The stock market is currently experiencing significant momentum as it reaches new heights ahead of the upcoming elections. Following a tumultuous start this month, both the S&P 500 and Nasdaq indices have rebounded remarkably. As of October 11, 2024, the S&P 500 surpassed last year’s records, climbing approximately 21.9% in 2024, while the Nasdaq outstripped it slightly with a 22.2% increase. This recovery marks a shift as the Nasdaq had previously lagged behind blue-chip stocks for a substantial part of the year. When considering total returns, which account for dividend reinvestment, the S&P 500 reported a 23.2% gain, comfortably ahead of the Nasdaq’s 22.9% growth.
The political landscape heading into the presidential election remains uncertain, with polls indicating a tightly contested race. Historically, the market tends to thrive amid political gridlock; however, stakeholders are wary of a tightly contested election leading to a prolonged decision-making process on election night. Moreover, analysts speculate about potential interest rate cuts from the Federal Reserve shortly following the elections, which could further influence market dynamics.
Looking ahead to 2024, the trajectory of the stock market appears less predictable. A transformative year in 2023 saw a principal recovery fueled by reduced inflation fears and the Fed’s decision to halt its rate hiking campaign. These factors enhanced the market’s performance and investor confidence. However, concerns linger regarding the resilience of jobs growth and overall GDP momentum, as high inflation and interest rates continue to pose challenges for economic growth.
In 2024, inflation worries have increasingly subsided. Nonetheless, there is caution regarding the labor market, with some signs suggesting that job growth may decelerate, potentially impacting economic expansion. For the year thus far, the stock market has once again reached unprecedented levels, propelled by accelerating GDP and corporate earnings, despite a cooling jobs sector. The Federal Reserve’s recent shift towards a more accommodative monetary policy adds an additional layer of optimism for investors.
As for corporate earnings, 2024 has shown signs of recovery compared to the preceding year, which recorded negative earnings growth for many firms. Analysts now anticipate 9% growth in S&P 500 earnings, building on 2023’s modest figures. Looking forward, if corporate earnings fall short of expectations, stock valuations could appear inflated. The backdrop of geopolitical tensions, including the ongoing Israel-Hamas conflict and slow economic activity in China, adds complexity to the global market landscape. China’s government recently implemented a robust fiscal stimulus initiative to significantly boost its economy.
Overall, the macroeconomic environment remains cautiously optimistic for U.S. stocks as the economy showcases resilience despite geopolitical and domestic challenges. Key economic indicators continue to reflect low-growth trajectories, yet consumer sentiment has recently plunged due to persistent high prices and elevated financing rates.
Despite these hurdles, there is a glimmer of hope as inflation appears to be moderating, which could potentially restore consumer confidence as interest rates decline. The expected trajectory suggests that while the economy is on a modest growth path, it should progress steadily throughout 2024, with GDP growth estimated at 2.1% following 2.9% growth in 2023. The outlook for 2025 mirrors this assumption, anticipating similar growth rates.
Currently, the Federal Reserve’s stance appears advantageous; with the federal funds rate set between 4.75% and 5.0% and core inflation at approximately 2.7%, there’s a narrowing gap that could justify further rate cuts in the coming months. As interest rates begin their decline, forecasts indicate the U.S. dollar may follow suit, stabilizing after a period of growth in 2023.
Energy prices have shown volatility, impacting various sectors but are expected to stabilize in line with broader economic conditions. Historically, the yield curve had been inverted; however, it has reverted to a normal curve, signaling potential for declining short-term yields while long-term yields maintain their relative premium.
In summary, while the stock market has shown robust gains over the past year, it remains to be seen how earnings growth and geopolitical circumstances will shape investor sentiment and market stability moving into 2024. With an expectation for sustained growth in U.S. stocks relative to global counterparts, diversified sector performance should underlie a favorable outlook as we approach year-end 2024, particularly as renewed interest in risk assets takes hold amidst easing economic concerns.