Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, rose 0.2% for the week.
  • The Fed’s interest rate cut, stable employment, falling inflation, and a wide federal budget deficit have produced an unusual macroeconomic environment in 2024.

Luke Kawa from Sherwood News noted this week that the US stock market, gauged by the S&P 500 index, is off to its best first three-quarters of a year in the 21st century. The market was up over 20% year-to-date through the end of September.


Source: Luke Kawa, Sherwood News, October 1, 2024

Given geopolitical turmoil and the upcoming presidential election, this may be a counterintuitive result. However, markets are responding to accelerating corporate profits, near record high profit margins, and a most unusual macroeconomic environment.

Two weeks ago, the Federal Reserve decided to lower its overnight target interest rate by 0.50%. That is a historically large rate cut in the context of a growing economy, but Fed Chairman Jerome Powell wanted to send a message that the Fed was prepared to defend full employment in a much more proactive manner versus its wait-and-see approach in the past.

The BLS’s monthly employment report for September released on Friday was far better than economists predicted. Payroll employment grew by 254,000 jobs versus 150,000 expected. July and August were revised higher by 72,000.  It was a good report.

The outsize rate cut from the Fed a few weeks back would not have made such an immediate impact on the labor market, and surely Mr. Powell is not yet regretting the 0.50%. Signals matter, however, for expectations, and the more the Fed indicates that it will create a more fruitful and cost-effective lending environment, the better the economy should respond.

A Federal Reserve in rate-cutting mode, falling inflation, a stable employment market: these are the ingredients to the heretofore elusive “soft landing” for the US economy. These factors, along with rising productivity, decent capital expenditures (particularly on AI), and (last but not least) a wide federal budget deficit, have led to strong corporate profit margins and expectations for earnings growth in 2025 and 2026. The stock market has responded by rising in 2024.

Stock market valuation metrics have also risen, and stocks could be described as “expensive”. Market skeptics claim the equity market is pricing in “perfection”. That is sort of what is happening, at least for now.

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