Quarterly market outlook - third quarter 2024

Our investment strategists provide Edward Jones’ perspective on the latest economic activity and what it may mean for you.

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Asset class performance

 Asset class performance
Source: Morningstar Direct, 6/30/2024. Total returns in USD. Cash represented by the Bloomberg US Treasury Bellwethers 3-Month Index. U.S. investment-grade bonds represented by the Bloomberg US Aggregate Bond Index. U.S. high-yield bonds represented by the Bloomberg US HY 2% Issuer Cap Index. International bonds represented by the Bloomberg Global Aggregate Ex USD Hedged Index. Emerging-market debt represented by the Bloomberg Emerging Market USD Aggregate Index. U.S. large-cap stocks represented by the S&P 500 Index. Developed international large-cap stocks represented by the MSCI EAFE Index. U.S. mid-cap stocks represented by the Russell Mid-cap index. U.S. small-cap stocks represented by the Russell 2000 Index. International small- and mid-cap stocks represented by the MSCI EAFE SMID Index. Emerging-market equity represented by the MSCI EM Index.

Past performance does not guarantee future results. An index is unmanaged and is not available for direct investment.

Looking back at the 1st half

Stocks rallied in the first half of 2024, driven by ongoing strength in mega-cap tech. But investment-grade bond returns have been muted in the face of higher yields.

Mega-cap tech leads U.S. markets higher while bonds lag

Equity markets rose in the first half of the year, led by a 15% gain in U.S. large-cap stocks. The usual suspects drove the gains for U.S. large-cap stocks, with information technology and communication services each higher by over 26% year to date. Enthusiasm around the growth potential of artificial intelligence (AI), along with robust profit growth, has lifted these sectors higher.

Bond yields rose modestly in the first half of 2024, pressuring investment-grade bond returns. Steady economic growth supported lower-quality issuers, with U.S. high-yield bonds and emerging-market debt posting modest gains in the first half.

Fed likely to follow global central banks’ easing policy

After two years of central banks tightening monetary policy to combat inflation, the European Central Bank and the Bank of Canada were the first of the G7 central banks to lower policy rates, each cutting rates by 0.25% in June. Economic growth in Europe and Canada has been sluggish. This, combined with lower inflation, provided policymakers with the confidence needed to begin cutting rates.

The Federal Reserve has maintained its policy rate target range at 5.25%–5.5% since July 2023. After several months of higher-than-expected inflation to begin 2024, inflation resumed its trend lower in Q2. If sustained in the months ahead, this could lead the Fed to cut interest rates once or twice this year.

International stock markets rise, but a stronger dollar dampens returns

International stocks gained in the first half of 2024, with emerging-market stocks rising 7.5% and developed international large-cap stocks higher by 5.3%. Fiscal support from China’s policymakers helped emerging-market stocks, while improving economic growth in Europe, albeit from low rates, and strong corporate profit growth in Japan aided developed international stocks. But a stronger U.S. dollar partially offset the rise in international stock prices.

Excluding the impact of currency, developed international large-cap and emerging-market stocks gained over 10% in the first half.

Action for investors

Narrow market leadership may make you question the value of diversification. We recommend resisting the urge to chase performance and instead maintain a diversified portfolio aligned to your long-term goals.

 Job openings move lower alongside wage growth
Source: Bloomberg.

Economic outlook

The U.S. economy continues to grow at or above trend levels but has cooled from growth rates seen in 2023. In Q1, U.S. GDP growth was 1.3% annualized, down from 3.4% in Q4 of 2023. However, consumption remained resilient at 2%, while government spending and net exports drove much of the softness.

As we look toward the back half of 2024, we expect economic growth to moderate from this past year, perhaps toward trend growth of 1.5% to 2%, driven by a normalization in the labor market and softening consumption.

Labor market shows early signs of cooling

The U.S. labor market went through a period of strength in the post-pandemic period. Average nonfarm jobs added from 2021 to 2023 were 324,000, while the unemployment rate averaged an impressive 3.6%. However, the labor market has cooled a bit this year, with the unemployment rate now at 4%, the highest since 2021. Leading indicators point to further softening, as job openings and the quits rate (the percentage of employees who voluntarily leave jobs) have fallen to recent lows. Meanwhile, the labor supply continues to increase, supported by immigration as well.

The labor market’s supply-and-demand dynamics could lead to further pickup in the unemployment rate and put some downward pressure on wage growth, in our view. If job uncertainty is elevated, consumer sentiment and some consumption may be negatively impacted. However, we continue to see this a normalization from a period of outsized strength rather than a deep or prolonged downturn.

Inflation may continue its bumpy path lower

After hotter-than-expected inflation data in Q1, recent inflation readings have surprised to the downside. In our view, two potential drivers could move inflation closer to the Federal Reserve’s 2% target:

  1. Shelter and rent components of inflation moderate, especially given real-time data has already slowed
  2. Services inflation cools as wage growth slows

While inflation may not drop in a straight line, we believe it should move lower, giving the Fed more comfort to signal rate cuts.

Action for investors

We believe the U.S. economic expansion can continue but likely at a slower pace, with U.S. GDP growth easing to trend levels of 1.5% to 2% annualized. In this backdrop, we continue to favor U.S. large-cap and mid-cap stocks, which we believe can do well as the labor market cools, inflation moderates and the Fed potentially starts cutting rates.

Disclaimer

Important information:

Investing in equities involves risk. The value of your shares will fluctuate, and you may lose principal.


 By Q4, earnings growth should broaden beyond tech (YoY%)
Source: FactSet.

Equity outlook

The U.S. stock markets continued to perform well in Q2. Despite a 4.5% correction in April, the S&P 500 was up over 4% for the quarter and on pace for gains of over 14% year to date. The markets’ momentum continues to lie in mega-cap technology, as enthusiasm around artificial intelligence (AI) has driven tech sectors and the broader market higher.

Can market leadership broaden?

Given our view that AI is in the early innings of a long-term growth phase, we believe technology sectors will continue to play a meaningful role in portfolios. Keep in mind that the S&P 500 has nearly a 50% weight to three growth sectors — technology, communication services and consumer discretionary — all of which house mega-cap AI stocks. These companies not only have delivered on earnings but have fortress cash positions, allowing them to reinvest in their businesses and return value to shareholders.

But we continue to believe market leadership should broaden beyond mega-cap technology for a few reasons.

  • First, we see earnings growth broadening in the back half of the year. While the contribution to earnings growth in Q1 came largely from technology sectors, by Q4 earnings growth will be driven equally by sectors outside technology, which should support these sectors as well.
  • Second, we believe that as we get closer to Fed rate cuts, cyclical areas of the market may play catch-up as yields moderate.
  • And finally, while the enablers of AI like semiconductors have gained most thus far, we believe that over time, the efficiencies from AI will be felt across sectors, which should support broader stock leadership as well.

Will the presidential election trigger volatility?

Historically, stock markets have experienced volatility in the six to eight weeks prior to U.S. Election Day, which is slated for Nov. 5 this year. However, markets typically recover in the weeks following the election.

In this election cycle, we expect Congress to remain divided, which means no major new regulation or legislation is likely, regardless of which party wins. Markets tend to prefer this environment of political gridlock, as it means a more transparent operating environment for companies to run their businesses. Over the long run, markets tend to follow the fundamentals — including inflation, interest rates and economic growth — more so than politics and elections.

Action for investors

We recommend using bouts of volatility as opportunities to rebalance and diversify portfolios. We remain overweight on U.S. large- and mid-cap equities, both of which can benefit as the Federal Reserve gets closer to interest rate cuts and earnings growth broadens.

Disclaimer

Important information:

Investing in equities involves risk. The value of your shares will fluctuate, and you may lose principal.
 


 Moderating inflation should allow Fed to cut rates soon
Source: Federal Reserve, Bureau of Economic Analysis.

Fixed income outlook

We expect moderating inflation to allow the Federal Reserve to start cutting rates soon, which should push short-term rates lower, increasing reinvestment risk for short-term bonds and CDs and steepening the yield curve. U.S. high-yield bond credit spreads remain well below historical averages, providing less compensation for default risk.

The Fed signals 1 rate cut this year

At its June meeting, the Fed trimmed expectations to one interest rate cut for this year, down from three cuts at its March meeting. While Core PCE inflation remains above the Fed’s 2% target, we expect inflation to continue to moderate, driven in part by lower shelter inflation and slower wage growth. The shelter component of PCE should decline as it catches up to market-based measures, which show housing costs rising at a slower pace.

Cooling labor markets, reflected in fewer job openings and slowly rising unemployment, should help slow wage growth. We expect moderating inflation to allow the Fed to pivot to rate cuts, likely in September and/or December.

As the timing and pace of the cuts become clearer, short-term yields should decline, likely steepening the yield curve and leading to higher reinvestment risk for short-term bonds and CDs. We see value in intermediate- and long-term bonds and bond funds, which allow investors to lock in rates for longer.

U.S. investment-grade bonds could underperform U.S. mid-cap stocks

A likely Fed pivot to interest rate cuts should stimulate the economy, which would be supportive for stocks. Bonds typically perform well during Fed rate-cutting cycles as their prices rise. But bonds could still underperform U.S. mid-cap stocks, which offer a balance of quality and cyclicality to potentially benefit from economic growth.

U.S. high-yield bond credit spreads below historical averages

Resilient economic conditions support lower-quality issuers, including U.S. high-yield bonds. Credit spreads — which indicate the excess yield above U.S. Treasury bonds to compensate for default risk — are well below historical averages. We see limited opportunity for them to narrow further.

Emerging-market debt is more attractive in our view, due to its higher quality and longer duration, as it would likely benefit more from lower rates.

Action for investors

We recommend underweighting U.S. investment-grade bonds, as we expect U.S. mid-cap stocks to outperform over the near term. We also suggest overweighting emerging-market debt, with U.S. high-yield bonds as a potential source of funds. Adding to intermediate- and long-term bonds and bond funds can help reduce reinvestment risk by locking in rates for longer.

Disclaimer

Important information:

The return of principal for bond funds and funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.


 Narrowing growth gap could help international developed stocks
Source: Bloomberg, Edward Jones. U.S. stocks represented by the S&P 500; EU stocks represented by the Stoxx 600.

International outlook

Global growth stayed resilient in Q2 despite high borrowing costs, bolstered by U.S. strength. As major central banks start cutting rates to normalize policy, early signs of recovery outside the U.S. are starting to emerge.

European economy sees a gradual rebound

After the euro area economy stagnated for more than a year, a modest recovery appears to be underway. Growth picked up more than expected in Q1, and timely survey indicators have moved higher since then, suggesting the region’s cyclical outlook is improving.

Despite unemployment falling to historic lows, inflation pressures have receded, and the European Central Bank (ECB) has started to gradually ease policy. Political uncertainty in France at the end of Q2 weighed on stocks in the region. But the Stoxx 50, a proxy for European large-cap stocks, has been keeping pace with the S&P 500 over the past two years and continues to trade at large discount to U.S. stocks.

With eurozone activity rebounding from a lull and U.S. economic activity normalizing after a period of exceptional strength, we believe international developed-market stocks offer catch-up potential and diversification benefits.

China stocks rally, but concerns remain

In response to an uncertain economic environment and an ongoing real estate crisis, China’s policymakers have lowered interest rates, allowed banks to keep smaller reserves, and announced measures to absorb some of the excess housing inventory. The policy support has helped improve investor sentiment and sparked a Q2 rebound in stocks.

But we remain cautious on the sustainability of the rally: Earnings estimates have not turned higher and are hovering around 2017 levels. Also, housing activity remains depressed, and there is a looming threat of another trade war ahead of the U.S. elections. Regardless of the election outcome, the fracturing in the U.S.–China relationship could continue.

Global rate-cutting cycle begins

More central banks began easing policy in Q2, with the ECB and Bank of Canada (BoC) lowering interest rates in June. With inflation not yet returned to target, central banks will likely take a cautious approach to rate cuts. But we think a multiyear easing cycle will continue to gain steam next year.

Lower rates can help drive a recovery in manufacturing activity and benefit cyclical sectors, which carry a higher weight in international indexes. Once the Federal Reserve signals it’s ready to lower rates as well, this could weigh on the U.S. dollar, helping the performance of international investments.

Action for investors

We recommend underweighting emerging-market equities, staying neutral with international developed equities, and overweighting U.S. stocks. Within fixed income, we see an opportunity to overweight emerging-market debt, which has higher interest rate sensitivity and historically outperforms U.S. bonds in periods following peak Fed policy.

Disclaimer

Important information:

Investing in equities involves risk. The value of your shares will fluctuate, and you may lose principal.

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.


 Government debt and deficits: Growing but not in uncharted waters
Source: Federal Reserve Bank of St. Louis, Congressional Budget Office. Federal debt held by the public.

Election issues and implications

Although presidential elections have historically not been a lasting influence on financial market performance, we do think there will be several issues raised during the campaign that connect to fundamental factors important to the economy and markets, including government debt, Federal Reserve policy and trade. We don’t expect the election’s outcome to dramatically alter the course of the markets or economy, but these factors do, in our view, have some near- and long-term implications.

Debt and deficits: A slowly approaching train

The U.S. fiscal situation will be under scrutiny during this election, particularly in light of budget deficits that have run north of 6% in recent years. What is concerning is the timing of the deficits as well as their size. We’ve seen larger, rising deficits as a percentage of GDP (mid-’70s, early ’80s, early 90s, 2008–10), but these accompanied periods of economic weakness. Today’s sizable deficits are occurring with above-average GDP growth. We believe this could require more fiscal restraint ahead, limiting the ability for fiscal support if the economy were to decline.

Overall federal debt poses a more structural challenge, but we do not believe this risk will come to bear in the near term. While the government’s $35 trillion-and-growing debt is an astronomical number, as a percentage of GDP, it’s not yet at a level that we think limits the government’s ability to borrow at reasonable rates. We also don’t see it as an immediate threat to the vibrancy of the economy or value of the U.S. dollar, though on the current trajectory, each is a viable risk further down the road.

Healthy economic growth offers the ability to delay or lessen those risks, so favorable economic policies can be a helpful outcome of the coming election. But we think the ultimate solution will require some form of fiscal spending and tax adjustments. We anticipate those to be more prominent in future elections, as we don’t expect either candidate this year to pursue material policies to address long-term debt issues.

Tariffs and trade in focus

We expect the campaign trail to include tough talk on trade with China. The U.S. economy’s growth does not rely dramatically on trade, but each candidate will likely want to pursue more favorable net trade terms.

That said, the use of tariffs to orchestrate such terms does present an inflationary risk. While such tactics were leveraged during former President Trump’s term, they occurred within a much more benign inflation environment. We think tariff policies will instigate some trade war anxieties for the markets ahead, but we think domestic consumption and investment trends will be the more powerful influence on economic outcomes.

The Fed will move independently of the election

The Fed would prefer to avoid any dramatic policy moves that could be construed as influencing the election. We are confident the Fed can and will act solely under the direction of incoming inflation and economic data. But the timing of such moves will likely occur in the months surrounding the election, with moderating inflation and softening employment conditions likely to support a case for a rate cut in the September–December window.

While that policy decision will be apolitical, we could see some election-driven uncertainty around the future of Fed Chair Jerome Powell’s role, if Trump were to propose a new Fed chief.

Action for investors

We recommend an overweight allocation to equities. Also, consider treating an election-driven market pullback as a buying opportunity.

Disclaimer

Important information:

Investing in equities involves risk. The value of your shares will fluctuate, and you may lose principal.


Strategic asset allocation guidance

Our strategic asset allocation represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals.

 Strategic asset allocation guidance chart
Source: Edward Jones.

Opportunistic portfolio guidance

Our opportunistic portfolio guidance represents our timely investment advice based on our global outlook. We expect this guidance to enhance your portfolio’s return potential, relative to our long-term strategic portfolio guidance, without taking on unintentional risk.

 Opportunistic asset allocation guidance
Source: Edward Jones

Visit our monthly portfolio brief for a discussion of portfolio performance.


Investment performance benchmarks

It’s natural to compare your portfolio’s performance to market performance benchmarks, but it’s important to put this information in the right context and understand the mix of investments you own. Talk with your financial advisor about any next steps for your portfolio to help you stay on track toward your long-term goals.

As of June 30, 2024

Asset class performance

Asset class performance
Total returnsFirst half 20243-year5-year
U.S. large-cap stocks15.310.115.0
U.S. mid-cap stocks5.02.39.4
U.S. small-cap stocks1.7-2.66.9
Int'l developed large-cap stocks5.32.66.5
Int'l small- & mid-cap stocks0.9-2.84.1
Emerging-market stocks7.5-5.13.1
U.S. investment-grade bonds-0.7-3.0-0.2
Int'l bonds0.7-0.40.5
Emerging-market debt2.2-2.20.5
U.S. high-yield bonds2.61.73.9
Cash2.73.12.2

U.S. equity sector performance

U.S. Equity Sector Performance
Total returnsFirst half 20243-year5-year
Information Technology28.219.727.1
Financials10.26.110.6
Consumer Staples9.07.49.4
Consumer Discretionary5.72.310.5
Communication Services26.76.314.7
Health Care7.86.711.5
Industrials7.88.111.5
Materials4.04.610.9
Real Estate-2.4-1.64.4
Utilities9.45.86.1
Energy10.924.912.9

Source: Morningstar Direct, 6/30/2024. Total returns in USD. 3- and 5-year periods are annualized returns. U.S. large-cap stocks represented by the S&P 500 Index. U.S. mid-cap stocks represented by the Russell Mid-cap Index. U.S. small-cap stocks represented by the Russell 2000 Index. International developed large-cap stocks represented by the MSCI EAFE Index. International small- and mid-cap stocks represented by the MSCI EAFE SMID Index. Emerging-market stocks represented by the MSCI EM Index. U.S. investment-grade bonds represented by the Bloomberg US Aggregate Bond Index. International bonds represented by the Bloomberg Global Aggregate Ex USD Hedged Index. Emerging-market debt represented by the Bloomberg Emerging Market USD Aggregate Index. U.S. high-yield bonds represented by the Bloomberg US HY 2% Issuer Cap Index. Cash represented by the Bloomberg US Treasury Bellwethers 3-Month index. Equity sectors of the S&P 500 Index. An index is unmanaged and is not available for direct investment. Performance does not include payment of any expenses, fees or sales charges, which would lower the performance results. The value of investments fluctuates, and investors can lose some or all of their principal. Past performance does not guarantee future results.

Investment Policy Committee

The Investment Policy Committee (IPC) defines and upholds Edward Jones investment philosophy, which is grounded in the principles of quality, diversification and a long-term focus.

The IPC meets regularly to talk about the markets, the economy and the current environment, propose new policies and review existing guidance — all with your financial needs at the center.

The IPC members — experts in economics, market strategy, asset allocation and financial solutions — each bring a unique perspective to developing recommendations that can help you achieve your financial goals.

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