Key takeaways

  • U.S. stocks are closing out what may be a second consecutive year of gains above 20%.

  • 10-year Treasury note yields moved higher since the Federal Reserve began cutting short-term interest rates.

  • Stocks appear to remain well positioned for further gains, though some volatility can be expected.

For the second year in a row, the stock market will likely produce gains exceeding 20%. A major question in the near term is how much upside remains based on current market valuations. In the meantime, the U.S. bond market reversed course, with long-term bond yields rising even as the Federal Reserve cut interest rates for the first time in more than four years.

 

Where today’s market stands

U.S. equity markets generated positive returns in all but two months of 2024. Markets quickly bounced back from October’s modest decline with an early November rally, particularly in the immediate aftermath of Donald Trump’s presidential election victory. In early November, the S&P 500, for the first time, briefly topped 6,000, but gave back some of those gains since.

Year-to-date through November 15, 2024, the S&P 500 is up more than 24%.1 This comes on the heels of 2023’s 26% gain. Large-cap U.S. stocks, represented by the S&P 500, continue to outpace other global equity markets. Late in the year, mid-cap and small-cap (Russell 2000) stocks began to close the performance gap with large-cap stocks. International stocks significantly lag domestic stock markets.2

Chart depicts 2024 returns across a range of stock market indices through 11/15/2024.
Sources: S&P 500, S&P Dow Jones Indices; Russell MidCap and Russell 2000 (Small Cap), FTSE Russell; MSCI EAFE and Emerging Markets, MSCI Inc. All returns as of November 15, 2024.

“Based on recent performance, we know that U.S. large-cap equity valuations are on the high side of fair,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Yet the underlying fundamentals, including solid earnings growth, remain supportive of equities, though there could be some year-end volatility.”

 

The changing state of bonds

After delaying interest rate cuts for much of the year, beginning in September, the Federal Reserve trimmed the federal funds target rate (which guides rates banks charge each other for overnight loans and tend to influence interest rates on financial products such as mortgages, automobile loans and credit cards) by 0.75%. Bond yields declined in the months leading up to Fed rate cuts, but after the first cut occurred, sentiment changed.3 “The recent rise in 10-year Treasury yields is more likely reflective of the market’s focus on stronger economic growth and concerns about rising federal deficits requiring increased government bond issuance,” says Haworth.

10-year U.S. Treasury note's yield: 2022 - 2024
Source: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates. As of November 15, 2024.

 

U.S. economy still growing

The underlying economic environment demonstrates continued strength, with Gross Domestic Product (GDP), the key measure of economic growth, expanding at an annualized 3.0% rate in 2024’s second quarter, followed by 2.8% annualized third quarter growth.4

“The economy’s held up reasonably well to this point because of the strong labor market, and consumers’ fairly strong financial position,” says Eric Freedman, chief investment officer for U.S. Bank Asset Management. “On balance, we’re still optimistic about the consumer, particularly among middle- and upper-income consumers.”

“The economy’s held up reasonably well to this point because of the strong labor market, and consumers' fairly strong financial position,” says Eric Freedman, chief investment officer for U.S. Bank Asset Management. “On balance, we’re still optimistic about the consumer, particularly among middle- and upper-income consumers.”

 

Where to invest today

“Be prepared to take what the capital markets offer given the current environment’s realities,” says Freedman. He advises that long-term investors consider positioning their portfolios with an overweight position in equities relative to fixed income, and a neutral weight invested in real assets. Freedman adds, “It’s critical to have a financial plan that’s tied to the specific goals you hope to achieve.” With a plan in place, you can more readily identify investment strategies that align with your goals.

Notably, says Haworth, investors should consider global diversification. “Although it looks like the U.S. economy remains stronger than those of overseas markets, valuations of non-U.S. stocks are more attractive, so they offer a little more margin for error,” says Haworth. “Economic and earnings fundamentals continue to look good.”

Based on your goals, timeline and risk appetite, consider these additional portfolio strategies:

  • Broad-based, global equity market exposure to capitalize on potential opportunities both domestically and overseas.
  • For tax-aware investors, consider slightly longer-than-average durations in municipal bonds, including a modest allocation to high-yield municipal bonds.
  • For non-taxable fixed income diversification, consider adding global positions and maintaining near-benchmark portfolio duration, and non-government agency issued mortgage-backed securities.
  • For trust portfolios, investors may consider reinsurance to capture differentiated cash flow with low correlation to other portfolio factors such as market or economic trends.

Have questions about the economy, markets or your finances? Your U.S. Bank Wealth Management team is here to help.

Note: Tax-loss harvesting does not apply to tax-advantaged accounts such as traditional, Roth and SEP IRAs, 401(k) and 529 plans. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies. Structured products are subject to market risk and/or principal loss if sold prior to maturity or if the issuer defaults on the security. Investors should request and review copies of Structured Products Pricing Supplements and Prospectuses prior to approving or directing an investment in these securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance. Employing leverage may result in increased volatility. These investments are designed for investors who understand and are willing to accept these risks. Reinsurance allocations made to insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events primarily driven by weather-related and other natural catastrophes (such as hurricanes and earthquakes). These events are typically low-frequency but high-severity occurrences. In exchange for higher potential yields, investors assume the risk of a disaster during the life of their bonds, with their principal used to cover damage caused if the catastrophe is severe enough. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Diversification and asset allocation do not guarantee returns or protect against losses. Past performance is no guarantee of future results.

Frequently asked questions

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Disclosures

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  1. S&P Dow Jones Indices LLC, performance as of November 15, 2024.

  2. S&P Dow Jones Indices; FTSE Russell; MSCI Inc. Based on returns as of November 15, 2024.

  3. U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates, through November 15, 2024.

  4. Source: U.S. Bureau of Economic Analysis, Gross Domestic Product.

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