As we approach the end of 2024, the outlook for the US stock market – which makes up almost 65% of the global equity benchmark – appears finely balanced.
Headwinds such as slowing growth, high market concentration, full valuations and election uncertainty are offset by several supportive tailwinds, including robust corporate earnings, moderating inflation and continued monetary policy easing.
Given these competing forces, a higher level of overall market volatility is expected moving forward. While this can be unsettling, it is a positive backdrop for active stockpicking, as company valuations and fundamental quality come into focus.
Currently, the S&P 500 is trading at 20x forward 12-month earnings. This still feels lofty
With corporate balance sheets still looking healthy and further room for manoeuvre on interest rates as the Federal Reserve is less fearful of inflationary pressures, a soft-landing scenario still looks like the most likely outcome.
From here, we expect a slow, steady grind forward, with periods of heightened volatility as markets react to macro data and earnings.
While many of the drivers behind the sharp correction we witnessed in August have been diluted, they have not disappeared. Given most of this year’s market rally has been driven by stocks becoming more expensive – with little change in their earnings potential – it is not surprising valuations remain elevated in the US, although they have slightly moderated. Currently, the S&P 500 is trading at 20x forward 12-month earnings. This still feels lofty.
The most recent earnings season proved positive for the most part, with the breadth of upside surprises looking strong versus previous quarters. For example, within the S&P 500, 80% of companies beat expectations versus the long-term average of 76%.
One of the more surprising features of the August correction was that markets overall behaved quite rationally
However, markets are forward looking, and there are some concerns surrounding the outlook for earnings. The magnitude of upside surprises across most sectors has generally weakened. Across technology, for example, the size of earnings per share was the lowest for a number of quarters.
One of the more surprising features of the August correction was that markets overall behaved quite rationally – most sectors performed in line with their respective earnings per share revisions. Stocks that missed expectations were punished severely.
With a potentially weaker growth environment ahead, and the prospect of more muted market returns, the importance of consistent, process-driven, stock selection increases. This year has already presented favourable opportunities for adding value, and this trend appears likely to continue, particularly as stock correlation – or the degree to which stock prices move together – decreases. As you might expect, stock correlations picked up noticeably during the recent August volatility but remain below medium-term averages.
Markets will likely continue to have bouts of volatility in the short term as sentiment shifts and markets move on emotions. In the long term, however, a company’s stock price tends to accurately reflect what it is economically worth.
Trump has repeatedly floated a 10% border tax on all goods coming to the US from abroad and a tariff as high as 60% on imports from China
While absolute returns may be pressured in the near term, this environment moving into 2025 should yield some good opportunities for stockpickers who stay anchored to fundamentals and reject false narratives.
Finally, when discussing the outlook for US stocks, it is also important to consider the upcoming election – the differing approaches of the candidates could have important implications for markets, industries and geopolitics during the next president’s time in office and beyond.
Former president Donald Trump and some of his key advisers have tended to regard significant trade deficits with other countries as potential signs of unfair competition and a detriment to the US economy.
In the run-up to the election, Trump has repeatedly floated a 10% border tax on all goods coming to the US from abroad and a tariff as high as 60% on imports from China. Setting aside feasibility and the specific numbers, these pronouncements signal that a second Trump administration would likely take an aggressive stance on trade policy that would extend beyond China.
Understanding companies’ exposure to overseas supply chains and their potential to increase prices in response to rising costs will be critical
A Kamala Harris presidency would likely take its cues from Joe Biden’s trade policies. During his presidential term, Biden left in place the tariffs that Trump levied on Chinese imports. His administration also took targeted actions on trade that tended to be informed by national security considerations and efforts to strengthen domestic industry.
In addition to focusing on strategically important industries, a Harris administration would probably favour a multilateral approach to trade policy, seeking to engage traditional US allies.
For investors, understanding companies’ exposure to overseas supply chains and their potential to increase prices in response to rising costs will be critical.
Justin White is portfolio manager of the T. Rowe Price US All‑Cap Opportunities Equity strategy
Comments