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.
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
“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.”
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.
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.”
“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:
Have questions about the economy, markets or your finances? Your U.S. Bank Wealth Management team is here to help.
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In the current environment, investors might consider an overweight allocation to equities, reduced positions in fixed income investments and a neutral weighting in real assets. Equities are ending another solid year of performance and valuations may be slightly extended. At the same time, fixed income investments gave back some ground recently, due in large part to continued U.S. economic strength. As always, consult with your wealth management professional to determine the most effective investment strategy aligned with your own goals and risk tolerance.
Domestic large-cap equities have been the capital markets stand out performers in 2024. The market’s performance in 2024’s first half was driven by technology-oriented stocks benefiting from investor enthusiasm about developments related to artificial intelligence. In the third quarter, with bond yields declining and the market convinced that Federal Reserve interest rate cuts would soon begin, other sectors such as real estate and utilities began to lead market performance. While equity market valuations may appear somewhat elevated given the market’s recent strong returns, analysts remain optimistic about 2025 corporate earnings growth, which could fuel a further stock market upside. However, you may consider dollar-cost averaging to potentially offset some of the risk of market volatility. You also should consider broadening your portfolio to include global diversification, to take advantage of more attractive overseas equity valuations.
In the short term, markets are unpredictable, and can experience short-term up-and-down movements. Investors need to position assets designed to meet long-term goals with a willingness to withstand some short-term market movements. In today’s market, stocks have enjoyed a solid 2024, but not without volatile periods. Bonds lost ground in the first half of the year as interest rates moved higher compared to where they stood at the end of 2023, then moved into positive territory until bond yields rose again, tempering total returns. Be sure to consult with your financial professional to assess your own risk tolerance level and position your long-term assets accordingly.
By easing monetary policy with interest rate cuts, does the Federal Reserve view the threat of recession as receding?
Declining – yet persistently elevated – prices continue to weigh on consumers and policymakers alike.
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