Summary
Stocks Roar in November: Our Monthly Survey of the Economy, Interest Rates, and Stocks Since 1980, November has been the best month for the S&P 500. In 2024, November was by far the best month of the year, rising 5.7% on a capital-appreciation basis and nearly 6% assuming reinvestment of all dividends. The monthly performance was so strong that it raised the average gain from all Novembers since 1980 to 2.22%, from 2.15% prior to 2024. A key feature of the market in November and in 4Q24 and 2H24 to date has been a widening of the sector rotation away from traditional growth areas (Information Technology, Communication Services) to a broad swath of sectors with cyclical, rate-sensitive, and defensive characteristics. Markets with good breadth would seem to be more durable and better positioned to withstand adverse news than thin and narrowly led markets. We would like to see this broadly advancing market carry into 2025 and see no reason yet why it would not. First, however, we would like to see a strong finish in December, which happens to be the second-best month for the S&P 500 since 1980. The Economy, Interest Rates, and Earnings U.S. economy GDP sustained mid-year 2024 strength into the third quarter. Highlights of the quarter included ongoing growth in consumer spending, particularly for durable goods, and a high level of spending by the federal government. A review of third-quarter data indicates a normally growing economy heading into year-end. The preliminary (second) report of third-quarter GDP showed growth of 2.8%, consistent with the advanced (first) report. Note that at mid-year, consensus expectations for 3Q24 GDP growth were in the 2% or lower range. The decrease from 3.0% growth in 2Q24 GDP reflects a downturn in private inventory investment and residential fixed investment. While the advance and preliminary reports both showed 2.8% growth, the preliminary report showed slightly stronger non-residential fixed investment spending than in the advance report, and slightly weaker (though still strong) growth in personal consumption expenditures and exports. Growth in real 3Q24 GDP primarily reflected increases in personal consumption expenditures, exports, and federal government spending. These gains were partly offset by an increase in Imports, which are a subtraction in the calculation of GDP. Personal consumption expenditures for 3Q24 increased 3.5%, up from 3.0% for 2Q24 and 2.5% for all of 2023. Spending on goods increased 5.6% in 3Q24, nearly double the 2Q24 rate. Durable goods spending rose a sharp 7.6% in 3Q24, extending second-quarter strength that reversed a decline in the first quarter. Durable goods spending was up 3.9 % for all of 2023. Non-durable goods spending rose 4.6% for 3Q24. The decline in annual inflation growth has mainly been concentrated in goods, while services inflation remains somewhat elevated. Consumers now appear more willing to buy goods at stable or in some cases lower prices. Consumer spending on services grew 2.6% in 3Q24, little changed from 2Q24 levels. Consumer spending on services grew 2.9% in 2023. Some of the growth in consumer services spending has been driven by rent equivalent and insurance, two costs consumers cannot control, and many cannot avoid. After a weak first quarter for PCE, the bounce-back in the second and third quarters suggests that consumers are adapting to structurally higher prices. We expect PCE within the GDP accounts to continue to send conflicting signals, with goods spending more volatile than services. We also look for a solid holiday season to drive on-trend consumer spending in 4Q24. Non-residential fixed investment, the proxy for corporate capital spending, rose at a 3.8% annual rate in 3Q24, slightly down from an annual rate of 3.9% in 2Q24; this category grew at a 6.0% rate in 2023. PCE and non-residential fixed investment represent about four-fifths of gross domestic product in any quarter. In 3Q24, Consumer spending added 2.37 percentage points to GDP, while non-residential fixed investment added 0.52 percentage points. Residential fixed investment remained negative in 3Q24, pulling back by 5.0% after declining 2.8% in 2Q24. Even with the Fed beginning to cut rates, the housing sector is a long way from healthy. The export-import balance favored imports in 3Q24, as it did in the first half, but exports were the strongest since 3Q22. Exports grew 7.5% in 3Q24, weaker than the 8.9% growth reported in the advance report. Imports were up 10.2%. Given the higher dollar value of imports, the net exports-imports balance subtracted 57 bps from overall 3Q24 GDP growth. We expect this category to remain volatile quarter over quarter. Another volatile category, the change in private inventories, subtracted 11 basis points from 3Q24 GDP after adding 105 basis points to 2Q24 GDP. Supply chain distortions have mainly receded. Sharply higher tariffs under a new administration could be another potentially disruptive factor. Overall government spending was up 5.0% and added 83 basis points to 3Q24 GDP growth. Federal spending was up 8.9%, led by a nearly 14% increase in defense spending, while state and local government spending grew 2.7%. The price index for gross domestic purchases increased 1.9% in 3Q24, compared with revised increases of 2.4% in 2Q24 and 3.1% in 1Q24. And the PCE price index advanced 1.5%, down from 2.5% in 2Q24. The core PCE index of 2.8% was unchanged from 2Q24. Solid GDP growth with lower price increases gives the Fed room to cut rates going forward. Outside the generally strong GDP accounts, the economic picture is mixed. U.S. economic indicators generally suggest a mix of deceleration and optimism, with growth continuing albeit at a subdued level. The consumer economy continues to send mixed signals, with jobs and wages still growing – but at a slower pace. The U.S. economy generated just 12,000 new jobs in October, but the report was considered an outlier due to the Boeing strike and the major hurricanes and storms in the Southeast. While growth in new jobs continues to slow, multiple indicators of the employment economy – including the unemployment rate, wage growth, and the average work week – remained healthy in October. The unemployment rate remained at 4.1% in October 2024 after ticking down to the level in September from 4.2% in August. Unemployment hit a multi-year high of 4.3% in July. October average hourly earnings increased 13 cents month to month from September and were 4.0% higher year over year. Annual wage growth continues to run above inflation, but the premium has narrowed. The now-concluded machinists’ strike at Boeing pressured exports, given the importance of aerospace to goods exports; the company has faced headwinds in both its commercial and defense & space units. Industrial production decreased 0.3% in October, which was worse than the 0.1% consensus call. The strike at Boeing reduced Industrial production by 0.2% in October and -0.3% in September, according to the U.S. Federal Reserve. The two major hurricanes that hit the Southeast reduced October Industrial production by 0.1%. Capacity Utilization was 77.1% in October, about 2.8 points below the long-run average. The NFIB’s small business optimism index came in at 93.7 in October, rising from 91.5 in September on optimism regarding a change to a more business-friendly administration. October marked the thirty-fourth consecutive month below the 50-year average of 98. This index has been battered by inflation, and before that by difficulty in finding qualified workers. The Uncertainty index for October reached an all-time high at 100, up seven points from 103 in September – the prior all-time high in this series. In the months preceding the Fed’s first rate cut of the cycle in September, something like optimism returned to the long-depressed housing industry. After first coming down to multi-month lows following the September rate cut, market interest rates spiked higher in October into early November. The effect of lower rates on housing will be positive. Given the huge number of homes with no mortgage and those with mortgages below 4%, however, Argus is not looking for a housing surge like that seen in the pandemic period. September existing home sales fell to a 14-year low, coming in at a seasonally adjusted annual rate (SAAR) of 3.84 million units. That may have marked the bottom of the cycle, however, as October existing home sales rose 3.4% to a 3.96 million SAAR. Most notably, October existing home sales rose 2.9% year over year, the first annual increase since July 2021. New home sales, by contrast, fell to a 610,000 SAAR in October, the lowest level since November 2022. We expect both new and existing home sales to remain volatile month over month, but to begin climbing off extremely depressed current levels as the Fed continues its rate-cutting cycle. The consumer seems slightly more optimistic, or perhaps reconciled to higher prices. Retail sales provided some good news for the market, rising 0.4% month over month from September and rising 2.8% from October 2023. Sales were ahead of the 0.3% consensus estimate. Excluding vehicles, parts, and gas, October retail sales were up 0.1%, suggesting that the automotive market may be showing early recovery signs. Personal incomes rose 0.6% in October, up from 0.3% in September; and personal customer spending rose 0.4%. The University of Michigan consumer sentiment index reached 71.8 in November 2024, after hitting a six-month high in October at 70.5. The November reading reflected post-election optimism on the economy and prospects for interest-rate relief. Note that historical GDP data were recently revised for all quarters and years from the first quarter of 2019 through the first quarter of 2024. Chief Economist Chris Graja, CFA, raised the Argus third-quarter 2024 GDP forecast to 2.8%, from a prior 1.6%; and raised the Argus 4Q24 GDP forecast to 2.8%, from a prior 1.7%. Given net first-half strength and the higher second-half outlook, Argus now looks for GDP growth of 2.6% for all of 2024, raised from a prior 1.9%. Argus retained its forecast for 2.0% GDP growth in 2025. We also continue to believe the U.S. economy can avoid recession in 2024 and 2025, as it did in 2023 and 2022. The central bank started its rate-hiking campaign in March 2022. Sixteen months and more than five percentage points later, the Fed halted in July 2023; and it held rates steady for eight straight meetings. At its mid-September 2024 FOMC meeting, the Fed cut interest rates by 50 basis points. Prior to that, the Fed last cut rates more than four years ago in 2020, amid the turbulence and extraordinary circumstances of the global COVID-19 pandemic. At its November 2024 meeting, the FOMC again cut the fed funds and discount rates, this time by 25 bps each. Normally, the Fed cuts rates when growth is slowing, and the economy is at risk of slipping into recession. This time, the Fed began its rate-cutting cycle at a time when GDP is growing, companies are reporting solid earnings growth, the workforce is close to full employment, and annual wage growth is higher than annual inflation growth. The Fed has nonetheless commenced cutting rates, we believe, because the fight against inflation has stalled. Inflation by a variety of metrics remains half a point to a point and a half above the Fed’s 2% target range. In its post-meeting commentary, the Fed has stated that risks to achieving its employment and inflation objectives are ‘roughly in balance.’ The FOMC under Chair Jerome Powell has shown itself unafraid of aggressive action when such action appeared to be needed, so the 50-bps cut in September was not a big surprise. Where the Fed goes from here is uncertain, however, due to the lack of progress on inflation. PCE and CPI inflation data both reached three-year lows in September but made no further progress in October. The Fed’s preferred inflation gauge, the core PCE price index, rose 0.3% in October and was up 2.8% year over year. The monthly increase matched those in September and in August, while the annual increase ticked up from 2.7% in September. The all-items consumer price index rose 0.2% month over month for October, in line with September, but rose 2.6% annually, after rising 2.4% year over year in September. Core CPI was unchanged at up 0.3% monthly and up 3.3% annually. The September producer price index rose 0.2% on a month-over-month basis, up from 0.1% in September. The year-over-year change bounced to 2.2% from 1.9% for September. The annual change in core PPI (less food and energy) jumped to 2.2% in October from 2.0% in September. Bond yields hit multi-month lows following the Fed’s September rate cuts, then moved higher soon after on solid economic data and economic optimism following the election. Yields have since come off those spiky highs but remain above September levels. Both middle-maturity and long-maturity yields, which moved up off their mid-September lows, have since moderated. The 10-year Treasury yield was 4.18% as of the end of November, compared with 4.37% as of the end of October and 3.75% as of the end of September; the cycle peak for the 10-year yield was the 4.9% level in October 2023. The two-year Treasury yield was 4.13% as of the end of November, vs. 4.21% as of the end of October and 3.55% as of the end of September; the peak level was 5.2% as of October 2023. Notwithstanding current noise in the market, Argus expects short-term yields to move lower from current levels. Long yields over time are expected to widen their relative premium to short yields. We have likely seen the end to two’s-10’s inversion in this cycle, but two- and 10-year yields could remain in proximity in the near term. Argus Fixed Income Strategist Kevin Heal is modeling one additional quarter-point rate cut in 2024, at the December FOMC meeting. The CME FedWatch tool showed a 62% probability of a quarter-point cut in December. If enacted, a quarter-point cut would bring the Fed’s central tendency to the 4.25%-4.50% level by year-end. On a preliminary basis, Argus fixed income strategy anticipates two or three additional quarter-point cuts in 2025, bringing the central tendency as low as 3.50%-3.75% by December 2025. The Fed is expected tailor its policy, according to Strategist Heal, based on the state of the economy in 2025. Heading into 3Q24 earnings season, our forecasts for S&P 500 earnings from continuing operations were $247 for 2024 and $265 for 2025. On a preliminary basis, we had modeled EPS in the high $280s-low $290s for 2026. Our 2024 forecast has not changed, but we are more favorably disposed to 2025 earnings. And we have also formalized and raised our EPS forecast for 2026. Our increased optimism toward 2025 and 2026 reflects expected better performance for some of the deeply lagging sectors, partly offset by EPS growth moderation in some of the fastest-growing sectors. According to forward consensus estimates, the Energy sector’s annual earnings decline will moderate in 4Q24 and 1Q25 before swinging to a modest positive in the second or third quarter. Materials and Industrials could swing to positive comparisons more quickly, possibly as soon as 4Q24 (Materials) and 1Q25 (Industrials). The strongest EPS growth in 3Q24 came from Communication Services, and specifically the media giants Meta Platforms and Alphabet. Growth forecasts for the sector in 2025 and 2026 anticipate potential moderation from high-teens percentage growth in 2024 to low-double-digit or even high-single-digit percentage growth going forward. Other sectors, however, are forecast to hold onto their current strong growth rates for the next year or more. Information Technology is forecast to sustain double-digit EPS growth in the mid- to high-teen percentages through 2026. Utilities growth is forecast to moderate but only slightly, while remaining above the long-term average. Other sectors forecast to growth EPS above their long-term averages include Financial, Healthcare, Consumer Discretionary, and Consumer Staples. The three sectors that were negative in 3Q24 are also forecast to bounce back to growth exceeding their long-term averages. We believe growth momentum for the commodity-sensitive Energy and Materials sectors will depend on the success of the Chinese government’s stimulus program and other factors including potential new tariffs. For 2025, we are raising our forecast for S&P 500 earnings from continuing operations to $276, from $265. Whereas our prior forecast assumed high-single-digit growth, our revised forecast models full-year EPS growth of 11.8%. The key drivers of our more positive outlook include all three of the negative sectors for 3Q24 swinging to full-year growth in 2025. That includes mid-single-digit growth in Energy earnings, and low-double-digit growth in Materials and Industrials. We also look for continued double-digit growth in key large sectors including Communication Services, Information Technology, Healthcare, and Discretionary. We look for a return to more normal mid-single-digit growth in Utilities and to low-single-digit growth in Staples. For 2026, we are raising our forecast for S&P 500 earnings from continuing operations to $307, from a preliminary outlook in the high $280s-low $290s range. Whereas our prior forecast assumed high-single-digit growth, our revised forecast models full-year EPS growth of 11.2%. We are keeping in place for 2026 several of the above-average growth assumptions in our 2025 forecast, while moderating the overall growth outlook slightly. We expect the AI transformation to continue to drive growth in Communication Services, Information Technology, and Consumer Discretionary. We look for growth to slow in defensive sectors but to pick up in Energy. Domestic and Global Markets At the end of November 2024, which was by far the strongest month of 2024, many indices were at or near all-time highs. At the 11-month 2024 mark, the S&P 500 had delivered total return (with dividend) of 28.1%. Nasdaq was up 28.9% on a total return basis and is maintaining slight leadership over the broad market index. In most years in which the overall stock market is up in double digits with one trading month remaining, the Nasdaq has typically built a significant performance lead over the broad market. As of November 2023, for example, the Nasdaq was up 37.0% YTD while the S&P 500 was up 20.8%. We believe the similarity in S&P 500 and Nasdaq performance in 2024 to date reflects the sector rotation that intensified in the second half, as well as hefty concentration of Magnificent 7 stocks in both indices. Wilshire Large Cap Growth, up 35.1%, maintained its 14-percentage-point premium to Wilshire Large Cap Value at November-end. With investors taking profits in the giants, small caps have narrowed their underperformance. The Russell 2000 soared 11% in November, driven by post-election enthusiasm toward domestic-facing companies. The DJIA is also closing the gap and is up over 21% for the year. The Barclays Bloomberg U.S. Bond Index, which was up 4.5% year to date at the end of September, fell to a 1.1% gain at October-end as interest rates spiked. The index was up 2.2% at the end of November as rates have come off their recent highs. Even with the broad market at or near all-time highs, we believe stocks can continue to rise from here, given positive fundamentals in GDP and earnings. There will also be a strong technical pull into year-end 2024 as hold-out bears capitulate and the market positions for a prolonged rate-cutting cycle. A surprising six sectors are doing better than the market
