A Roller Coaster Ride to New Highs

The third quarter of 2024 was a roller coaster ride reflecting investors’ changing sentiment toward interest rates, the economy, and artificial intelligence (AI). The long-awaited market broadening began early in the quarter with investors rotating away from mega cap tech into cyclicals and small caps. The rotation coupled with some soft economic reports pushed the market to a nearly 10% correction. Then, optimism over better prospects of an economic soft landing inspired the market to resume its climb and finish at all-time highs for the third consecutive quarter. Overall, those with strong stomachs were rewarded with a nearly 6% gain in the S&P 500.

Source: Sawgrass Asset Management | Past performance does not guarantee future results. It is not possible to invest directly in an index.

Commentary and actions by the Federal Reserve (Fed) were well received by the market, as investors appreciated the certainty amid a slew of conflicting economic reports. Inflation readings confirmed a sustainable cooling of price growth to the Fed’s target 2% level. Soft payrolls reports began casting doubt on the Fed’s ability to avoid recession while starting its easing cycle. Confident comments from Fed Chair Powell that the Fed was on top of the labor situation restored upside momentum to the market. In September, Powell and company backed up their economic bravado with a half-percentage point cut in interest rates, the first such move since the Covid-19 pandemic of 2020.

Concerns over the resilience of AI revenues and consumer spending were major themes for the quarter. Despite reporting continued growth in revenues, many AI-related stocks failed to meet high expectations when issuing guidance. Investors began selling AI stocks early in the earnings season, but the AI trade was resurrected after optimistic reports were issued later in the quarter. Similar drama occurred with consumer stocks as many retailers warned about diminished spending observed in lower income consumers. However, late quarter economic reports suggested that consumer confidence has faltered but spending remained steady.

Looking forward, many of the themes that have fueled this nearly two-year bull market have been showing signs of fatigue. The AI secular growth story has come under more scrutiny, the idea of a resilient economy tested by shifting consumer patterns, and the prospect of future volatility has made bonds a potentially more attractive option than stocks for many now wealthier investors. Speaking of volatility, it’s the one theme that has picked up steam as uncertainty surrounding the upcoming U.S. presidential election and multiple ongoing foreign conflicts continued to spur investor anxiety. Recently observed volatility has mostly been due to rotation into previously unloved pockets of the market. With rising levels of volatility likely ahead, a further broadening of the market may be the type of trend needed for future gains.

CRN: 2024-1004-12032 R

Opinions in this piece are those of Sawgrass Asset Management and are not necessarily that of AAM.

Any forecasts or opinions expressed herein are Sawgrass Asset Management’s own as of October 2, 2024 and are subject to change without notice. This information may contain, include or is based upon forward-looking statements. Past performance is not indicative of future results.