Last month, the bull market turned two years old.
Since bottoming on October 12, 2022, the S&P 500 Index has advanced 60% through the last day of October, according to S&P 500 data from the St. Louis Federal Reserve.
The S&P 500 Index is a market-capitalization-weighted index. Simply put, the larger companies in the index have a greater influence on its performance than the smaller companies.
Why is this important? On average -over this period of time - the larger companies have outperformed the smaller ones. According to S&P Global, the ten largest firms in the S&P 500 have nearly doubled since the S&P 500’s October 2022 low.
On the other hand, if each stock in the S&P 500 was equally weighted, this measure would have risen a solid 37% from its bottom on October 12, 2022, through October 31, 2024.
What accounts for this discrepancy? The AI revolution, which has helped several large tech firms significantly outperform the broader market.
Another index - the granddaddy of market averages - the Dow Jones Industrial Average, which is comprised of just 30 companies, touched its most recent bottom on September 30, 2022. It’s up an impressive 45% through the end of October, per St. Louis Federal Reserve data.
| Key Index Returns |
|
|
| Index |
MTD% |
YTD% |
| Dow Jones Industrial Average |
-1.3% |
10.8% |
| NASDAQ Composite |
-0.5% |
20.5% |
| S&P 500 Index |
-1.0% |
19.6% |
| Russell 2000 Index |
-1.5% |
8.4% |
| MSCI World ex-USA** |
-5.2% |
4.9% |
| MSCI Emerging Markets** |
-4.4% |
9.4% |
| Bloomberg U.S. Aggregate |
-2.5% |
1.9% |
Source: MSCI.com, Bloomberg, MarketWatch
MTD returns: September 30, 2024 – October 31, 2024
YTD returns: December 29, 2023 – October 31, 2024
**in US dollars
But market strength extends beyond technology. The surprisingly resilient U.S. economy has helped fuel profit growth, which has helped drive equities higher.
While AI and a resilient U.S. economy have been significant factors, let’s consider one more. The rate of inflation has slowed, taking pressure off the Federal Reserve, which hiked interest rates sharply in 2022.
The Fed has begun to slowly take its foot off the monetary brakes, with a much-anticipated rate cut near the end of September. It was the first reduction in interest rates by the Fed since early 2020.
Most investors believe the Fed will reduce interest rates through the remainder of the year, once in November and once in December.
But the pace for next year turns a little murky.
Will inflation continue to slow and gradually return to the Fed’s target of 2%? Will Fed policy help guide the economy to what’s called an "soft landing?" A soft landing is loosely defined as a slowdown in economic growth that leads to lower inflation without a recession.
Or, will economic growth remain strong, boosting corporate profits while slowing or ending rate cuts?
Or—let’s consider one more possible scenario— the economy falls into a recession.
Economic forecasters have traditionally struggled to pinpoint the onset of a profit-killing recession. Recessions tend to sneak up on economists. That said, you may recall in 2022, recession forecasts were widespread. Nonetheless, many of the brightest economic minds fell flat with their predictions.
Given today’s bull market, paraphrasing what we said last month bears repeating.
Robust market performance sometimes leads to euphoria that can encourage too much risk-taking. We strongly caution against that.
Leaning heavily into stocks may underpin returns, but unexpected volatility from any number of sources can spark shorter-term declines that extend beyond one's comfort level.
A balanced approach based on your goals and risk tolerance can help tap into the long-term potential stocks have historically offered while helping to diminish some of the downside risks that can materialize when markets unexpectedly decline.
