October 2024 Market Lookback
Don’t let the slightly negative performance of U.S. stocks toward month-end fool you into thinking October didn’t go well. Much of it was smooth sailing, as investors digested strong economic data: Through October 29, the S&P 500 and Treasury yields were up 1.2% and 50 basis points, respectively. Strong growth data pushed investors to temper interest rate cut expectations. However, mixed results from some of the artificial intelligence stock darlings at the end of the month took wind out of the market’s sails.
Macro
• Q3 GDP grew at a seasonally adjusted annual rate of 2.8%, above what’s thought to be the long-term trend of about 1.8% (the eighth such reading out of the last nine quarters).
• Q3 residential investment growth was weak at −5.1% but that was offset by consumer spending growth of 3.7%, the strongest since Q1 2023.
• The unemployment rate fell to 4.1% in September, below consensus estimates and marking the second straight monthly decline, remaining unchanged in October despite the confluence of major worker strikes and hurricanes.
• According to the Conference Board, consumer confidence jumped to an index value of 108.7 in October, above all estimates.
• Gold set an all-time high of $2,787 an ounce on October 30, continuing its scorching year-to-date rally.
Equities
• Large-cap stocks outperformed small-caps and growth stocks outperformed value, both by 0.7 percentage points.
• Weighed down by a pullback in Chinese stocks and a 4% appreciation in the U.S. dollar, both developed international markets and emerging markets lagged U.S. stocks.
• With 70% of S&P 500 companies reporting results, earnings have come in almost 8% above consensus while expectations for next quarter have been revised down by nearly 2%.
Fixed Income
• Two and 10-year Treasury yields began the month at 3.64% and 3.78%, respectively, before rising over 50 basis points in response to a mix of stronger than expected data and heightened focus on the government deficit.
• The MOVE Index, an interest rate volatility proxy, rose from 94.6 to 135.2 in October, the highest value since last October.
• The 30-year fixed mortgage rate finished October at 7.28%, the highest month-end rate since May.
• High Yield credit spreads narrowed to 282 basis points, the smallest spread since June 2021, in response to diminishing fears of an economic slowdown.
A Decade of Leadership
In what has become somewhat uncommon, large-cap growth stocks were not the size and style leader this past month. Part of why that’s sort of surprising is that large-cap growth stocks have been on a relentless march, outperforming in seven of the last 10 years (narrowly missing out on eight by less than a percentage point in 2021). Quite simply, if you were an investor looking to put money to work at basically any point over the prior decade, large-cap growth was your best bet.
This sustained leadership by growth stocks has reshaped market dynamics, leading to increasingly concentrated returns among a handful of mega-cap tech companies. These companies, initially buoyed by robust growth from cloud computing and online advertising, were well-positioned to benefit from the emergence of artificial intelligence as the next frontier of innovation. This has helped boost their already-lofty valuations and drive the more recent leg of large-cap growth dominance.
In some ways, traditional valuation metrics have taken a back seat to growth potential, with investors continuing to reward companies with strong market positions in transformative technologies. Betting that the gravity of valuations would bring down these companies with rocket fuel growth has been a costly one.
Speed Bump or Roadblock?
There’s no telling if or when things might change, but it’s clear that a regime shift won’t happen if market giants continue to deliver the goods. It’s notable then, that results from leading technology companies have been mixed this earnings season. While the Magnificent Seven all reported earnings that beat consensus expectations, the stock price reactions were not all uniformly positive.
The contrast between mostly stellar results and mixed stock performance calls into question whether this is an early warning sign of large-cap growth dominance coming to an end, or just a temporary speed bump. Thinking of the big picture can help us cut through the noise. These companies don’t operate in a vacuum. They make their money by selling goods and services to others. When a technology is still in its early days, use-cases might not be fully fleshed out. That makes it hard to convince them to pay more to adopt upgrades – elevated economic uncertainty magnifies that effect.
The longer it takes for companies to produce profits that recoup their AI spending , the more skittish investors will get. They could even start to penalize companies for overspending. That could lead to a broader market rotation. But until the next chapter of the AI story is written, it’s impossible to know for sure just when that rotation might come.
Photocredit: iStock/phototechno
Performance data quoted represents past performance. Past performance does not guarantee future results. Market returns will fluctuate, and current performance may be lower or higher than the standardized performance data quoted.
ML202410
Read more
