View from the Observation Deck

In a previous post (click here), we noted that Jerome Powell’s commentary to the Financial Services Committee on 7/9/24 appeared to have set the stage for a dramatic shift in the performance of small cap stocks relative to their large cap counterparts. For today’s post, we set out to expand our observations to include the price-only returns of the Bloomberg Magnificent 7, S&P 500 Equal Weighted, and S&P MidCap 400 Indices. The chart above includes the price-only returns of the specified indices from 7/9/24 to 12/10/24, normalized to a factor of 100. To avoid overcrowding the chart, the S&P 100 Index was removed from our dataset.

On 7/8/24, prior to Powell’s address, the federal funds rate futures market indicated there was a 72.0% chance that the Federal Reserve (“Fed”) would cut its policy rate at its September meeting. That expectation surged following his remarks, rising to 98.0% on 7/23/24.

As we now know, the Fed would cut its policy rate at both its September and November meetings. Currently, the federal funds target rate (upper bound) sits at 4.75%, down from 5.50% in July. 

Investors increasingly expect another rate cut in December.

On 12/11/24 the federal funds rate futures market indicated that there was a 99% chance the Fed would reduce its policy rate at its next meeting, up from a 66% chance less than two weeks ago on 11/29/24.

Valuations for the S&P 500 Equal Weight, S&P SmallCap 600, and S&P MidCap 400 Indices remain more attractive than those of the Blomberg Magnificent 7 and broader S&P 500 Indices.

As of 12/11/24, the price-to-earnings ratios for each of the indices in today’s chart were as follows: Bloomberg Magnificent 7 Index (42.43); S&P 500 Index (25.52); S&P 500 Equal Weighted Index (19.32); S&P MidCap 400 Index (18.54); and S&P SmallCap 600 Index (18.52).

For reference, the total returns for the five indices in today’s chart were as follows (7/9/24 – 12/10/24):

S&P SmallCap 600 Index: 18.00%
S&P MidCap 400 Index: 14.66%
Bloomberg Magnificent 7 Index: 13.40%
S&P 500 Equal Weighted Index: 12.50%
S&P 500 Index: 8.82%

Takeaway: As today’s chart clearly shows, market breadth has widened considerably since Powell’s speech in July. In our view, the catalysts behind this phenomenon, including lower interest rates, increasingly attractive valuations among smaller market capitalizations, and strong 2025 earnings estimates, will likely lead to further diversification into smaller companies. Earnings for the S&P Small Cap 600 Index are estimated to increase by 17.49% year-over-year (y-o-y) in 2025, the most of any index in today’s chart. For comparison, the 2025 earnings growth estimates for the remaining indices were as follows: Bloomberg Magnificent 7 Index (16.51%); S&P MidCap 400 Index (13.11%); S&P 500 Equal Weighted Index (12.71%); and S&P 500 Index (12.59%). Notably, earnings growth is expected to increase for all but one of the indices presented today. At 16.51%, the Mag 7 Index’s 2025 earnings growth estimate falls far short of 2024’s estimated earnings growth rate of 68.37% (as of 12/11/24). As always, these are estimates and are subject to constant revision. As investors begin to plan for 2025, we trust they will be asking: “what investments are worth the weight they’ve been assigned in my portfolio?” and adjusting accordingly.

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 500 Equal Weighted Index is the equal-weight version of the S&P 500 Index. The Bloomberg Magnificent 7 Price Return Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies in the U.S. The S&P MidCap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is an unmanaged index of 600 companies used to measure small-cap U.S. stock market performance.

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The blog will resume on Tuesday, January 7th.

View from the Observation Deck

The yield on the 10-year Treasury note (T-note) sat at an all-time low of 0.51% on 8/4/20, according to data from Bloomberg. The 10-year T-note’s yield increased substantially since then, climbing to 4.99% on 10/19/23 (most-recent high) before settling at 3.62% on 9/16/24 (most-recent low). As of 12/6/24, the yield on the 10-year T-note yield stood at 4.15%, representing an increase of 365 basis points (bps) from its all-time low. To view the last post we did on this topic, click here.

Seven of the 11 debt categories presented in today’s chart posted positive total returns over the period.

As many investors may be aware, bond yields typically move in the opposite direction of prices. In our previous post on this topic, we noted that the surge in the 10-year T-note’s yield coincided with a dramatic sell-off in the longer-duration fixed income categories we tracked. Today’s chart reveals that many of those fixed income asset classes have seen significant price recoveries since then. Notably, seven of the 11 debt categories represented in the chart exhibit positive total returns, up from just two in our last post.

Inflation, as measured by the trailing 12-month rate of change in the Consumer Price Index (CPI), stood at 2.6% at the end of October 2024, down from 3.2% in October of last year and 6.5 percentage points below its most recent high of 9.1% in June 2022.

Recent disinflation, coupled with a weakening U.S. labor market and softening global growth prompted the Federal Reserve (“Fed”) to reduce the federal funds target rate (upper bound) by a total of 75 bps over their last two meetings. That said, inflation remains above the Fed’s target of 2.0%, and there are concerns that it may not be entirely under control. In the U.S., consumer sentiment surged to a reading of 74.0 in December 2024 (preliminary results), up from its most recent low of 50.0 in June 2022. Holiday sales data paints a picture of a consumer willing to spend (and give!) in increasingly larger sums. Adobe Analytics reported that consumers spent a record $10.8 billion and $13.3 billion shopping online during Black Friday and Cyber Monday this year. Meanwhile charitable donations on Giving Tuesday (the Tuesday following Thanksgiving) surged by 16% year-over-year to a record $3.6 billion in 2024.

 
The total returns for intermediate-term U.S. and global government bonds remain sharply negative over the period captured in the chart.

The strength in the U.S. dollar likely had a negative impact on the performance of foreign bonds, in our opinion. The U.S. Dollar Index (DXY) increased by 13.57% over the period indicated in today’s chart, according to data from Bloomberg. The U.S. Dollar Index stood at 106.06 as of the close of trading on 12/6/24. Remarkably, the U.S. Dollar Index has closed above the 100 mark in all but four trading sessions since 4/13/22.

Takeaway: From our perspective, the fixed income environment has improved dramatically since our last post on this topic just over 13 months ago. Propelled by the combination of disinflation and easing monetary policy, 7 of the eleven indices we track posted positive total returns since 8/4/20, up from just two in our last post. Many investors making an allocation to fixed income do so for the yield these securities provide. Notably, given recent disinflation, the 10-year T-note has offered investors a positive real yield (yield minus inflation) for 17 consecutive months (thru 10/31/24). That said, it is possible that inflation, which remains above the Fed’s 2.0% goal, could march steadily higher. Persistent consumer spending and a stronger than expected U.S economy form the basis of this thesis. As of 12/6/24, the federal funds rate futures market revealed that investors expect just two interest rate cuts totaling 67 bps through the first six months of next year, down from four cuts totaling 100 bps at the end of October. We will update this post as new information becomes available.

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 ICE BofA U.S. High Yield Constrained Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The Morningstar LSTA U.S. Leveraged Loan Index is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market. The ICE BofA Emerging Markets Corporate Plus Index tracks the performance of U.S. dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets. The ICE BofA Fixed Rate Preferred Securities Index tracks the performance of investment grade fixed rate U.S. dollar denominated preferred securities issued in the U.S. domestic market. The ICE BofA U.S. Mortgage Backed Securities Index tracks the performance of U.S. dollar denominated fixed rate and hybrid residential mortgage pass-through securities publicly issued by U.S. agencies in the U.S. domestic market. The ICE BofA 1-3 Year U.S. Corporate Index is a subset of the ICE BofA U.S. Corporate Index including all securities with a remaining term to maturity of less than 3 years. The ICE BofA 1-3 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government with a remaining term to maturity of less than 3 years. The ICE BofA 22+ Year U.S. Municipal Securities Index tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions with a remaining term to maturity greater than or equal to 22 years. The ICE BofA U.S. Corporate Index tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofA 7-10 Year Global Government (ex U.S.) Index tracks the performance of publicly issued investment grade sovereign debt denominated in the issuer's own domestic currency with a remaining term to maturity between 7 to 10 years, excluding those denominated in U.S. dollars. The ICE BofA 7-10 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government with a remaining term to maturity between 7 to 10 years. 

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View from the Observation Deck

We update this post on small-capitalization (cap) stocks every now and then so that investors can see which of the two styles (growth or value) are delivering the better results. Click Here to view our last post on this topic.

The S&P SmallCap 600 Pure Growth Index (Pure Growth Index) outperformed the S&P SmallCap 600 Pure Value Index (Pure Value Index) in four of the six time frames covered by today’s chart, with the 1-year and YTD returns reflecting a widening advantage for the Pure Growth Index.

As we see it, deteriorating earnings expectations are likely a key catalyst behind the recent total return difference between these Indices. Bloomberg data reveals that the Pure Value Index experienced year-over-year (y-o-y) earnings growth in just one of that past eight quarters. The third quarter of this year was particularly trying for the Pure Value Index which saw earnings growth contract by 38.27% y-o-y. By contrast, the companies that comprise the Pure Growth Index experienced y-o-y earnings growth in four of the past eight quarters, with earnings growth surging 22.90% y-o-y in Q3’24.

The three top performing sectors in the broader S&P SmallCap 600 Index and their total returns (YTD thru 12/3) were as follows: Financials (28.54%), Industrials (27.49%), and Communication Services (26.79%).

As of 11/29/24, the largest sector in the Pure Growth Index was Consumer Discretionary at 18.8%. The largest sector in the Pure Value Index was Financials at 22.8% as of the same date.

The total returns in today’s chart, thru 12/3/24, were as follows (Pure Growth vs. Pure Value):

• 15-year average annualized (12.04% vs. 11.04%)
• 10-year average annualized (8.75% vs. 8.02%)
• 5-year average annualized (9.46% vs. 13.91%)
• 3-year average annualized (2.97% vs. 9.78%)
• 1-year (32.14% vs. 23.81%)
• YTD (22.03% vs. 11.68%)

Takeaway: As today’s chart illustrates, the Pure Growth Index enjoyed substantially higher total returns than the Pure Value Index over the trailing 12-month and YTD time frames (thru 12/3/24). Conversely, the Pure Value Index had the better showing over the 3-year and 5-year time periods. The last time we posted about this topic, we presented the idea that Price to Earnings (P/E) ratios offered insight into the Pure Growth Index’s recent outperformance. In our view, that estimation holds. At 16.62, the current P/E ratio (as of 12/4/24) for the Pure Growth Index sits well below its 10-year annual average of 23.16. By comparison, the current P/E for the Pure Value Index surged to 29.24 as of 12/4/24, up from 17.34 when we last posted on this topic, and well-above its 10-year annual average of 28.51. While a portion of that P/E expansion can be attributed to increasing valuations, the impact of stagnating earnings growth cannot be overstated, in our opinion. We look forward to providing an update to this topic in the New Year.

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 SmallCap 600 Index is an unmanaged index of 600 companies used to measure small-cap U.S. stock market performance. The S&P SmallCap 600 Pure Growth Index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest growth characteristics based on three factors: sales growth, the ratio of earnings-change to price, and momentum. It includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score. Constituents are drawn from the S&P SmallCap 600 Index. The S&P SmallCap 600 Pure Value Index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics based on three factors: the ratios of book value, earnings, and sales to price. It includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score. The respective S&P SmallCap 600 Sector Indices are capitalization-weighted and comprised of S&P SmallCap 600 constituents representing a specific sector.  

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View from the Observation Deck

Total assets invested in covered call strategies have been growing rapidly over the past several years. Data from Morningstar Direct revealed that net assets in the “derivative income” asset class totaled $70.7 billion in May 2024, up from $44.5 billion over the same period the year before, according to Reuters. In a signal of continued interest, investors funneled a record $3.5 billion into the asset class in October 2024 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 negative total returns just three times in the table above. The CBOE BuyWrite Index outperformed the S&P 500 Index in two of those three years (missing the third 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%. During those time periods, 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 12 years in today’s table (not including 2024) 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. Perhaps unsurprisingly, a similar story has played out so far in 2024. The S&P 500 Index’s total return totaled 28.06% year-to-date through 11/29. For comparison, the CBOE BuyWrite Index increased by 17.51% on a total return basis over the same period.

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 periods where the market is performing exceedingly well. As a recent example, the S&P 500 Index surged by 26.26% in 2023, outperforming the CBOE BuyWrite Index by 14.44 percentage points. So far this year (thru 11/29/24), the S&P 500 Index has exceeded the CBOE BuyWrite Index by 10.55 percentage points on a total return basis. Unless something dramatic occurs in December, we expect the S&P 500 to be the winner again this year. 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 into the earnings beat rate for the companies that comprise the S&P 500 Index (“Index”). While quarterly earnings estimates provide a view into the expected financial performance of a given company, they are not guarantees, and equity analysts continually adjust their estimates as new information is obtained. That said, from Q3’20 through Q3'24 (the 17 quarters in today’s chart), the average earnings beat rate for the companies that comprise the Index was 77.6%.

As of 11/20/24, the sectors with the highest Q3’24 earnings beat rates and their percentages were as follows: Information Technology (87.5%); Health Care (83.3%); Financials (77.5%); and Consumer Staples (77.4%), according to S&P Dow Jones Indices. Real Estate had the lowest beat rate at 45.2%, while Materials had the highest earnings miss rate (46.4%) over the quarter.

As indicated in today’s chart, the percentage of companies in the Index that reported higher than expected earnings in Q3’24 (71.7%) stood 5.9 percentage points below the 4-year average of 77.6%.

Per the chart, this is not unusual. The Index’s earnings beat rate exceeded the average in just seven of the 17 quarters presented. More recently, the Index’s beat rate exceeded the average in just two of the past eight consecutive quarters. Keep in mind that the Q3’24 data in the chart reflects earnings results for 470 of the 503 companies that comprise the Index and could change in the coming weeks. 

FactSet reported that the blended, year-over-year (y-o-y) earnings growth rate for the Index stood at 5.8% as of 11/22/24. 

If the metric remains positive, it will mark the fifth consecutive quarter of y-o-y earnings growth. For comparison, the y-o-y earnings growth rates for Q1’24 and Q2’24 were 5.8% and 11.2%, respectively.

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). Despite this fact, the S&P 500 Index closed at 5,969.34 on 11/22/24, representing an increase of 66.9% on a price only basis from its most recent low of 3,577.03 (10/12/22). From our perspective, persistent earnings growth has been a key catalyst to higher equity valuations. Case-in-point, the Q3’24 blended (y-o-y) earnings growth rate for the Index was 5.8% on 11/22/24. While that is below the 5-year and 10-year averages of 10.0% and 8.5%, respectively, it represents the fifth consecutive quarter of y-o-y earnings growth for the Index. Additionally, earnings are estimated to rise substantially over the coming quarters. FactSet reported that analysts estimate the Index’s earnings will increase by 12.0%, 12.7%, 12.1%, and 15.3% in Q4’24, Q1’25, Q2’25 and Q3’25, respectively.

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

Companies often return capital to their shareholders through dividend distributions. The practice is so common that 403 of the 503 constituents in the S&P 500 Index (“the Index”) distributed a cash dividend to their equity owners as of 11/14/24. In addition to acting as a conduit for the return of capital, dividend distributions account for a significant portion of the Index’s total return. According to data from Bloomberg, dividends contributed to over 37% of the total return of the Index over the 96-year period between December 30, 1927, and December 29, 2023.

• Dividend payments from S&P500 Index constituents totaled $70.91 per share (record high) in 2023, up from $67.57 (previous record high) in 2022. 
  
  
• As of 11/18/24, dividend payments are estimated to total $77.24 and $81.68 per share in 2024 and 2025, up from $74.54 and $79.66 per share in 2024 and 2025, respectively, on 1/31/24.
• Of the 11 major sectors that comprise the Index, eight of them had yields above the 1.26% generated by the Index over the period captured in the table. Financials, Information Technology, and Health Care contributed the most to the Index's dividend payout at 15.63%, 15.45% and 14.10%, respectively.
  
  
• The payout ratio for the S&P 500 Index stood at 36.43% on 11/18/24. A dividend payout ratio between 30% and 60% is typically a good sign that a dividend distribution is sustainable, according to Nasdaq.
  
  
• Many investors view changes in dividend distributions as an indication of strength and or weakness in the underlying company. For that reason, companies will often avoid decreasing or suspending their dividend payout. There were a total of 12 dividend cuts and two suspensions year-to-date through the end of October. For comparison, 22 dividends were cut and four were suspended over the same period last year.

Takeaway: Dividend distributions continue to be one of the most efficient methods by which companies can return capital to their shareholders. As such, investors often view consistent dividend payments and dividend increases as indications of strength. In the 96-year period between December 30, 1927, and December 29, 2023, more than 37% of the total return of the Index came from dividends. Remarkably, dividend growth estimates for the Index have increased since the start of the year. The Index’s 2024 dividend payments were forecast to total a record $77.24 per share on 11/18/24, up from $74.54 per share on 1/31/24. Furthermore, dividend sustainability appears to have improved since 2023. Just 12 dividends were cut and two were suspended this year (through 10/31), down from 22 cuts and four suspensions through October 2023.

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 a capitalization-weighted index comprised of 500 companies used to measure large-cap U.S. stock market performance, while the 11 major S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector. 

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The next blog will be posted on 11/26.

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 recent 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 continues to be true as of today’s update to this post. Case in point, the S&P 500 Technology Index increased to its third consecutive quarterly all time high at the end of September 2024. By contrast, prior to the most recent quarter, semiconductor sales hadn’t posted a quarterly record since Q4’21.

Worldwide sales of semiconductors totaled a record $166.0 billion in Q3’24, an increase of 23.2% from Q3’23.

Amidst unprecedented demand, the Semiconductor Industry Association reported that worldwide semiconductor sales surged by 26.2% to a record $555.9 billion in 2021. In 2022, sales increased to another record  ($574.1 billion), 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. Since then, as evidenced by the third quarter’s record, sales of semiconductors increased dramatically. Aggregate semiconductor sales totaled $456.7 billion year-to-date through 9/30/24, putting them within reach of 2022’s record tally.

The technology sector continues to be a top performing sector compared to its peers.

Propelled forward by promising developments in AI and an easing in the global chip shortage, the S&P 500 Information Technology Index increased by 57.84% in 2023. In our view, these factors remain relevant today, and continue to entice investors to the sector. Year-to-date through 11/12/24, the S&P 500 Information Technology Index posted a total return of 36.34%, second only to the S&P 500 Communication Services Index which increased by 37.41% on a total return basis over the same time frame. Despite surging valuations, recent cuts to the federal funds rate appear to have made competing sectors more attractive to investors. Tellingly, the S&P 500 Information Technology Index increased by just 1.58% since 7/9/24, the day Jerome Powell testified that the U.S. economy was no longer overheated, making it the worst performing of all 11 subsectors that comprise the broader S&P 500 Index over the period (7/9 thru 11/12).

Takeaway: It is nearly impossible to discuss semiconductors and technology stocks without mentioning developments in AI, and rightly so. 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 have served as potent catalysts to technology stocks over the past several years. Despite record technology sector valuations, global semiconductor sales remain below their all-time yearly high set in 2022. That said, increased demand for AI-related chips resulted in record semiconductor sales in Q3’24. Should that trend continue, 2024 could be a record setting year for sales in the space.

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
With the U.S. Presidential election officially behind us, we thought it would be timely to provide an update regarding estimated 2024 and 2025 earnings and revenue growth rates for the companies that comprise the S&P 500 Index (“Index”). On November 11, 2024, the Index closed at a record 6,001.35, representing an increase of 25.82% on a price-only basis from when it closed at 4,769.83 on December 29, 2023, according to data from Bloomberg. For comparison, from 1928-2023 (96 years) the Index posted an average annual total return of 9.56%. In our post on this topic from October 2023 (click here), we wrote that increased revenues could boost earnings and provide the catalyst for higher equity valuations going forward. We believe that the Index’s year-to-date price improvement is reflective, in part, of that scenario playing out.

The most recent estimates reveal favorable earnings growth expectations.

As today’s table shows, earnings for the companies that comprise the Index are estimated to increase by a combined 9.7% and 12.8%, respectively, year-over-year (y-o-y) in 2024 and 2025. These figures are mixed from when they stood at 9.5% and 14.5%, respectively, the last time we posted on this topic (click here). Keep in mind that estimates for 2024 reflect favorable comparisons to 2023’s earnings which declined by 0.9% in 2023 (not in table). In 2024, earnings are now estimated to decline in three of the eleven sectors that comprise the Index (Energy, Industrials, and Materials), up from just two in our last post. The Energy sector’s 2024 earnings estimates continued to decline, falling from -12.6% in our last post to -19.0%. From our perspective, the decline in earnings estimates is likely reflective of plummeting oil and gas prices. The price of WTI crude oil stood at $68.04 per barrel on November 11, 2024, down 11.83% y-o-y, according to data from Bloomberg. The price of natural gas stood at $2.92 per million BTUs as of the same date, down 3.73% y-o-y.

Revenue growth rate estimates for 2024 and 2025 remain favorable.

As of November 8, the estimated revenue growth rate for companies in the Index stood at 5.2% and 5.5%, respectively in 2024 and 2025. These figures are mixed since our last post when they stood at 4.9% and 6.0%, respectively, in 2024 and 2025. Nine of the eleven sectors that comprise the S&P 500 Index reflect positive y-o-y revenue growth rate estimates for 2024 with five of them estimated to surpass 5.0%. For comparison, ten of the eleven sectors are estimated to see revenue growth in 2025.

Takeaway: In our view, the Index’s year-to-date total return of 25.82% can be explained, in part, by the estimated earnings and revenue growth rates revealed in today’s table. Since our last post on this topic, six of the 11 sectors that comprise the Index saw their 2024 earnings and revenue estimates increase. With the U.S. Presidential election behind us, and the Federal Reserve having announced its second rate cut of the year, we believe investors would be well-served to retrain their focus on these two driving forces of equity valuations. Time will ultimately reveal the accuracy of these estimates, but we maintain that higher revenues could be the best catalyst for growing earnings, and in turn, drive equity valuations higher.

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 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

Today's blog post is for those investors who want to drill down below the sector level to see what is not performing well in the stock market. The S&P 500 Index was comprised of 11 sectors and 126 subsectors as of 11/1/24, according to S&P Dow Jones Indices. The 15 worst-performing subsectors in today’s chart posted total returns ranging from -6.64% (Health Care Services) to -61.30% (Drug Retail) over the period. Click here to view our last post on the worst performing subsectors.

• As indicated in the chart above, five of the 15 worst-performing subsectors came from the  S&P 500 Index Consumer Discretionary sector, followed by three subsectors from the Consumer Staples sector. Drug Retail, a subsector of the Consumer Staples sector was the worst performer, posting a total return of -61.30% for the period. 
• Each of the 11 sectors that comprise the Index were positive on a year-to-date (YTD) basis through 11/5/24. Information Technology was the top performer, with a total return of 31.57% over the period. The Health Care sector was the worst performer, posting a total return of 9.78% over the time frame. For comparison, the broader S&P 500 Index posted a total return of 22.61% during the period.
• As of 11/1/24, the most heavily weighted sector in the S&P 500 Index was Information Technology at 31.75%, according to S&P Dow Jones Indices. For comparison, the Financials and Health Care sectors were the next-largest with weightings of 13.33% and 11.18%, respectively.

Takeaway: As we enter the final months of the year, the S&P 500 Index looks poised to register back-to-back years of positive total returns. Notably, each of the S&P 500 Index’s 11 major sectors are positive YTD (thru 11/5). For comparison, the Real Estate, Consumer Staples, Health Care, and Utilities sectors all suffered negative total returns over the same period in 2023. In our view, the Utilities sector stands out among its peers in this regard. After posting a total return of -7.08% (the worst performer) in 2023, the sector has enjoyed a stunning turnaround, notching a total return of 26.72% YTD thru 11/5, making it the third-best performing sector in the broader Index. Click here to read our recent commentary on the Utilities space. As always, there are no guarantees, but there could be some potential deep value opportunities in this group of subsectors. For those investors who have interest, there are a growing number of packaged products, such as exchange-traded funds, that feature S&P 500 Index subsectors.

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 is for those investors who want to drill down below the sector level to see what is performing well in the stock market. The S&P 500 Index was comprised of 11 sectors and 126 subsectors on 11/1/24, according to S&P Dow Jones Indices. The 15 top-performing subsectors in the chart posted total returns ranging from 80.93% (Semiconductors) to 32.45% (Trading Companies). Click here to view our last post on the top performing subsectors.

• As indicated in the chart above, the Industrials sector had the most subsectors (3) represented in the top 15 performers on a year-to-date (YTD) basis.
  
  
• With respect to the 11 major sectors that comprise the S&P 500 Index, Communication Services posted the highest total return for the period captured in the chart, increasing by 31.22%. The second and third-best performers were Information Technology and Utilities, with total returns of 29.83% and 26.40%, respectively. The S&P 500 Index posted a total return of 21.46% over the period.
  
  
• As of 11/1/24, the most heavily weighted sector in the S&P 500 Index was Information Technology at 31.75%, according to S&P Dow Jones Indices. For comparison, the Financials and Health Care sectors were the next-largest with weightings of 13.33% and 11.18%, respectively.
  
  
• Using 2024 consensus earnings estimates, the Information Technology and Energy sectors had the highest and lowest price-to-earnings (P/E) ratios at 35.16 and 13.95, respectively, as of 11/4/24 (excluding Real Estate). For comparison, the S&P 500 Index had a P/E ratio of 24.44 as of the same date.

Takeaway: The Information Technology, Financials, and Communication Services sectors accounted for 41.34%, 14.91%, and 12.95%, respectively, of the total return of the S&P 500 Index YTD through 10/31/24, according to data from S&P Dow Jones Indices. With a total return of 31.22%, communication services stocks are the top-performer in the S&P 500 Index YTD through 11/1, followed by technology companies (+29.83%). Surprisingly, none of the 15 subsectors in today’s chart come from the S&P 500 Utilities sector, which happens to be the third-best performer with a total return of 26.40% YTD. For those investors who may have an interest, there are a growing number of packaged products, such as exchange-traded funds, that feature S&P 500 Index subsectors.

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.

To Download a PDF of this post, please click here.