Third Quarter 2024 Review
The third quarter of 2024 witnessed significant market volatility, particularly through the transitions from July to August and into September. During this period, volatility spiked, resulting in dramatic market movements. Some indexes recovered quickly, while others, notably the NASDAQ 100, struggled to regain their mid-July highs. This volatility was primarily fueled by uncertainty surrounding the economic outlook, heightened by contradictory financial data being presented to investors.
Conflicting Jobs Data
The job market data during this quarter was mixed at best. Initially, a disappointing July jobs report raised alarms about potential economic slippage, which was further compounded by another weak report for August. However, the narrative shifted when the September jobs report, released in early October, surpassed expectations and brought notable upward adjustments for the previous two months. This inconsistency left markets in a state of confusion, especially when the October report indicated far lower than anticipated growth in non-farm payrolls, with prior months being revised downwards.
Amid all this data turbulence, the Federal Reserve's decision to cut the overnight rates by 50 basis points in mid-September aimed to stave off a prospective economic downturn. Strikingly, while the Fed took these precautionary measures, the 10-year Treasury rate rose by around 60 basis points, reflecting investor demand for a premium on longer-duration investments. This divergence emphasizes the reality that despite the Fed’s intentions, market reactions often dictate financial trends.
Impact on Economic Conditions
Parsing through the varied economic signals proves challenging. The fixed-income market, for instance, is influenced by inconsistent economic data, which often undergoes substantial revisions. Should the economy continue to outperform expectations, we may see additional market-driven rate increases, a strengthening dollar, and tighter financial conditions, which in turn could limit the Fed's scope for rate cuts.
S&P 500 Earnings Outlook
Turning our attention to equity markets, we are seeing downward revisions in earnings estimates for the S&P 500 for both 2024 and 2025. This adjustment reflects not a faltering economy but rather previous inaccuracies in projected gross margins and a lack of awareness regarding how a strong dollar can suppress earnings growth.
Historically, analysts have tended to set initial gross margin estimates high, only to see adjustments down over time. For context, estimates for 2023 began at 12.5% and for 2024 at 13%, while 2025's starting estimate sits at a lofty 13.8%. This level seems ambitious, especially when we consider the only year gross margins exceeded 13% was in 2021—a period with vastly different economic conditions.
Analyzing projections, if we assume sales around $2000 per share with margins closer to a practical 12.75%, earnings for 2025 may drop to between $250 and $260 per share, compared to a current implied earnings estimate of $272.85. Such a decline would have ramifications, increasing the S&P 500’s price-to-earnings ratio and reducing anticipated growth rates for 2025 to between 4.5% and 8.5%, down from approximately 14%.
Portfolio Management Insights
In light of these developments, I maintain a cautious posture regarding the equity market, believing it remains overpriced at its current valuation. This perspective drives my portfolio adjustments. Despite this vigilance, we have seen a relative underperformance compared to the S&P 500 Total Return Index thus far in 2024.
As of September 30, the Mott Capital Thematic Growth Portfolio achieved a rise of 9.58%, net of fees and including dividends, while the S&P 500 Total Return Index growth stood at 22.1%. The overall portfolio is stable, with minimal adjustments made since the last report.
3Q 2024 Stock Performance Overview
Highlighting specific stock performance, Illumina (NASDAQ: ILMN) notably surged nearly 25% during the quarter, contrasted by Shopify (NYSE: SHOP) with gains of 21.3% and Intuitive Surgical (NASDAQ: ISRG) realizing a 17.7% increase. In contrast, some technology stocks faced declines, with Alphabet (NASDAQ: GOOGL) seeing a drop of 9.0% and Microsoft's stock reflecting a 3.7% decrease. The heightened scrutiny over technology spending on artificial intelligence projects has placed pressure on these giants.
Despite challenges in performance, companies like Boeing (NYSE: BA) continue to manage through turbulence. Falling by 16.5%, Boeing is implementing strategies to strengthen its balance sheet, including addressing a recent strike and appointing a new CEO. With a significant backlog of orders valued over $500 billion, I remain confident in Boeing's long-term prospects.
Currently, our liquidity maintains a range of 25% to 30%, providing a solid buffer to capitalize on any market pullbacks, as long as valuations seem favorable.
Until next period,
Frequently Asked Questions
What were the main drivers of market volatility in Q3 2024?
The volatility stemmed from inconsistent economic data and confusion in labor market reports, causing uncertainty among investors.
How did the Federal Reserve respond to economic concerns?
The Fed cut overnight rates by 50 basis points to avert a potential economic slowdown amid mixed economic signals.
What is the earnings outlook for the S&P 500 in 2024 and 2025?
Earnings estimates for the S&P 500 have been revised downwards for both years due to previous overestimations of gross margins.
How has Illumina's stock performed recently?
Illumina's stock notably rose by nearly 25% during the third quarter, reflecting positive investor sentiment.
What strategy is being used for the portfolio management?
The strategy involves caution, considering valuations high, while maintaining liquidity to seize favorable opportunities if market conditions shift.
