View from the Observation Deck

Today's blog post compares the performance of energy-related stocks to the broader market, as measured by the S&P 500 Index, over an extended period. Given global dependence on oil, natural gas, and electricity, the prices of companies in those industries are subject to a myriad of influences. Click here to view our last post on this topic.

The U.S. Energy Information Administration (EIA) estimates that U.S. electricity consumption will total a record 4,215 billion kilowatt hours (kWh) in 2025, up from the previous record of 4,097 billion kWh in 2024. 

Electricity demand is surging as resource-intensive workloads such as training AI models, electric vehicle charging, and electric appliances are introduced into more U.S. homes. As we see it, the disparity in trailing 12-month returns for energy companies (2.80%) compared to Utilities (27.51%) reflects this phenomenon. That said, the EIA estimates that natural gas will account for 40% of total U.S. power generation in 2025, requiring increased inventories and production. Colder than expected weather in January and February resulted in declining natural gas inventories. The EIA forecasts inventories will fall to less than 1.7 trillion cubic feet in March, 10% below the 5-year average for the metric. As a result, natural gas prices continued to surge, increasing by an astonishing 137.93% over the trailing 12-month period ended 3/18/25.

Year-to-date (YTD), the Energy Index has outperformed the Utilities Index by 278 basis points (see table).

Energy stocks remain among the top-performers YTD despite growing concern that the U.S. economy could fall into a recession. With a total return of 6.74%, the Energy Index is the second-best performing sector in the broader S&P 500 Index YTD thru 3/18/25. The S&P 500 Health Care Index was the only sector to outperform it, increasing by 6.81% over the period. From our perspective, much of this performance has been driven by the emergence of the U.S. as a global leader in energy production. Data from the EIA reveals that the U.S., which accounts for the largest share of worldwide oil production, produced a record 13.2 million barrels of oil per day in 2024. The figure marks the seventh year in a row where the U.S. produced the largest share of global crude oil. Additionally, the U.S. is also the world’s largest exporter of liquefied natural gas (LNG), shipping 4.37 billion cubic feet of LNG throughout the globe in 2024.

Takeaway: The specter of a U.S. recession, growing geopolitical tensions, and potential tariff wars have been unable to quell investors’ appetite for energy stocks in 2025. We expect many will find this data surprising, as the energy sector is typically quite volatile when faced with these headwinds. That said, segments of the energy sector appear to be undergoing foundational shifts which could upend traditional near-term expectations. The emergence of the U.S. as a global leader in crude oil production and LNG exports is a relatively new phenomenon, as is the increase in electricity demanded by AI, electric cars, and electric household appliances. The fact that natural gas is expected to account for 40% of U.S. electricity production this year further solidifies the point. As a capstone, the current administration appears to have taken an energy friendly stance. Utilities, which are often seen as safe havens during market turmoil, could benefit from the recent tailwinds discussed today as well, in our opinion. Will the Energy Index continue to outperform its peers in the Utilities Index this year? We will update this post with new information as warranted.

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 Energy Index is a capitalization-weighted index comprised of 21 companies spanning five subsectors in the energy sector. The S&P 500 Utilities Index is a capitalization-weighted index comprised of 29 companies spanning five subsectors in the utilities sector. 

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View from the Observation Deck

Today’s blog post is intended to provide insight into the movement of bond prices relative to changes in interest rates. For comparative purposes, the dates in the chart are from prior posts we’ve written on this topic. Click here to view our last post in this series.

Five of the eight bond indices we track saw prices decline since our last post. That said, prices for six of the eight indices increased above their time series lows from February 2024.

Notably, these price declines occurred despite the Federal Reserve (“Fed”) announcing three rate cuts totaling 100 basis points (bps) at the end of 2024. As this data is atypical (fixed income prices and yields generally move in opposite directions), several explanations warrant investigating. First, fixed income markets are forward looking. We believe the increase in fixed income prices between our posts on 2/9/24 and 8/13/24 reflect that. At that time, interest rate cuts were just a rumor, but investors felt increasingly certain that rate reductions were forthcoming. Prices increased as a result. That certainty has been whittled away in recent months amidst growing threats of recession, resurgent inflation, tariffs, and geopolitical strife, in our opinion. Second, as interest rates fall, companies often become more profitable, which can increase their attractiveness relative to fixed income. Case-in-point, the S&P 500 Index increased by 4.60% (total return) between 8/13/24 and 3/14/25.

A few notes on inflation.

While down significantly from its most recent high, inflation, as measured by the trailing 12-month rate of change in the consumer price index (CPI) stood at 2.8% in February 2025, above the Fed’s target of 2.0%. The CPI is also above its most recent low of 2.4% (September 2024). For comparison, the CPI averaged 3.8% over the 50-year period ended December 2024.

Takeaway: Valuations improved for just three of the eight fixed income indices in today’s chart between 8/13/24 and 3/14/25. This is particularly noteworthy given the Fed’s year-end policy rate reductions, which would typically lead to price increases. We believe falling bond valuations reflect reduced certainty permeating the current investment climate. Future Fed policy decisions are looming unknowns, as are the dichotomous (to interest rate policy) threats of resurgent inflation and a potential U.S. recession. At 2.8%, the CPI remains stubbornly above the Fed’s target rate, which could limit its ability to reduce rates in the face of an economic slowdown. We will continue to update this post throughout the 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 Morningstar LSTA U.S. Leveraged Loan 100 Index is a market value-weighted index designed to measure the performance of the largest segment of the U.S. syndicated leveraged loan market. 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 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 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 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. 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 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 Global Corporate Index tracks the performance of investment grade corporate debt publicly issued in the major domestic and Eurobond markets.

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View from the Observation Deck

For many investors, dividend payments have become an ordinary and expected benefit of equity ownership. Notably, 408 of the 503 constituents in the S&P 500 Index (“Index”) reported distributing a cash dividend to their equity owners as of 2/28/25. That said, the impact of dividends on the investment landscape has been nothing short of extraordinary, with dividend distributions accounting for a significant portion of the Index’s total return. According to data from Bloomberg, dividends accounted for 36.50% of the total return of the Index over the 97-year period between December 30, 1927, and December 31, 2024.

• Dividend payments from the Index’s constituents totaled a record $74.61 per share in 2024, up from $70.91 (previous record high) in 2023.
  
  
• As of 3/12/25, dividend payments are estimated to increase to $81.65 and $86.64 per share in 2025 and 2026, respectively.
  
  
• The Index’s dividend payout ratio stood at 35.57% on 3/12/25. 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 financial strength or weakness in the underlying company. Just three dividend cuts and one suspension were announced year-to-date through the end of February. For comparison, six dividends were cut and zero were suspended over the same period last year.

Takeaway: Dividend distributions continue to be one of the most efficient ways for companies to return capital to shareholders. They also contribute meaningfully to overall returns. In the 97-year period between December 30, 1927, and December 31, 2024, more than 36% of the total return of the Index came from dividends. Investors often view consistent or increasing dividend payments as a sign of financial strength. Tellingly, analysts estimate the Index’s dividends will increase to a record $81.65 per share in 2025 and $86.64 per share in 2026. Finally, dividends can be a significant potential inflation hedge. Inflation, as measured by the consumer price index, increased by 34.43% over the 10-year period ended December 2024. Total dividends paid by the Index’s constituents increased by a staggering 85.78% over the same period. To paraphrase Rockefeller: it’s always good to see dividends coming in.

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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View from the Observation Deck

Understandably, accelerating losses among U.S. equities captured investors’ attention over the past several weeks. At market close on 3/10/25, the S&P 500 Index (“Index”) had given back all its early-year gains and moved into negative territory, posting a total return of -4.30% year-to-date (YTD). March has been a particularly harsh month for equity investors, with the Index declining 5.66% (total return) month-to-date thru 3/10. While the sell-off is broad-based across U.S. equity indices, certain market segments are being hit harder than others. Total returns for the tech-heavy Nasdaq 100 and Magnificent 7 Indices were -7.39% and -15.51%, respectively, YTD thru 3/10. There are numerous theories and possibilities for stocks’ recent rout. For today’s post, we set out to offer additional perspective to what we’re seeing reported by most news outlets. The chart above compares the annual price returns for the Index along with the year’s corresponding change in earnings per share (EPS) stated as a year-over-year percentage.

The Index’s price increased at a faster pace than its constituents’ earnings over the period captured in today’s chart.

As many investors are likely aware, there is a fundamental correlation between a company’s market value and earnings. The Index’s price increased by 23.40% over the three-year period in today’s chart. By contrast, the Index’s earnings increased by 16.56% over the same time frame. Removing 2022’s result skews the data further, with the Index’s price increasing 53.19% compared to a 10.87% increase in earnings. In our view, the latest weakness in equity prices may reflect growing concern over this recent valuation expansion.

Earnings estimates reflect strength in the year ahead.

Data from FactSet revealed that the Index’s Q4’24 blended, year-over-year earnings growth rate stood at 18.2% on 2/28/25, marking the highest observation for the metric since Q4’21. Estimates point to earnings increasing in the years to come as well. As of 3/7/25, analysts estimated that the Index’s total earnings per share would increase from $243.02 in 2024, to $271.23 and $309.16 in 2025 and 2026, respectively. That said, these are estimates and are subject to change as new information is made available.

The Index’s earnings yield suggests equities are undervalued when compared to the yield on the 10-year treasury note (“T-note”).

The earnings yield, which is calculated by dividing the Index’s 2025 estimated EPS by its current price surged to 4.83% on 3/10/25, up from 4.41% on 2/19/25 (the Index’s all time high). For comparison, the yield on the 10-year T-note stood at 4.22% at the close on 3/10/25.

Takeaway: We believe that earnings growth is foundational to higher equity prices over time. It follows, then, that we expect equity prices will return to growth if earnings continue to increase. Currently, analysts estimate that Index earnings will increase 11.61% in 2025 and 13.98% in 2026. Keep in mind that these estimates are subject to change. Case-in-point, the likelihood of a U.S. economic recession is rising, putting the profitability of U.S. companies at risk. As recession risk increases, so do the odds that the Fed will cut interest rates. As of 3/10/25, the federal funds rate futures market implied that the Fed would lower interest rates to 3.50% by year-end. For comparison, the metric stood at 3.90% at the close of 2024. Declining interest rates could push borrowing costs lower and increase the profitability of companies’ future projects. In other words, the Fed’s defense against recession could prove to buoy equity prices to some extent. There are many ways to dissect the Index’s recent price fluctuation. We trust this post offers further insight and a unique perspective. We will update you 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 S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The NASDAQ 100 Index is a modified capitalization-weighted index of the 100 largest non-financial issues listed on the NASDAQ. The Bloomberg Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of seven widely-traded U.S. companies.

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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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