024.

Historically, an inverted yield curve has been a fairly accurate indicator of an impending economic recession. Data from the Federal Reserve Bank of San Francisco shows that an inverted yield curve has been a precursor to each of the last 10 economic recessions in the U.S. since 1955. After 783 consecutive days, the yield curve between these two benchmarks disinverted on 9/4/24, marking the end of the longest inversion in history. Fortunately for U.S. investors, a recession has yet to materialize, but we may not be out of the woods yet, in our opinion.

Takeaway: Despite recent cooling, inflation remains stubbornly high in several of the major economies covered in today’s table. Case in point, headline inflation readings are above stated targets in the U.S., the U.K., Japan, and Germany. Despite declining central bank policy rates, most of the countries in today’s table saw 10-year yields climb year-over-year. That said, short term interest rates fell among all but one country (Japan). We expect central bank policy rates will remain elevated in countries where inflation has reaccelerated but recognize that these decisions are largely data dependent. Should these economies face substantial stagnation their central banks could lower short term rates once again. We will continue to monitor the situation and report back as new developments occur.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry. 

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