Q3 2024 Market Review and Q4 Outlook
- Trevor Cobb
- Oct 15, 2024
- 8 min read
Updated: Mar 16
The third quarter of 2024 marked a pivotal moment in global financial markets. With the Federal Reserve’s decisive action to cut U.S. interest rates by 50 basis points and signal a longer-term easing cycle, markets are recalibrating their expectations for growth, inflation, and corporate performance. The shift highlights the Fed’s pivot from a strict focus on inflation to balancing its dual mandate of price stability and employment, signaling a new phase in the post-pandemic economic recovery.
This transition has set the stage for evolving dynamics in the global economy and financial markets, as businesses, consumers, and investors adjust to the changing macroeconomic backdrop. The third quarter reflected both optimism and caution, as markets digested these developments while assessing the potential risks and rewards for the remainder of the year.
In this report, we review the key developments in Q3 2024 and outline our outlook for Q4 2024 and beyond, covering key asset classes and regional economic performance.
Q3 2024 Market Review
Economic Developments and Fed Policy
The defining feature of Q3 2024 was the Federal Reserve’s shift toward a more accommodative monetary stance. The Fed’s 50 basis point interest rate cut signaled an intent to support economic growth after a period of aggressive tightening. Inflation, which had been the central focus of monetary policy since the post-pandemic recovery began, showed signs of moderating, giving the Fed room to address concerns about the labor market.
Inflation and Growth: Inflationary pressures, while still present, began to ease in response to the Fed’s actions, with a return to the 2% target expected by mid-2025. U.S. economic growth remained relatively resilient, though a moderate slowdown was evident, with GDP growth projected to stabilize around 2% in the coming quarters.
Labor Market Dynamics: The labor market, while still strong, showed signs of softening, with a slight increase in unemployment and wage growth remaining relatively contained. The Fed’s easing was partly motivated by the need to maintain employment levels and prevent a sharper slowdown in hiring.
Corporate Confidence and Consumer Spending
Corporate sentiment remained fragile in Q3, although there were positive signals from certain sectors. With borrowing costs expected to decline, companies may begin to regain confidence in their expansion plans.
Corporate Confidence: Firms are cautiously optimistic that lower interest rates will create more favorable conditions for investment, particularly in technology and in capital-intensive sectors such as industrials. However, concerns about global economic weakness, particularly in Europe and China, weighed on sentiment.
Consumer Behavior: On the consumer side, spending moderated in response to a cooling labor market but remained resilient overall. While there were concerns about potential weakness in consumer confidence, strong savings and stable household balance sheets have provided a buffer.
Recession Risks and Global Considerations
Despite the Fed’s accommodative stance, recession risks remain on the horizon. Many analysts believe the rapid expansion of the U.S. economy over the past year is unsustainable, and a slowdown in the latter half of 2024 is widely anticipated.
Recession Risks: Traditional recession triggers such as excessive corporate leverage or capital misallocation are largely absent, but the cooling economy could be vulnerable to external shocks. U.S. consumers and businesses are not overextended, yet global headwinds could exacerbate the slowdown.
Global Market Dynamics: The global picture was mixed in Q3. While U.S. markets showed resilience, Europe continued to face sluggish growth, with the goods cycle struggling to recover. China, grappling with a faltering property market and weak demand, saw limited improvement, while Japan remained on the path of cautious recovery.
Financial Market Performance
Equity and bond markets were shaped by both optimism around the Fed’s easing and concerns about a potential economic slowdown.
Equities: U.S. equities performed well, particularly in sectors like technology and consumer discretionary. The S&P 500 showed continued strength, although earnings growth is expected to slow in 2025 as the economy moderates. Meanwhile, international equities had a more mixed performance, with Japanese and emerging market stocks (excluding China) outperforming Europe and China.
Fixed Income: In credit markets, high yield bonds maintained tight spreads, reflecting confidence in the extension of the economic cycle. Bond markets, however, navigated several challenges, with U.S. Treasury yields remaining relatively high and concerns about future inflationary pressures.
Q4 2024 Outlook and Beyond
As we enter the final quarter of 2024, the outlook for the U.S. and global economy is defined by cautious optimism. While the risks of a recession have not disappeared, there is growing confidence in the possibility of a soft landing. We break down the outlook by asset class and region to provide a comprehensive market review of where we see opportunities and potential challenges for the remainder of the year and into 2025.
Economic Outlook: U.S. and Global
U.S. Economic Outlook: The most likely scenario for the U.S. economy in Q4 2024 is a soft landing. Inflation is expected to continue moderating, with wage growth decelerating and labor market pressures easing. The Fed’s preemptive rate cuts should help mitigate deeper economic challenges, although risks remain if consumer confidence weakens significantly.
Global Economic Dynamics: Globally, the picture remains mixed. Europe and the UK are beginning to show signs of recovery after facing near-recession conditions in 2023. However, Germany remains a drag on European growth, while China’s economic outlook continues to be weighed down by weak consumer confidence and property market challenges.
Political Landscape and Market Implications as Election Looms
As we enter the final stretch of the 2024 U.S. election cycle, the races for president and control of Congress have become increasingly competitive. While elections are a central part of democratic governance, it is important to note that, historically, the U.S. political system’s checks and balances have limited the ability of any one individual or party to enact sweeping reforms. As a result, the U.S. markets have typically shown resilience, with U.S. stocks trending higher regardless of which party holds office. Long-term investors would be wise to keep this in mind, staying focused on their strategic plans and avoiding reactions to short-term political noise.
Historically, diversified portfolios, such as the classic 60/40 mix, have delivered positive returns during most presidential-election years, and we expect 2024 to follow suit. However, there are several political risks we are monitoring closely as the election approaches.
Key Risks Heading into November 2024 Elections
Tariffs: Tariffs are a key area of concern, but not as impactful as many investors might assume. Noted economist Paul Krugman has long argued that moderate tariffs do not have significant effects on economic growth. The U.S. has been engaged in a limited trade war since 2018, which has not yet been a systemic event for markets. That said, more extreme measures, such as a 60% tariff on all imports from China, could have significant consequences.
Corporate Taxes: Changes in corporate taxation could materially affect markets. The Democratic candidate Kamala Harris has proposed increasing the corporate tax rate to 28%, while Republican Donald Trump is advocating for a decrease to 15%. Such shifts in corporate tax rates could impact S&P 500® earnings-per-share growth by 5-10 percentage points. The legislative outcome of the election, particularly whether it results in a gridlocked Congress or a single-party "wave" victory, will largely determine the likelihood of tax changes.
Fiscal Policy and Treasury Yields: Both major political parties have presided over substantial fiscal deficits in recent years. In the event of a wave election, continued fiscal largesse could push U.S. Treasury yields higher, especially if the U.S. economy remains resilient.
Fed Independence: While Fed Chair Jay Powell’s term runs through May 2026, the long-term independence of the Federal Reserve remains a point of discussion in political circles. Although there are excellent candidates on the Fed’s Board of Governors, any perceived threats to the central bank’s independence could unsettle inflation expectations and steepen the Treasury yield curve.
U.S. Market Outlook
Equities
Outlook for U.S. Equities: We maintain a positive outlook for U.S. equities, supported by a favorable macroeconomic environment and the Fed’s easing policy. While earnings growth is expected to moderate, sectors like technology, healthcare, and consumer discretionary are well-positioned to benefit from structural trends, including artificial intelligence and digital transformation.
Sector Positioning: We continue to favor U.S. equities, with a focus on mega-cap tech firms that have strong fundamentals and are well-positioned for long-term growth. Additionally, small-cap stocks, particularly those in the industrial and energy sectors, offer potential for outsized returns as the economy stabilizes.
Fixed Income and Credit Markets
Bond Market Dynamics: U.S. bond markets will likely continue to face volatility as investors weigh the impact of falling interest rates against lingering inflation concerns. With 10-year U.S. Treasury yields hovering around 3.75%, we remain neutral on duration but see selective opportunities in shorter-duration bonds and high-quality corporate credit.
High Yield Credit: High yield bonds offer attractive risk-adjusted returns, with yields of around 7% and low default risks. We expect credit spreads to remain tight as the economy avoids a recession, but investors should remain vigilant for potential shifts in sentiment if economic conditions worsen.
Global Market Outlook
Europe and the UK
European Equities: Europe’s recovery is gaining momentum, with stronger bank lending and rising consumer confidence, particularly in France and Spain. However, Germany’s reliance on China and its lagging industrial sector remain challenges. We remain cautious on European equities, particularly in the manufacturing and industrial sectors, while maintaining a more optimistic outlook on services and technology firms.
UK Markets: The UK has finally begun to recover from prolonged stagnation, with rising business confidence and moderating inflation. We believe UK equities offer selective opportunities, particularly in the financial and consumer sectors, as the economy stabilizes.
Japan and China: A Tale of Contrasts
Japan: Japan continues to experience uneven growth, with weak household spending offset by rising business confidence. While the Bank of Japan’s decision to raise rates could pose risks to growth, we remain optimistic about Japan’s corporate governance reforms and earnings outlook, particularly in the technology and industrial sectors.
China: China’s outlook remains one of the more concerning global stories. Weak consumer confidence, lingering property market challenges, and subdued demand are dragging down growth. While the Chinese government has not yet implemented large-scale stimulus, we remain cautious on Chinese equities and prefer exposure to other emerging markets, which offer more compelling growth prospects.
Asset Class Outlook
Equities
U.S. Equities: Our "add on weakness" approach continues for U.S. equities, particularly in mega-cap tech and energy sectors. Despite high valuations, strong corporate fundamentals and earnings resilience support our positive outlook.
International Equities: We favor Japanese and select emerging market equities outside of China. While we remain cautious on European stocks, Japanese firms and emerging markets present opportunities, especially given the Fed’s dovish turn.
Fixed Income
Government Bonds: We remain neutral on long-duration government bonds but see opportunities in shorter-dated U.S. Treasuries. In Europe, select core bonds offer attractive risk-reward dynamics as yields adjust to lower growth expectations.
Credit Markets: High yield bonds are a key area of focus, offering equity-like returns with lower volatility. Despite the potential for economic slowdown, we expect credit spreads to remain compressed as the cycle extends.
Commodities and Currencies
Oil and Gold: Oil prices may remain under pressure due to weak demand, particularly from China, though geopolitical risks could create spikes. Gold, while typically benefiting from rate cuts, may face near
U.S. Dollar and Yen: The U.S. dollar remains expensive, and we expect it to depreciate in a soft landing scenario. The Japanese yen is no longer oversold, following the unwinding of the yen carry trade.
Real Estate and Infrastructure:
Attractive Valuation: Both sectors are still attractively priced relative to broader equities, though the valuation gap has narrowed following a 15% rally in listed real estate in Q3.
Diversification: We believe real estate and infrastructure can continue to serve as valuable diversifiers in portfolios, especially as central banks cut rates, supporting the sector.
Private Markets:
M&A and Real Estate: The rate-cutting cycle should provide a floor under commercial real estate and potentially unlock M&A opportunities, though borrowing costs will remain elevated through the end of 2024.
Operational Focus: Private market participants will need to focus on operational value-add, and the dispersion of outcomes within the sector will be high due to ongoing macroeconomic uncertainty, making manager selection critical for success.
Conclusion
As we look ahead to Q4 2024, maintaining a diversified, balanced approach is essential given the mixed signals from markets. While we remain cautiously optimistic about a soft landing in the U.S., the potential for downside risks—particularly from lingering recession concerns—means that protecting against volatility and focusing on long-term strategy should guide investment decisions.
Sources and Disclosures