View from the Observation Deck

Today's blog post features the cumulative total returns of five major equity indices (three domestic and two foreign) since the start of 2000. We chose to highlight 5-year rolling total returns in an effort to smooth out intra-year volatility introduced by the significant number of challenging global events that transpired since 2000. We update this post on an annual basis. Click here to see the January 2024 version of this post.

Emerging markets equities clearly outperformed in the first decade covered in the table but have lagged the U.S. indices since. In the U.S., large-, mid-, and small-capitalization (cap) stocks have shared the spotlight dating back to 2007, with large-caps (S&P 500 Index) dominating each of the last seven 5-year rolling periods. From our perspective, continued globalization and a dramatically stronger U.S. dollar have been key catalysts to this shift in performance. While it is no secret that U.S. companies generate a significant portion of their revenue from overseas, many investors may not be aware of just how dependent they have become on international sales. Notably, 41.8% of S&P 500 Index revenues were generated outside of the U.S. as of 12/31/24.

Regarding the U.S. dollar: a strong dollar can decrease returns for U.S. investors holding positions in unhedged foreign securities, and vice versa. From 2000-2009, the U.S. Dollar Index declined by 23.57% − a nice tailwind for foreign holdings. From 2010-2019, the same index appreciated by 23.80% − a notable headwind for foreign holdings. During the current decade, spanning 2020-2024, the U.S. Dollar Index surged by 12.55% to 108.49, well above its 20-year average of 89.75.

For additional context, the average annual total returns for each of the five equity indices in today’s table were as follows (12/31/99 – 12/31/24): 9.66% (S&P MidCap 400); 9.50% (S&P SmallCap 600); 7.69% (S&P 500); 5.67% (MSCI Daily TR Net Emerging Markets in USD); and 3.78% (MSCI World ex-U.S.), according to data from Bloomberg.

Takeaway: The returns depicted in today’s table offer a powerful reminder that the buy and hold strategy can still serve investors well. Despite rising geopolitical tensions, wars, government lockdowns, and two bear markets (in the S&P 500 Index), each of the indices in today’s table reflect positive total returns over the most recent 5-year rolling period. While the S&P 500 Index remains a clear outlier, there is no way to predict what indices could outperform next. For those investors with extended time horizons, today’s table may serve as an antidote to an overly myopic outlook regarding their equity holdings.

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 stocks 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 Small Cap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. The MSCI World (ex-U.S.) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets excluding the U.S. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The U.S. Dollar Index (DXY) indicates the general international value of the dollar relative to a basket of major world currencies.

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View from the Observation Deck
Dividend payments have been a key characteristic of most of the companies that comprise the S&P 500 Index (“Index”) for decades. In fact, as of 12/31/24, 407 of the 503 companies that comprise the Index paid a dividend. That figure is little changed from 1998, when 418 companies in the Index paid dividend distributions to shareholders. For today’s discussion, we set out to explain the fundamental relationship between dividends and earnings, and to determine if the recent record-high earnings in the Index have translated into higher yields.

The companies that comprise the Index distributed a record $630 billion in dividends in 2024 (preliminary data), up from $565 billion and $588 billion in 2022 and 2023, respectively. Despite record distributions, the dividend yield of the S&P 500 Index has been trending downward (see chart). 

As of 12/31/24, the yield on the Index stood at just 1.27%, down from 1.49% and 1.76% at the end of 2023 and 2022, respectively. For comparison, the yield on the Index averaged 1.90% over the full period captured in today’s chart.

The Index’s earnings are estimated to surge from $243.12 in 2024 to $273.23 in 2025 (as of 1/10/25).

Given that dividends are paid from profits, a company’s ability to increase its earnings plays a crucial role in assessing its capacity to maintain (or grow) its dividend payout. From our perspective, the consistent, long-term pattern of earnings growth revealed in today’s chart, combined with the continued decline in the Index’s yield, indicates that the environment is ripe for continued dividend growth.

The S&P 500 Index’s dividend payout ratio is currently well-below average.

As many investors are likely aware, the dividend payout ratio measures the percentage of earnings that are paid to shareholders in the form of dividends. The Index’s dividend payout ratio stood at just 37.28% on 12/31/24. For context, the Index’s dividend payout ratio averaged 41.80% (monthly basis) over the period captured in today’s chart.

Takeaway: Dividends have played an indispensable role in equity valuations for many decades. As noted above, the combination of low current yields, record-high earnings, and a below-average dividend payout ratio may be an indication that conditions are conducive to near-term dividend growth for the Index. In our last post on this topic (click here) we noted that companies will often hoard cash as recessionary pressures mount. Given strong recent economic data, we find that scenario to be less likely now than it was then. That said, dividends are just one of the ways companies return profit to shareholders. Another is stock buybacks. The most recent data from S&P Dow Jones Indices reveals that S&P 500 companies announced a total of $699.3 billion in share repurchases over the first three quarters of 2024, up from $576.1 billion over the same period in 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 an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance.

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View from the Observation Deck

We are often asked what our favorite sectors are. Sometimes the answer is more evident than at other times, and often it only makes sense via hindsight. Today’s blog post is one that we update each quarter to lend context to our responses. While the above chart does not contain yearly data, only two sectors in the S&P 500 Index (“Index”) have been the top-performer in back-to-back calendar years since 2005. Information Technology was the first, posting the highest total return in 2019 (+50.29%) and 2020 (43.89%). Energy was the second, posting the highest total return in 2021 (54.39%) and 2022 (65.43%), according to data from Bloomberg.

• The top-performing sectors and their total returns in Q4’24 were as follows: Consumer Discretionary (14.25%), Communication Services (8.87%), and Financials (7.06%). The total return for the Index was 2.39% over the period. The other eight sectors generated total returns ranging from 4.84% (Information Technology) to -12.42% (Materials).
  
  
• By comparison, the total returns of the top performing sectors in the fourth quarter of last year were as follows: Real Estate (18.83%), Information Technology (17.17%), and Financials (13.98%). The worst-performing sectors for the period were: Health Care (6.41%), Consumer Staples (5.54%), and Energy (-6.99%).
  
  
• Notably, none of the three top sectors from Q3’24 were among the leaders in the most recent quarter. 
  
  
• Driven by continued advancements in artificial intelligence (AI), the S&P 500 Communication Services and Information Technology Indices saw total returns of 40.23% and 36.61%, respectively, during the 2024 calendar year.
  
  
• The S&P 500 Index posted a total return of 25.00% in 2024. Ten of the eleven major sectors that comprise the Index were positive on a total return basis.
  
  
• Click here to access our post featuring the top-performing sectors in Q1’23, Q2'23, Q3'23 and Q4’23.

Takeaway: As we observe from today’s chart, the top-performing sector often varies from quarter to quarter. The fourth quarter of 2024 was no exception, with the Consumer Discretionary, Communication Services, and Financials Indices rising to the top. From our perspective, the Consumer Discretionary Sector’s 14.25% total return is largely the result of persistent consumer spending. In total, consumers are estimated to have spent between $979.5 and $989.0 billion in November and December, representing an increase of 2.5% to 3.5% year-over-year. For the second year in a row the S&P 500 Index enjoyed a positive total return, increasing by 25.00% in 2024. Of the eleven sectors that make up the Index, the Communication Services and Information Technology Indices boast the highest total returns on a trailing 12-month basis (40.23% and 36.61%, respectively). That said, it is worth noting the dramatic turnaround in Utilities stocks in 2024. After weathering a total return of -7.08% in 2023 (the worst performer for the year), Utilities surged by 23.43% (total return) in 2024 making them the fifth-best performer during the year. Will a different sector rise to the top in the first quarter of 2025? We look forward to seeing what the data reveals.

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 stocks 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

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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