2024 Q4
November 1st, 2024
Our quarterly S&P 500 forecast for 2024 Q4 (average price returns) indicates a 4.6 percent growth over the previous quarter. Our monthly forecast for November is lower than October’s average. Geopolitical problems such as the Russia-Ukraine, and the Israel-Lebanon conflict cannot be captured in a forecast model. Thus, any uncertainty concerning these issues makes the 95 % confidence interval around the point forecast rather wide.
The rate cut boosts the stock market
Following the significant 50 bp interest rate cut in September, the US stock market was unstoppable. The market rally continued in October until the last week of the month. The S&P 500 index is up 21.5 percent since the beginning of the year. As the combined share of Microsoft, Alphabet, Amazon, Apple, Meta, and Nvidia is about 25 percent of the S&P 500 index, optimism regarding AI/tech stocks is a major contributor to the rally. Resilient economic growth on the back of strong consumer and government spending and the cooling inflation have furthered the rally.
September’s jittery start with increasing geopolitical risks changed direction after the Fed lowered its benchmark rate by 50 basis points to a range of 4.75% to 5%. As September’s inflation came out cooler, investor optimism increased. The market analysts started pricing two more rate cuts for November and December.
Consumers were optimistic that the US economy wasn’t falling a cliff, but expanding at a resilient pace. China’s stimulus measures contributed to the positive market sentiment further.
However, the markets had periods of volatility, particularly towards the end of October, as investors digested earnings reports and economic data. The S&P 500 index ended the month 1 percent below September’s end. On average, the index was still 3 percent over September’s average.
Looking forward, there may be more volatility ahead in November as Americans go to the polls on November 5. Both presidential candidates Donald Trump and Kamala Harris have proposed policies that could have inflationary consequences. Depending on the election results, a victory by Trump may especially reignite inflation due to his protectionist stance.
GDP Q3 growth slows down
The United States’ Gross Domestic Product (GDP) expanded at an annual rate of 2.8% in 2024 Q3 according to the advance estimate (Source: the Bureau of Economic Analysis (BEA)). This was slower than the market forecast of 3 percent and also slower than the 2nd quarter growth of 3 percent.
As we reiterated many times, so long as consumer spending which accounts for more than two-thirds of U.S. economic activity, stays healthy, the US economy is not likely to contract severely. Consumer spending is related to job creation. 254,000 US jobs were added in September, well above the Dow Jones consensus forecast (150,000 jobs). US unemployment edged down slightly to 4.1 percent. This news confirmed the cooling in the US labor market is still rather slow.
Retail sales edge up, home sales jump
Starting with the economic data, retail sales rose slightly in September whereas home sales sharply increased:
The advance estimate of U.S. retail and food services sales for September was up 0.4 percent from the previous month (both seasonally and inflation-adjusted). This estimate was 1.7 percent (±0.5 percent) above September 2023.
The National Association of Realtors index of pending home sales jumped 7.4 percent in September after increasing 0.6 percent in August. The Pending Home Sales Index leads existing home Sales by a month or two. The latest figure shows the US housing market’s recovery is gaining momentum after stalling in July. The US home buyers are getting more optimistic about the prospect of interest rates being cut with falling inflation.
Labor market was tighter in October
The advance seasonally adjusted insured unemployment rate was 1.2 percent for the week ending October 19, unchanged from the previous week’s revised rate. The US unemployment fell to 4.1 percent in September from 4.2 % in August. Once again, the initial jobless claims are much lower than the critical 250,000 mark. The latest unemployment rate drop signals that the labor market is not loosening quickly. That said, this does not change the investors’ anticipation of two rate cuts before the end of the year.
In the week ending October 26, the advance figure for seasonally adjusted initial claims was 216,000, a decrease of 12,000 from the previous week’s revised level. The 4-week moving average was 236,500, a decrease of 2,250 from the previous week’s revised average.
PMI deteriorates, consumer outlook shines
The Chicago Purchasing Managers’ Index (PMI) fell to 41.6 in October from 46.6 in September. This was below the market anticipation of 46.9. The index’s long-term average from 1967 to 2024 is 54.7. Hence the current value indicates a contraction in business activity.
The Conference Board’s consumer confidence index jumped in October to 108.7 from 99.2 in September (1985=100). The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—increased to 138 (1985=100) from 123.8 in September. Furthermore, the Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—increased to 89.1 (1985=100) from 82.8 last month.
A reading below 80 for the Expectations Index would indicate that consumers are concerned about a recession this year. For a long while the Expectation index hovered below 80. The recent improvement in consumer confidence indices reflects optimism regarding the strength of the economy.
Inflation lowest since February 2021
The annual inflation rate in the US unexpectedly slowed to 2.4 % in September 2024, compared to 2.5 % in August. This was in line with the analysts’ expectations.
The Federal Reserve’s preferred metric — the personal consumption expenditures price index fell to the annualized rate of 2.1 in September from 2.2 in August. This was also in line with the market forecasts. Core inflation, which excludes food and energy, showed an annualized rate of 2.7 % in September, unchanged from August. The annual growth was 0.1 percent above the market forecast. Although these price changes are still above the Fed’s target of 2 percent, the price stability is encouraging enough to warrant further rate cuts before the end of 2024.
In the past, Fed Chairman Jerome Powell made it clear that despite curbing inflation, there was no rush to cut rates given the robust pace of economic growth. However, Powell endorsed a policy shift in his latest speech. He expressed confidence in the sustainability of the cooling inflation. Markets expect despite the resilience of the labor market, Fed’s policy of monetary easing will continue.
Real consumer spending, which is a significant driver of economic activity, U.S. increased 0.3 percent in September after rising 0.2 percent in August. This was higher than the market’s forecast of 0.1 percent.
After the first rate cut
For nearly a year, the Fed was keeping its benchmark borrowing rate between 5.25% and 5.5%, the highest in more than 23 years. The Fed cut the rate by 50bp in its September meeting, a first in four years. Analysts were debating if more rate cuts would follow before the end of 2024.
The Fed Chairman Jerome Powell’s speech on the last day of September clarified the future of rate cuts. He avoided committing to a preset course. Nevertheless, Powell signaled two more rate cuts coming this year but in smaller, 25bp increments, provided the economy evolves as expected.
After Powell’s speech, the 10-year U.S. Treasury Bond yield ended September at 3.74 percent. The 10-year yield rose in October and ended the month at 4.3 percent. The markets are expecting both the future rate cuts, a strong economy and the presidential candidates’ economic policies could somewhat revive inflation.
The Fed and the markets are ruling out a hard landing for the US economy despite the slower growth in Q3. The inversion in the yield curve at the end of August disappeared and at the end of October, the difference between the 10-year and 2-year US Treasury Bond yield was positive (0.12). This indicates that investors are no longer worried about recession.
Fed is expected to announce a 25 bp rate cut in its 6-7 November meeting after the presidential election. In agreement with most economists, we expect another 25 bp rate cut in December.
US corporate earnings rebound in Q2
The US corporate earnings with inventory valuation and capital consumption adjustments (domestic industries) fell in 2024 Q1 by 1.4 percent from the previous quarter. This was mainly caused by the depleted savings from the pandemic era, leading to lower consumer spending and earnings. As we predicted in our last forecast, the 2024 Q2 earnings slightly recovered helped by lower production costs, thanks to the cooling inflation. The earnings were up 2.63 percent from the previous quarter. This was a bit more than our prediction of 1.7 percent growth.
Our consumer sentiment indicators are based on our ‘keyword’ algorithm related to ‘Google Trends’. Accordingly, these indicators are among the explanatory variables that predict US corporate profits. Our prediction for 2024 Q3 is stable corporate earnings, with a 1.1 percent drop over the previous quarter. We expect the earnings to be 7.2 percent higher over 2023 Q3.
The historical data from October 31st, 2024
Can the forthcoming US election have an impact on the S&P 500?
We tested the hypothesis whether or not the US presential elections have an impact on the performance of the stock market. To test the hypothesis, we used our monthly estimation data that span from 1994 M1 to 2024 M7. We included in our S&P 500 models a dummy variable that takes the value of 1 for the months of November (election month) and the subsequent month in the years 1996, 2000, 2004, 2008, 2012, 2016 and 2020. Our results indicated that there was no statistically significant impact on the stock market performance, irrespective of the winning candidate.
A victory by Trump is expected to be more inflationary given his intention to increase the tariffs on Chinese imports. Harris on the other hand, intends to increase the corporate tax rate from 21% to 28%. The overall impact on the US economy of the election outcome is difficult to predict as many factors are at play. If the winning candidate has a clear policy shift concerning the ongoing global conflicts such as the war in Ukraine or in the Middle East, this can affect energy prices and inflation expectations. However, these effects are too complex to quantify using historical data.
The S&P 500 remains overvalued
According to Factset Insights from November 1, The forward 12-month P/E ratio for the S&P 500 is 21.3. This P/E ratio is above the 5-year average (19.6) and above the 10-year average (18.1).
For Q3 2024, Factset estimates the (year-over-year) earnings growth rate for the S&P 500 as 5.1 %. The Q3 earnings season is well underway. For Q3 2024 (with 70% of S&P 500 companies reporting actual results), 75% of S&P 500 companies have reported a positive EPS surprise and 60% of S&P 500 companies have reported a positive revenue surprise.
Given that the falling saving rate accompanies the higher consumer spending, the driving force behind corporate earnings is expected to lose steam in the coming months. That said, we do not expect a significant drop in 2024 Q3.
The graph below shows the S&P index forward P/E ratio, calculated using the monthly interpolated US company earnings and the S&P 500 index (indexed to 21 for June). As can be seen, the P/E ratios were also over 20 for long periods in the past. Although the forward P/E ratio is high by historical standards, we do not expect a sharp downward correction to come in Q4.
