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The S&P 500 shot up 5.5% in Q3 and marked the seventh advance of the last eight quarters. During this two-year period, the index has posted a total return of +66%.

Read this week's Major Trend. 

Read this week's Major Trend. 

Traditionally defensive themes such as Staples and Utilities have outperformed over the summer months, reminding investors of the benefit of not going all-in on the AI growth theme. Quality is one of the most robust defensive factors, but even so has managed to outperform during the bull market run that began in October 2022.  While some Quality funds are designed to play defense, others seem more inclined to the offensive side of the field. We recommend that investors decide if they are targeting Quality specifically as a defensive exposure or as a core long-term holding to ensure they select the appropriate fund.

Read this week's Major Trend. 

The Major Trend Index has oscillated within the Neutral range throughout 2024, moving back and forth between High Neutral and Neutral earlier on, and more recently between Neutral and Low Neutral.  Standing at Low Neutral today, the exact reading in the MTI within this range is less important than the trend, which has shifted to Neutral and below with recent economic data and weaker equity prices.

Read this week's Major Trend.

Financials is now the top sector weight in our Select Industries portfolio, with impressive valuations, growth, and relative strength driving industries within the sector up the ranks of the Group Selection (GS) Scores.

Homebuilding stocks are up more than fourfold since mid-2017, yet the group still ranks as the sixth most attractive among >100 industries we monitor. High mortgage rates and the frozen market for existing homes may continue to benefit the builders. Still, Homebuilding stocks are now near 2.0x price/book—a threshold that coincided with prior peaks in the group’s long-term relative strength.

The labor market is weakening, but the bulls prefer to say it is “normalizing.” While the latest tally of 7.7 million job openings is impressive, the last two-years’ decline seems too steep and too persistent to be called “normalization.” The slowdown also leaves the payroll-employment growth rate perilously close to the 1.4% economic stall speed seen at the outset of all but one previous recession.

The DXY is one of the few measures that shows the dollar is better off than it was four years ago. One dollar tucked under the mattress on the eve of the pandemic is now worth just $0.82, the steepest decline over such a short period since the early 1980s.

2022-24 monetary tightening has been one of the most aggressive cycles in history, but other stimuli may have muted its impact. First, fiscal policy has been conspicuously looser than any prior period of tight money. Second is the stock-market wealth effect: U.S. equity market cap has leapt nearly $12T (~40% of GDP)—a larger wealth increase (versus GDP) than that of the entire 1982-1987 bull market.

The yield curve is back in the spotlight, as the yield spread between the 10-yr. Treasury and 2-yr. Note finally flipped positive on September 4th, after a record 26 months of inversion. While some economists claim this steepening implies a recession is now imminent, the historical record of such “un-inversions” is a mixed bag—in some cases the recession was still eight months- to over one-year away.

Seven of eleven underlying sectors outperformed the overall index in August (+4.5% versus +2.3%, respectively). However, those seven subsets make up just 48% of the S&P 500. The +1% returns contributed by Info Tech and Communication Services (which comprise 39% of the S&P 500) highlight just how much the index depends on those two tranches of firms.

We think Mega-Cap Tech valuations are extremely hard to defend, even under the rosiest AI scenarios. The last couple of months have seen those stocks finally come under serious scrutiny—and such skepticism comes at a precarious time, both technically and psychologically.

Since the end of March, the S&P 500’s 12-Mo. Forward EPS estimate is up 6.2%; our 5-Yr. Normalized EPS estimate for the S&P 500 is up 4.2%; and 12-Mo. Trailing Cash Flow Per Share for the MSCI USA Index has increased 4.6%.

Royal Blue Growth (+4%) was our best performing style box in August. That gain has pushed this large-growth proxy’s median P/E ratio to 42.8x—the most extreme observation since the contemporary peak of 45.0x set in December 2021.

No bull market in history has faced stiffer monetary headwinds than the one that began in October 2022. Despite that challenge, stocks have illustrated the technical vitality of a youthful bull.

Bull markets that lacked a traditional recessionary “father figure” had shorter lives (33 mos. vs. 61 mos.) and produced gains just one-third the size (+63.6% vs. +186.9%). If today’s SPX bull matched the return of its four most-cyclically relevant predecessors, it would extend until May 2025, and top out at 5,852—8% above its September 6th close. (Not great.)

The Small Cap discount widened once again, as the long-running theme of Large Cap leadership over Small Caps resumed in August. The S&P 600 SmallCap index lost 2%, while the Equal Weighted S&P 500 gained 2%.