Dec. 2, 2024: This market still has room to run

Key takeaways

• Third-quarter earnings results were generally positive. Earnings breadth is expanding across sectors. Margins remain strong enough to continue to support a healthy labor market.

• Small- and mid-cap stocks were big winners in November with the Russell 2000^® Index up more than 10%.

• Other areas to watch include cyclical stocks and select parts of the international equities market.

November was the best month of the year so far in an already remarkably strong 2024 for the S&P 500 Index.¹ With the index now up 26.5% this year, Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, said he can understand how some investors might question whether the market can continue to march higher into the end of the year.

That said, he believes the U.S. economy remains fundamentally strong, and notes that December historically has been the S&P 500’s best month of the year, with gains 74% of the time going back to 1928. Consequently, he remains bullish.

“To be sure, momentum and sentiment are a bit stretched, particularly across cyclical stocks,” he said, “but I believe all that means is we might be in for a brief consolidation either through price or time before resuming the upward march.”

The third-quarter earnings season is now nearly complete, and the results were generally positive. Technology earnings remained robust while the increase in earnings breadth across sectors and industries continued to play out. Margins are strong, giving Orton comfort that the labor market is unlikely to deteriorate materially in the near future, and economic data continues to surprise to the upside. Critically, he said, the S&P 500’s strength has been broad both during earnings season and in November, with the breadth in earnings growth translating into increased breadth in price. The market of stocks (i.e., the S&P 500^® Equal Weight Index, up 6.24%) outperformed the broader stock market (the S&P 500, up 5.87%) in November, while small- and mid-caps were big winners with the Russell 2000^® Index up more than 10%.

“I believe this sort of healthy rotation is critical to supporting bull markets, and it doesn’t look like it will stop in the near future,” Orton said. “As we head into next year, I expect to see a continued rotation into more cyclical parts of the market as well as down the market cap spectrum, supported by strong U.S. economic growth, deregulatory tailwinds, and continued earnings growth.”

Additionally, Orton noted that financial conditions are already loose and are set to loosen even more going forward.

“That is not an environment where I believe that investors should think about reducing risk,” he said. “Rather, I favor considering whether to use downside opportunistically and to think about leaning into the notion that a balanced portfolio between growth, cyclicality, and income could actually work in the brave new world of 2025.”

That said, Orton noted that this is a high volatility bull market. The recent escalation between Ukraine and Russia highlights this and is a reminder of the lurking geopolitical risks on the board, including Gaza, Iran, and Taiwan.

“There will be increasing headline risk going forward, leading to more volatility,” he said. “But I believe these events are unlikely to impact corporate fundamentals and instead could provide investors with opportunities to consider using downside opportunistically.”

Two pushbacks that Orton receives regarding his “fairly bullish outlook” are focused on valuations and inflation.

“I don’t think it’s possible to go a day — or maybe even just a few hours — without hearing that U.S. equities are expensive,” he said. “The U.S. market looks pretty rich relative to both other geographic segments and to its own history, but I have long argued that much more nuance is required.”

Economic and earnings growth for the U.S. has “trounced” most developed and emerging markets, he said, and he believes that looks set to continue next year. Still, he said there are exceptions, which is why selectivity overseas is so important.

The average stock also looks quite different from the cap-weighted market from a valuation perspective, Orton said. Don’t forget that valuations in the S&P 500 have tracked the sharp rise in the “growthiness” of the U.S. economy as a whole over the past 30 years. In 2024, a good balance between earnings growth and multiple expansion has driven the market higher, and Orton said he expects to see earnings drive even more of the market’s gains in 2025.

Tied into valuation considerations are interest rates, and tied into rates is inflation. The rapid disinflation in core goods prices that characterized the last year has started to ebb while core services inflation has continued to slow more gradually. That has left inflation more likely to settle a little above the U.S. Federal Reserve’s 2% target rather than below it. The known unknowns of policy under President Donald Trump’s second administration also leave some questions with respect to the inflationary path, Orton said, but the pullback in rates over the last week signaled to him that “perhaps some of that adjustment has already been done — or that we’ll cross that bridge when we come to it.”

“All that said, even with sticky inflation and a terminal rate higher than current forecasts, there is still scope for additional Fed interest rate cuts, and I believe that we’ll see rates lower at the end of 2025,” he said.

Orton’s Investment Playbook

Equities have a positive backdrop heading into next year, but Orton said that doesn’t mean the path higher will be smooth. The market is full of uncertainty on the policy front, but he believes that if strength across the broader market of stocks continues, that rotation could keep the market afloat. The S&P 500 is poised to post its second consecutive year of gains since the start of the current bull market, and it looks like both years could have performance of more than 20%. Orton said his base case isn’t to see performance of more than 20% again next year, but he doesn’t think that can be written off, either, even with some bumps along the way. While it would be rare to have three consecutive years of 20%-plus performance for the S&P 500, it did happen from 1995 to 1998, and in 1999 the S&P 500’s return was 19.5%. Consequently, Orton favors owning the broad market, and within that, thinking about leaning into certain sectors, factors, or size segments. Areas he’s watching now include:

• Small- and mid-caps. The Russell 2000 just closed one of its best Novembers on record, up over 10%, while the Russell Midcap^® Index wasn’t too far behind. Orton said it’s clear that enthusiasm around economic growth and the outlook for an inflection in earnings growth down the market cap spectrum have propelled smaller companies, and he believes this trend could continue. Flows are returning to the space, and Orton said valuations remain attractive relative to large caps: The S&P 500 has hit 53 new highs this year while the Russell 2000 is trading right around its last all-time-high set in November 2021. “There’s room to run,” he said, “and I encourage investors who are underweight to these asset classes to consider adding to small- and mid-cap positions.”

• Cyclicals. The growth of the U.S. economy has been robust, and Orton said it looks like that will continue in 2025. It’s no surprise that earnings picked up this year in more economically sensitive sectors like industrials and financials. Meanwhile, materials and energy have had their share of challenges – largely tough comparisons to previous periods, idiosyncratic issues across certain industries, and exposure to a global economy that hasn’t been as strong as the U.S. economy. After struggling for some time, leading indicators suggest that manufacturing could emerge from three years of stagnation in 2025. The consumer, industrial, and construction sectors of the economy all have started to post positive surprises. Orton has favored thinking about leaning into cyclicality in the second half of this year, and he thinks the trade in financials, especially regional banks and capital markets companies, has scope to keep moving higher on the prospect of a less restrictive Federal Trade Commission (FTC) regime and an increased likelihood of consolidation within the industry. He also continues to favor industrials. “I have advocated evaluating the potential benefits of ‘playing offense with defense,’ and I still like aerospace and defense companies, especially those with software elements or those that provide security solutions for domestic law enforcement.” Orton also likes companies exposed to construction spending, those that could benefit from increased capital expenditures to support the growth of artificial intelligence. These include electric equipment companies and manufacturing-related companies that could get a boost from reshoring and infrastructure projects.

• International equities. There is a reason that U.S. equities have outperformed so consistently over the past 15 years relative to international markets, Orton said. Strong earnings growth, supported by the moats of the mega-cap tech complex, has been tough to beat. And while there are a lot of challenges right now from a fundamental and technical perspective for many overseas markets, especially in Europe, Orton believes there is a lot of bad news already priced in. “I don’t think it will take too much to go right in order to see certain parts of international markets outperform,” he said. “The key is selectivity.” Areas he likes include:

  • Global banks.

  • Japan, which is embarking on a massive green stimulus package that could prove supportive to parts of the market. If U.S. relations with China become more strained, Orton also expects that Japan could be relatively insulated from tariff-related threats as it’s a key ally.

  • India, where a recent pullback in the NIFTY 50 Index provided investors with an opportunity to consider adding capital or increasing their exposure to what Orton sees as one of the most dynamic growth stories in the past few decades.

What to watch

Friday brings the November U.S. payroll report from the U.S. Bureau of Labor Statistics. Consensus expectations are for an addition of 200,000 jobs, following a plunge of 12,000 new jobs in October, which reflected the impact of hurricanes and a prolonged strike at a major airline manufacturer.

Earlier in the week, the Job Openings and Labor Turnover Survey (JOLTS) and Institute for Supply Management reports will help gauge the strength of the U.S. economy ahead of the end of the year. On Wednesday, Federal Reserve Chair Jerome Powell takes part in a moderated discussion at the New York Times DealBook Summit. European Central Bank President Christine Lagarde also will speak at other events.

¹ Unless otherwise indicated, all data cited is sourced from Bloomberg as of Nov. 29, 2024.

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
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Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.

International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.

Definitions
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.

Capital markets companies provide services to financial markets that serve buyers and sellers of financial assets.

Comps, short for comparables, carries different meanings depending on the industry and context, but generally entails a comparison of financial metrics — often for two different time periods — or other factors to quantify performance or determine valuation.

A consensus estimate is a forecast of a public company’s projected earnings, the results of a particular industry, sector, geography, asset class, or other category, or the expected findings of a macroeconomic report based on the combined estimates of analysts and other market observers that track the stock or data in question.

Consolidation is a term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.

Core inflation measures generally exclude prices that are considered to be more volatile and thus less useful for tracking more durable trends inflation, including prices for food and, in many instances, fuel.

Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.

Disinflation refers to the temporary slowing of the pace of price inflation and describes what happens when the inflation rate is marginally lower over the short term. Disinflation refers only to the rate of change in the rate of inflation. In this, it is distinct from inflation and deflation, which describe the direction of prices.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.

An earnings recession is considered to be two or more consecutive quarters of declining corporate year-over-year profits.

Fund flow is the net of all cash inflows and outflows into and out of a particular financial asset, sector, or index. It typically is measured on a quarterly or monthly basis. Investors and others look at the direction of fund flows for indications about the health of specific securities and sectors or the overall market.

Growth investing is a stock-buying strategy that focuses on companies expected to grow at an above-average rate compared to their industry or the market.

Headline risk describes the possibility that a news story will influence the price of a security or group of securities.

The inflation target rate of the U.S. Federal Reserve is the rate of price increases that the Fed prefers to see to ensure the economy will remain stable. Generally, the Fed’s target rate is 2%, as measured by the Personal Consumption Expenditures (PCE) Price Index.

The Institute for Supply Management produces several surveys assessing business conditions and outlooks across a variety of industries. They include the ISM Purchasing Managers’ Index (PMI), which measures the prevailing direction of economic trends in the manufacturing sector, and the Services ISM^® Report on Business^®, which is based on data compiled from purchasing and supply executives and reflects the change, if any, in the current month compared to the previous month in supplier deliveries along with seasonally adjusted business activity, new orders, and employment.

The Job Openings and Labor Turnover Survey (JOLTS) program produces monthly data on job openings, hires, and separations compiled by the U.S. Bureau of Labor Statistics. The survey’s job openings rates consider month-to-month changes in the number of job openings reported on both a state and national level.

Known unknowns refer to identified areas of potential risk with uncertainty surrounding the timing, scope of impact, or path of development for those risks.

Loose financial conditions are marked by an increase in available funds or a decline in interest rates that reduces the costs of lending and accordingly drives up demand.

Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.

Market of stocks is a term market participants use when referring to the diversity of technical or other characteristics that may exist at any given time within the overall stock market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.

A moat, in finance, refers to a business’s ability to maintain competitive advantages in relation to its competitors and thereby to safeguard its market share and long-term profits. Investor Warren Buffett popularized the term.

A multiple, sometimes referred to as the price multiple or earnings multiple, is a measure of a company’s value based on the ratio of its current share price to its earnings per share. This ratio is known as the price-to-earnings ratio, or P/E.

Multiple expansion occurs when a stock’s multiple rises, in some cases faster than the stock’s fundamental value. Multiple expansion creates arbitrage opportunities for investors who have bought the stock at the lower multiple value.

A net profit margin, often shortened to net margin, measures how much net income or profit a company generates as a percentage of revenue. It can be expressed as a percentage or a decimal.

The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment.

Reshoring describes an effort to bring manufacturing and other services back to the United States from overseas operations.

Rotation describes the movement of investments in securities from one industry, sector, factor, or asset class to another as market participants react to or try to anticipate the next stage of the economic cycle.

Sticky is a term used to describe measured data that is slow to change, in contrast to faster-changing or more variable data.

Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance.

A terminal rate is the level at which a central bank stops adjusting interest rates — either upward or downward — in its attempts to manage inflation and avoid recession.

Trailing indicators are data or measurements that reflect events, trends, results, or developments that took place in the past. Trailing indicators typically refer to a specific time period for which the data in question is aggregated, summed, or averaged. Trailing indicators help reflect trends that occur over specified periods of time.

Underweight describes a portfolio position in an industry sector or some other category that is less than the corresponding weight level in a benchmark portfolio.

Indices
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.

The S&P 500^® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.

The NIFTY 50 Index is a stock index on the National Stock Exchange of India that tracks the largest assets in the Indian equity market. It is diversified across 13 sectors of the Indian economy: financial services, information technology, consumer goods, oil and gas, automobiles, telecommunications, construction, pharmaceuticals, metals, power, cement and cement products, fertilizers and pesticides, and media and entertainment.

The Russell 2000^® Index measures the performance of the 2,000 smallest companies in the Russell 3000^® Index, which represents approximately 7% of the total market capitalization of the Russell 3000^® Index.

The Russell Midcap^® Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities of the Russell 1000^® Index based on a combination of their market capitalization and current index membership and represents approximately 27% of the total market capitalization of the Russell 1000^® Index.

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M-651062 Exp. 4/2/2025