Through the first nine months of 2024, the economy proved resilient as inflation moderated and consumers continued to spend, while the financial markets kept setting record highs. Still, investors should remain cautious, as various domestic and global factors may lead to increased volatility in the months ahead.

Inflation Continues to Ease

During the third quarter, inflation fell below 3% for the first time since March 2021. Although this is substantially below the peak of 9.1% set in June 2022, it remains above the Federal Reserve’s target inflation rate of 2%. Shelter and housing costs, which are a large component of the Consumer Price Index (CPI), remain sticky, given elevated prices, high interest rates and a limited supply of available homes and rental units.

As for the labor market, which is central to the economy and also part of the Fed’s mandate, conditions softened a bit in the first nine months of the year as the unemployment rate increased from 3.7% in January to 4.1% in September. Overall, the number of job openings continued to trend lower, as did the number of people quitting their jobs.

With inflation on the decline and the unemployment rate having increased during this period, the Fed began cutting interest rates in September. During a press conference on September 18, Fed Chair Jerome Powell announced that the Fed had lowered the target range for the Federal Funds Rate by half of a percentage point to a range of 4.75% to 5.0%. Powell indicated the drop in inflation allowed the Fed to start easing policy and emphasized that the slowdown in job growth was the key factor in the larger-than-expected half-point reduction. Currently, the markets are pricing in one or two more quarter-point cuts by the end of the year. The pace of rate cuts could be tempered by a strong labor market.

Economy Remains Resilient

In looking at the overall strength of the economy, Real GDP is expected to increase by 2.6% in 2024 and 1.8% in 2025, marking a slowdown from an average of 2.9% in 2023.

Treasury rates shifted lower across most of the yield curve in the first nine months of 2024. The yield curve has been inverted since July 2022. Historically, this is an early warning signal of a potential recession. However, a recession has not materialized thus far and appears unlikely before year end.

Year-over-year earnings growth for the S&P 500^® Index is estimated to be 2.9% for the third quarter, and 9.3% overall for the 2024 calendar year. Earnings growth is expected to broaden, with nine of the 11 sectors projected to report year-over-year growth.

Financial Markets Review

Turning to the financial markets, through the first nine months of 2024, stocks and bonds both finished in positive territory. The S&P 500 was up a robust 22.1% during this period, while the Bloomberg U.S. Aggregate benchmark, a proxy for bond performance, was up 4.4%.

Large-cap equities outperformed small-cap equities, largely due to the mega-cap stocks in the benchmark, namely the “Magnificent 7.” Entering October, these stocks represented roughly 31% of the weight in the S&P 500 and accounted for nearly 46% of the total return of the Index. During the third quarter, investors saw a broadening of performance for the Index as the Magnificent 7’s growth moderated, while the rest of the stocks in the S&P 500 picked up. Overall, the equal-weighted S&P 500 Index outperformed the market-cap-weighted index by 3.7%.

During the third quarter, mid-cap and small-cap stocks both outperformed their large-cap counterparts, with the S&P 400^® Index and Russell 2000^® Index up 6.9% and 9.3%, respectively. Despite the strong performance, mid-caps and small caps still finished the first nine months lagging large caps. The valuation gap, in terms of price/earnings, between small-cap (19.4x) and large-cap stocks (24.6x) is the widest it’s been since April 2003.

Looking at growth versus value investing, growth stocks underperformed value stocks during the third quarter across all size segments. However, on a year-to-date basis, growth stocks continue to hold the lead over value stocks.

International markets, as measured by the MSCI EAFE, finished the third quarter up 7.3%, lagging U.S. small-cap indices, but outperforming U.S. large-cap and mid-cap indices. Year-to-date through September, the MSCI EAFE lagged the U.S. stock market, but still showed a healthy overall performance, up 13.0%.

Outlook

While performance for the first nine months of 2024 was strong, particularly for large-cap stocks, the financial markets are likely to experience elevated volatility in the months ahead given the U.S. presidential election, persistent inflation and geopolitical risks. Investors should remain cautious, as the financial markets may face pullbacks due to elevated valuations among equities and potentially slower economic growth. Diversification can help reduce volatility as investors navigate through unpredictable markets.

Jamie Zendel is EVP, Head of Quantitative Strategies, and Erik Wennerstrum is VP, Quantitative Research, at Mutual of America Capital Management LLC.

Past performance is no guarantee of future results. The index returns discussed above are for illustrative purposes only and do not represent the performance of any investment or group of investments. Indexes are unmanaged and not subject to fees or expenses. The index returns above reflect the reinvestment of distributions. It is not possible to invest directly in an index.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

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