View from the Observation Deck

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

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

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

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

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

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

Time in the market, not timing.

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

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

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

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View from the Observation Deck

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

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

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

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

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

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

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

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

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

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View from the Observation Deck

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

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

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

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

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

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

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

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View from the Observation Deck

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

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

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

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

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View from the Observation Deck

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

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

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

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

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View from the Observation Deck

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

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

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

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

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

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

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

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

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

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View from the Observation Deck

With fourth quarter earnings season well underway, we wanted 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 January 28, 2025, the Index closed at 6,067.70, representing an increase of 27.21% 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 1928-2024 (97 years) the Index posted an average annual total return of 9.71%. We have maintained that increased revenues could boost earnings and provide the catalyst that drives equity returns higher going forward. We believe that the Index’s continued price improvement is reflective, in part, of that scenario playing out.

The most recent estimates reveal favorable earnings growth expectations in 2024 and 2025.

As today’s table shows, earnings for the companies that comprise the Index are estimated to increase by a combined 10.1% and 12.4%, respectively, year-over-year (y-o-y) in 2024 and 2025. In our last post on this topic, these figures stood at 9.7% and 12.8%, respectively (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 estimated to decline in three of the eleven sectors that comprise the Index (Energy, Industrials, and Materials), unchanged from our last post. In 2025, however, earnings are estimated to increase for each of the Index’s sectors.

Revenue growth rate estimates remain favorable.

As of January 24, 2025, the estimated revenue growth rate for the companies in the Index stood at 5.3% and 5.6%, respectively, in 2024 and 2025. These figures increased since our last post when they stood at 5.2% and 5.5%, respectively. Ten 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, seven of the eleven sectors are estimated to see revenue growth in excess of 5.0% in 2025.

Takeaway: As we’ve previously observed, equity markets are forward-looking discounting mechanisms, meaning the price of an efficient market should reflect the sum-effect of present and future (expected) events. With that in mind, we believe that the recent total returns in the S&P 500 Index, which increased by 26.26% & 25.00% in 2023 and 2024, respectively, are representative of the earnings and revenue growth rates shown in today’s table. Notably, earnings estimates reveal that analysts expect much broader market participation in 2025 than in 2024. 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 prices 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

In September 2018, the Telecommunications sector was renamed the Communication Services sector as part of a broad reconstitution of the S&P 500 Index. The number of constituents in this sector expanded from just a handful of telecom carriers to 22 companies today. The new members have brought more diversification to the sector via exposure to the internet, media, and entertainment industries (see subsectors in chart above). These companies were formerly members of the Information Technology and Consumer Discretionary sectors. Click here to view our last post on this topic.

As indicated in the chart above, the S&P 500 Communication Services Index (Communication Services Index) has significantly underperformed the S&P 500 Information Technology Index (Information Technology Index) since its inception.

That said, of the eleven sectors that comprise the S&P 500 Index, the Communication Services Index was the top performer in 2024, posting a total return of 40.23%. Information Technology came in second, with a total return of 36.61% over the period.

With a total return of 5.43% year-to-date through 1/27/25, the Communication Services Index is the fifth-best performing sector. The S&P 500 Health Care and Financials Indices were the first and second-best performers with total returns of 7.26% and 6.40%, respectively, over the same period.

After blockbuster growth in 2024, the earnings outlook for the Communication Services Index is mixed for 2025.

As of 1/24/25, data from Bloomberg showed that the earnings per share (EPS) for the Communication Services Index were estimated to increase by 26.79% in 2024. The figure represents the highest estimated earnings growth rate of all eleven sectors that comprise the broader S&P 500 Index. By contrast, the 2024 EPS growth estimate for the S&P 500 Index stood at 10.11% on 1/24/25. With a current estimate of 11.02%, however, the Communication Services Index’s EPS is not expected to increase at nearly the same rate in 2025.

Takeaway: The Communication Services Index posted the highest total return (+40.23%) of all eleven sectors that comprise the broader S&P 500 Index in 2024. In our view, unprecedented interest in Artificial Intelligence (AI) has been a major catalyst to surging valuations within the sector. Since its inception in 2018, the Information Technology Index (another of AI’s chief benefactors) is the only sector to outperform the Communication Services Index. In our view, investors would be well-served to monitor recent developments among competing AI companies closely. As the cost to integrate AI declines, we expect increased adoption among industries that have yet to benefit from the technology. Furthermore, we expect that interest rate policy will continue to influence investor behavior over the near-term. The Communication Services and Information Technology Indices are the fifth-best and worst performing sectors, respectively, since Jerome Powell revealed interest rate cuts were forthcoming on 7/9/24, posting total returns of 13.36% and -2.25%. The S&P 500 Financials and Consumer Discretionary Indices, by contrast, increased by 24.18% and 22.95% (total return) respectively, over the same period.

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

Investors directing capital into U.S. mutual funds and exchange traded funds (ETFs) favored passive investing over active management in 2024.

Passive mutual funds and ETFs reported estimated net inflows totaling $885.94 billion in 2024, while active funds reported estimated net outflows totaling $165.36 billion during the year. The top three active categories with net inflows over the past 12 months were Taxable Bonds, Nontraditional Equity, and Municipal Bonds, with inflows of $223.93 billion, $43.28 billion, and $36.97 billion, respectively (see table above). For comparison, the top three passive categories were U.S. Equity, Taxable Bond, and International Equity, with inflows of $462.28 billion, $258.53 billion, and $96.04 billion, respectively.

Despite compelling total returns in the broader equity markets, equity mutual funds and ETFs saw much lower inflows than their fixed income counterparts over the trailing 12-month period.

Combined, the active and passive equity categories experienced inflows of $136.32 billion for the in 2024 (not in table). For comparison, the Taxable and Municipal Bond categories reported net inflows totaling $529.53 billion over the same time frame. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 Indices posted total returns of 25.00%, 13.89%, and 8.64%, respectively, in 2024, according to data from Bloomberg. With respect to foreign equities, the MSCI Emerging Net Total Return and MSCI Daily Total Return Net World (ex U.S.) Indices posted total returns of 7.50% and 4.70%, respectively, over the same time frame. For comparison, the Bloomberg Municipal Long Bond, Bloomberg U.S. Aggregate, and Bloomberg Global-Aggregate Bond Indices saw total returns of just 1.40%, 1.25%, and -1.69%, respectively, during the year.

Takeaway: Passive mutual funds and ETFs saw inflows of $885.94 billion compared to outflows of $165.36 billion for active funds over the trailing 12-month period ended 12/31/24. U.S. Equities experienced the largest disparity, with active shedding $295.71 billion compared to inflows of $462.28 billion for passive funds. Yet again, despite compelling total returns in the broader equity markets, equity funds saw smaller net inflows than their fixed income counterparts. Net inflows into active and passive equity ETFs totaled 136.32 billion during the year, whereas fixed income saw combined net inflows of $529.53 billion over the same time frame. Overall, U.S. long term ETFs saw net inflows of $720.58 billion in 2024, an increase of nearly 2.7% year-over-year. The figure represents the third-highest total over the past 10 years. Of the ten category groups in the table, only sector equity and allocation funds saw net outflows during 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 and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. companies with a small market capitalization. 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 MSCI World (ex U.S.) Index is a free-float weighted index designed to measure the equity market performance of developed markets. The Bloomberg Municipal Long Bond Index cover the USD-denominated long-term tax exempt bond market, including local general obligation, revenue, insured, and prefunded bonds. The Bloomberg U.S. Aggregate Bond Index measures the investment grade, U.S. dollar-denominated, fixed rate taxable bond market. The Bloomberg Global Aggregate Bond Index measures global investment grade debt in local currency markets. 

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View from the Observation Deck

Like many of you, we have been closely watching the economic impact of changing policy rates (real or implied) in the U.S. over the past several years. We even wrote several pieces highlighting the effect of these changes on the broader equity markets (click here for a recent example). For today’s post, we will investigate the influence of these policy changes on a smaller subset of the equity market, namely the banking and financial sectors. To do so, we plotted the price-only returns of the S&P Banks GICS Level 2 Index, S&P Regional Banks Index, and S&P 500 Financials Index against the broader S&P 500 Index. Our observations begin on 7/9/24, the day after Federal Reserve Chairman Jerome Powell’s testimony to Congress that the U.S. economy no longer appeared to be “overheated”.

Powell’s initial comments sent interest rate expectations sharply lower. By the end of the year, however, implied interest rates surged amidst stronger than expected economic data.

On 7/8/24 (the day of Powell’s address), the federal funds rate futures market implied that the federal funds target rate would decline to 4.67% by 1/29/25. For comparison, the federal funds target rate (upper bound) stood at 5.50% that same day. The market adjusted quickly in the wake of Powell’s comments. On 9/30/24, the same market predicted the federal funds target rate would decline to 3.82% by 1/29/25. These expectations waned in the months since, challenged by better-than-expected economic data, stubbornly high inflation, and persistent consumer spending. As of 1/16/25, the futures market implied that the federal funds target rate would decline to 4.32% on 1/29/25. For comparison, the federal funds target rate (upper bound) was 4.50% on 1/16/25.

On 9/4/24, after 783 consecutive days, the longest yield curve inversion in U.S. history ended.

At market close on 9/4/24, the yield on the benchmark 10-Year U.S. Treasury Note (T-note) closed at 3.76%. Notably, the yield on the 2-Year T-note also stood at 3.76% that day, marking the end of the longest yield curve inversion in U.S. history. As many investors are likely aware, a “normal” yield curve is one where investors demand a premium to lend assets over longer time frames. When the yield curve is inverted, shorter dated maturities command a higher premium than longer dated ones. This situation is particularly trying for companies in the financial and banking sectors, who earn profit by borrowing money from the Federal Reserve at short term rates and lending it to customers over longer terms. Understandably, as the yield curve normalized, banks’ expected profitability increased.

Earnings estimates for the S&P 500 Financials Index underwent substantial upward adjustments in the wake of Powell’s Congressional testimony.

On 1/17/25, analysts estimated that the S&P 500 Financials Index would see calendar year earnings growth of 14.30% in 2024, up substantially from when earnings were estimated to grow by just 6.86% on 7/5/24. Notably, the lion’s share of this increase can be attributed to surging earnings estimates for banks and financial services companies. On 1/17/25, analysts estimated an earnings growth rate of 3.18% for banks and 20.37% for financial services companies in 2024, up from -5.22% for banks and 12.39% for financial services on 7/5/24.

The total returns for the four indices in today’s chart from 7/9/24 – 1/16/25 were as follows:

S&P Regional Banks Index: 29.26%
S&P 500 Banks GICS L2 Index: 22.46%
S&P 500 Financials Index: 20.27%
S&P 500 Index: 7.18%

Takeaway: From our perspective, the yield curve’s normalization in the wake of Powell’s testimony was a significant catalyst to the banking and financial services companies that comprise the S&P 500 Financials Index. Case-in-point, valuations surged amid a rapid recalculation of earnings estimates for these companies (see above). Notably, the S&P 500 Financials Index has been the top performing subsector in the broader S&P 500 Index, posting a total return of 20.27% between 7/9/24 (the day after Powell’s testimony to Congress) and 1/16/25. For comparison, the Communication Services and Information Technology Sectors, which were the top performers in 2024, posted total returns of 8.68% and -0.03%, respectively, over the same period. That said, risks in the form of economic deterioration and the potential for restrictive lending standards remain. We will report back as developments warrant it.

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 Financials Index is a capitalization-weighted index of companies in the S&P 500 Index that are classified as members of the GICS financials sector. The S&P 500 Banks Index is a capitalization-weighted index. The S&P Banks Select Industry Index comprises stocks in the S&P Total Market Index that are classified in the GICS Asset Management & Custody Banks, Diversified Banks, Regional Banks, Diversified Financial Services and Commercial & Residential Mortgage Finance sub-industries. The S&P Regional Banks Select Industry Index is comprised of stocks in the S&P Total Market Index that are classified in the GICS regional banks sub-industry.

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