Topic Tags: U.S. Equity

2025 Market Preview Video

This video is a recording of a live webinar held January 16 by Marquette’s research team analyzing 2024 across the economy and various asset classes as well as themes we’ll be monitoring in 2025.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Director of Research, Managing Partner
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
James Torgerson, Research Analyst
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Dennis Yu, Research Analyst
Michael Carlton, Research Analyst
Chad Sheaffer, CFA, CAIA Senior Research Analyst

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.

If you have any questions, please send our team an email.

Back to Back!

This week’s chart details each calendar year return for the S&P 500 Index dating back to 1928, with consecutive 20%+ returns highlighted in orange. Despite a slight pullback over the last few weeks, the index posted a return of more than 20% in 2024, which represents only the fifth time in history that the benchmark has recorded such a figure in consecutive years (note that the five straight years of 20%+ returns in the 1990s are counted as one instance). As investors look ahead to 2025 and beyond, many are asking the following question: How have markets performed after such strong periods?

In the years following the first three of these instances (1937, 1956, and 1984), the S&P 500 Index notched a significantly lower return, with an average of -1.1%. Interestingly, each of these years was marked by either tighter monetary policy, inflation, decreased industrial production, higher unemployment, or some combination of these trends. As mentioned above, the late 1990s saw a staggering five consecutive years of 20%+ returns for the S&P 500 Index, fueled by a boom in investor interest in e-commerce, software, and telecommunications companies. The so-called “Dot-Com Bubble” led to widespread speculation related to unprofitable companies and a rapid expansion in market valuations, and the bursting of this bubble caused the S&P 500 Index to decline sharply in the first three years of the new millennium.

In the last two years, performance of the S&P 500 index has been largely driven by investor interest in artificial intelligence and the Information Technology sector. The Magnificent Seven stocks (Apple, Microsoft, Amazon, Alphabet, NVIDIA, Meta, and Tesla) have led the charge, accounting for over 50% of the total return for the benchmark since the beginning of 2023. As artificial intelligence becomes increasingly integrated into the global economy, these and other similar companies are expected to attract more investment and drive additional index returns. While there are some similarities between the current environment and the Dot-Com Bubble, the U.S. economy continues to show resilience and most of the winners from the last two years are well-established businesses with healthy profits. Still, history has shown us that periods of robust equity market performance do not continue forever. As the calendar changes to 2025, investors should keep this idea in mind as it relates to expectations for near-term stock returns.

Earnings Don’t Grow to the Sky

Loyal readers of Marquette research publications are likely aware that a small handful of U.S. large-cap technology-oriented stocks, dubbed the “Magnificent 7,” has comprised an outsized portion of performance of the overall domestic equity market over the last several quarters. Specifically, Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta, and Tesla have accounted for roughly 55% of the total cumulative return of the S&P 500 Index since the beginning of last year. Much of this performance has been fueled by the remarkable earnings growth exhibited by these companies since early 2023, which can be observed in this week’s chart. Readers will note the striking periods of 3Q23, 4Q23, and 1Q24, during each of which the Magnificent 7 posted year-over-year earnings growth of more than 50%. This is in stark contrast to the growth notched by the S&P 500 Index during those periods, which was never more than 8%. As a result of these dynamics, the Magnificent 7 stocks have surged to a combined weight of roughly 32% of the S&P 500 Index as of the time of this writing.

Many of the Magnificent 7 companies are set to report third quarter results later this week, and this basket of stocks is expected to post year-over-year earnings growth of more than 18% for the period (compared to roughly 4% for the S&P 500 Index as a whole). While outsized results like these are expected to continue into the fourth quarter, analysts expect a moderation of earnings growth for these high-flyers in 2025. Specifically, by the end of next year, consensus forecasts call for only a 3% differential between Magnificent 7 earnings growth and that of the S&P 500 Index. Investors may have already started to take note of these moderating expectations. To that point, since July 10, which represented the culmination of a 22% rally to begin 2024, the Bloomberg Magnificent 7 Index has fallen by roughly 2%. This performance figure lags that of every major S&P 500 Index sector during that time.

While the healthy forecasted earnings growth by the Magnificent 7 over the coming quarters should reassure investors that these businesses remain fundamentally sound, it is fair to question the extent to which these stocks will drive S&P 500 Index performance going forward. Investors should certainly expect more moderate returns, both on an absolute basis and relative to the broad market, from this cohort in the years ahead. Remaining broadly diversified across sectors, industries, and geographies, as well as thoughtful exposure to products (i.e., equal-weighted indices) that help mitigate market concentration risks where appropriate, are some tactics equity investors can use to navigate an environment of slowing earnings growth for the Magnificent 7.

The Market Doesn’t Care

With the election less than two weeks away, polls indicate a very tight race not only for president but for control of the House and Senate as well. Given that margins in some of the swing states are likely to be razor thin, final election results will not be determined until several days after November 5th. There is no debate that the candidates and their expected policies are vastly different, but as investors, should we care who wins? Does the market care?

In this edition, we examine a variety of historical data cuts to determine what market impacts might be expected based on the outcomes of this year’s elections.

3Q 2024 Market Insights

This video is a recording of a live webinar held October 23 by Marquette’s research team analyzing the third quarter of 2024 across the economy and various asset classes and themes we’ll be monitoring over the remainder of the year.

Our quarterly Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real assets, and private markets, with commentary by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Director of Research, Managing Partner
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Michael Carlton, Research Analyst
Hayley McCollum, Research Analyst

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.

If you have any questions, please send our team an email.

The Elusive Small-Cap Revival

U.S. small-cap equities have trailed their larger peers for over 13 years. Although the asset class has shown intermittent signs of strength throughout that period, including at the end of 2023 and in July of this year, a lasting shift in leadership continues to be elusive. When assessing the prospects of small-cap equities going forward, it may be helpful to analyze the high yield bond market, as the behavior of high yield spreads can serve as an indicator of small-cap strength. The primary reason for this relationship is likely that tighter spreads indicate economic strength and lower recession risk, and performance of small-cap stocks is closely tied to the health of the economy. To that point, over the last two decades when high yield spreads retreated below key levels outlined in this week’s chart, small-cap equities have tended to perform well. A recent example of this phenomenon came in late 2020, when spreads fell sharply, and the Russell 2000 Index advanced by over 22%. Spreads fell again in November of last year and remain tight to this day, and the Russell 2000 Index has advanced by roughly 36% over this period.

Although large-cap stocks continue to propel markets into the fourth quarter, there are several potential catalysts for small-cap equities that could be unlocked in the near future. First, forward valuations (e.g., price-to-earnings ratios) for small caps relative to large caps sit near historic lows. Additionally, investors may see a shift in Federal Reserve policy as a trigger for a market regime change, as small-cap equities are more negatively impacted by higher interest rates given the larger debt burdens these companies typically carry. Put simply, lower interest rates have historically been a tailwind for small-cap stock performance. Perhaps most importantly, the fundamental backdrop for small caps shows signs of improvement. Specifically, easing pressures from interest expenses and a reacceleration of sales may support earnings growth, which has fallen short of lofty expectations from the beginning of the year. Finally, the benefits of reshoring and recent government spending that will likely accrue to smaller companies have yet to be fully realized.

Despite these potential catalysts, a revival within the small-cap space remains elusive, at least for now. While a softer inflation reading in July spurred a brief rally in small-cap equities, the Russell 2000 Index has retreated by roughly 50 basis points since the Fed cut its policy rate. This figure is well below the 2.4% return notched by the S&P 500 Index since that time. Indeed, large-cap stocks may currently be perceived as a safe haven amid higher levels of market volatility, economic risk, geopolitical conflicts, and consumer weakness. Still, Marquette believes a dedicated allocation to small-cap stocks will ultimately prove beneficial to investors in the future given the diversification benefits offered by the space and the potential catalysts for stronger performance outlined above.

September is the Cruelest Month

The S&P 500 Index pulled back by more than 2% yesterday in a move that is not unprecedented based on the history of the benchmark. Specifically, the bellwether equity index has averaged a return of roughly -0.7% in the month of September dating back to 1928, which is particularly striking given that average performance of the benchmark has been positive in every other month of the year. There are several possible explanations for the potential anomaly that some have dubbed the “September Effect.” First, sales by investors returning from summer vacations aiming to lock in taxable gains or losses prior to the end of the year could be a driving force behind lackluster September returns. Additionally, September could see higher levels of equity sales due to market participants seeking to fund tuition costs for their children prior to a new academic year. The September Effect could also be seen as a self-fulfilling prophecy, as expectations for poor near-term equity returns could lead to widespread investor selling.

It is important to highlight a few points related to the September Effect that may assuage concerns related to equity performance over the coming weeks. First, many economists chalk the September Effect up to pure chance, given that any persistent market anomaly would be exploited by investors, causing it to disappear over time. It is also important to remember that the S&P 500 Index has actually notched a positive return in roughly 52% of September months dating back to 1928, meaning that the average figure cited in the first paragraph is skewed by a few negative observations of significant magnitude. As it relates to this year, several factors could buoy equity prices in the near term, including resilient corporate earnings, moderating inflation, and a high probability of a reduction in interest rates by the Federal Reserve at its meeting later this month. While challenges also face equity markets at present, market participants should remain disciplined as it relates to portfolio allocation and adhere to long-term investment policy objectives. Indeed, while the September Effect may serve as a notable phenomenon worthy of additional study, it ultimately should not factor into the investor decision making process.

Profits and Employment: A Balancing Act

Following last week’s preliminary annual benchmark review from the Bureau of Labor Statistics that suggested U.S. job growth has been weaker than initially estimated, investors have been closely monitoring the labor market for signs of strain. Corporate profit margins may be particularly important to watch as they directly impact the labor market and have historically served as a leading indicator of layoffs and economic frailty.

Using the quarter-over-quarter percentage increase in average initial jobless claims as a proxy for changes in employment, this week’s chart highlights the relationship between the labor market and pre-tax corporate profit margins. Over the past three decades, corporate profit margins have generally trended higher and sit at approximately 12.2% today. While current margins are down slightly from recent cycle peaks, they remain elevated compared to historical levels. This signals that corporate profitability remains relatively robust. Despite challenges caused by higher rates and inflationary pressures, these higher margins have allowed companies to avoid significant layoffs by tapping into other cost-control measures as needed. Given that workforce reductions are often seen as a last resort for companies due to the high costs associated with obtaining, training, and retaining employees, significant layoffs typically do not occur until corporate profit margins have declined precipitously from cycle peaks. The orange line illustrates this point by showing sharp increases in initial jobless claims during economic downturns, including the Dot-Com Bubble, the Global Financial Crisis, and the COVID-19 pandemic, during which quarter-over-quarter jobless claims spiked by an astonishing 165%.

While there were certainly other dynamics at play during each of these recessionary periods, significant increases in layoffs generally coincided with slower growth and material declines in corporate profitability. These trends underscore the importance of monitoring these indicators in tandem.

The State of the American Consumer

The U.S. economy has long been driven by consumers, with consumption constituting more than two-thirds of GDP growth: As the consumer went, so went the economy. More recently, robust consumer spending has fueled positive domestic GDP growth and helped buoy the prices of financial assets. That said, there are now signs that these trends may be shifting. For instance, delinquency rates across various consumer loan types have ticked up, as have debt burdens as a share of overall household income. Additionally, personal savings rates in the U.S. have now dropped below long-term averages. From a big picture perspective, what do these trends mean for the overall health and growth of the economy?

This newsletter examines long-term tailwinds and emerging headwinds for the American consumer and expectations for both consumers and overall GDP growth going forward.

Keep Calm and Carry On

U.S. equity markets began last week on a volatile note, with the S&P 500 Index experiencing its biggest daily drop (-3%) since 2022. The factors behind this sharp decline were outlined in last week’s publication, “Volatility Pops as Equities Drop.” In recent days, however, investors appear to have been appeased by more favorable economic data and carry trade exposures that are now much less significant. To that point, the S&P 500 experienced its largest daily gain since 2022 just a few days after Monday’s drop, rising 2.3% last Thursday, August 8. This week’s chart illustrates the most significant daily changes in the S&P 500 since 2020 in an attempt to compare recent market swings to those of previous years. Based on the information above, it is clear that last Monday’s 3% decline was much less severe than the most extreme daily losses exhibited by the index in 2020 and 2022. Interestingly, the largest daily loss of 12% for the S&P 500 in 2020, which came in response to the COVID-19 outbreak, was followed later that same week by the benchmark’s largest daily gain for the year (+9%).

The significant price movements within equity markets exhibited last week and more broadly illustrate two important points. First, market action can sometimes be driven by “animal spirits,” a term popularized by economist John Maynard Keynes that describes the emotional factors that occasionally supersede logic in investment decision making. Animal spirits are important for investors to keep in mind, as they help explain that many market swings are not indicative of a permanent shift in the economic landscape, but rather stem from human emotions such as fear or hope, which can be fickle. The second point is that adverse reactions to market selloffs can result in even more pain for investors since significant daily losses are often followed closely by large gains. To that point, an investor who allocated to the S&P 500 Index in the 1990s and missed the five best days of index performance would have seen a roughly 37% reduction in their final investment value relative to one who missed zero days (through the end of last week). Put simply, keeping calm and carrying on is often the best prescription for bouts of market turmoil.