Market Review
Fixed income struggled while U.S. mega-cap stocks reclaimed performance leadership
The adage “everything old is new again” rang true in October, as third quarter market drivers reversed course and market leadership resembled the first half of the year. The Russell 3000® reached an all-time high, led by large-capitalization growth stocks. International equities were down for the month. Although the Federal Reserve (Fed) cut its policy rate in September, long-term interest rates rose in October, causing the Bloomberg U.S. Aggregate Bond Index to deliver its worst monthly performance since April.
In addition to rising interest rates and tightening financial conditions, international equities were pressured by a stronger U.S. dollar, as the U.S. Dollar Index had its best month since early 2022 (Figure 1). Emerging market equities were impacted by ongoing equity market volatility in China, where stocks declined more than 10% from their early October peak as stimulus measures have yet to materialize into fiscal support.
Figure 1. Monthly Change in the U.S. Dollar Index (%)
The October international equity market pullback was underpinned by a stronger U.S.Dollar
As of 10/31/2024. Source: Bloomberg L.P.
View accessible version of this chart.
Theme of the Month
Market's path forward hinges on earnings and manufacturing
While potential policy changes stemming from the recent U.S. elections will likely increase market volatility in the short run, we believe corporate earnings will drive prices in the long run. In fact, data from Morningstar show the S&P 500® price and quarterly earnings per share have a 50-year correlation of 0.97. We believe October’s return to concentrated market performance introduces doubt about the long-term sustainability of the third quarter’s broad global rally, making third-quarter earnings season critical to the market’s path forward.
Theoretically, strong year-to-date returns across global markets would suggest an equally solid earnings backdrop — and the data appears to support that at the broad index level. Through October 31, the MSCI All Country World Index has a price return of 16%, and is expected to grow earnings by approximately 9% for the year. Similarly, the S&P 500 has a year-to-date return of 21% and earnings growth is expected to be 9% for the year.
However, beyond the headline earnings numbers, expectations for 2024 earnings growth and third-quarter results are disappointing. Why? First, earnings growth remains heavily supported by the Magnificent 7 mega-cap stocks (Alphabet, Inc.; Amazon.com, Inc.; Apple, Inc.; Meta Platforms, Inc.; Microsoft Corp.; Nvidia Corp. and Tesla, Inc.) for both the year and the quarter (Figure 2).
Figure 2. Consensus Earnings Growth Estimates
Earnings growth continues to languish ex-mega cap tech
| Earnings Growth | |||
| Q3 2024 | 2024 | 2025 | |
| S&P 500 | 5.2 | 9.4 | 15.2 |
| S&P 500 ex-Magnificent 7 | 2.1 | 4.4 | 13.8 |
| S&P 400 MidCap® | -7 | -5.4 | 15 |
| Russell 2000® | 5.8 | 14.8 | 51.1 |
| Russell 2000 ex-Biotechnology | -5 | -2.6 | 34 |
| MSCI World ex USA | 4.8 | 4.5 | 7.5 |
| MSCI Emerging Markets | 6.1 | 15.3 | 11.4 |
As of 10/31/2024. Source: FactSet®. FactSet® is a registered trademark of FactSet Research Systems Inc. and its affiliates.
Second, the Energy, Materials and Industrials sectors rank lowest in expected 2024 earnings growth but are among the most highly correlated to the business cycle. As such, their weak earnings confirm what leading economic indicators have suggested for some time: manufacturing activity is slowing. Furthermore, the monthly ISM® Manufacturing PMI® released on November 1, fell to the lowest level since July 2023. Excluding a brief rise to 50.3 in March 2024, the index has been below 50 — implying manufacturing activity is contracting — since November 2022. It is also notable that the Manufacturing data sits in stark contrast to a robust ISM® Services Index.
We believe the ISM Manufacturing survey highlights secular growth issues within the transportation and aerospace industries. Without a recovery in those key industries, we believe it will be a challenge to forge meaningful improvement in manufacturing earnings, and ultimately prices.
Within the transportation industry, automobile manufacturing has largely driven the slowdown, in our view. The auto industry has a significant multiplier effect on several other industries and sectors; therefore, its success remains a critical driver of U.S. manufacturing overall.
We believe the long-term success of the auto industry depends greatly on the speed and scale of building out an electric vehicle (EV) infrastructure grid. Global EV production accelerated from 14% to 18% in 2023, according to Bloomberg data, but currently only represents 10% of the U.S. auto market. However, the longer it takes to build national EV infrastructure, the more consumers will be hesitant to switch from internal combustion engine vehicles, in our view.
The automobile industry of the S&P 500 alone is expected to see earnings growth decline 7.6% in 2024, almost entirely stemming from challenges faced by Tesla, Inc. That said, consensus expects it to grow 11% in 2025. While the shift to EV usage may take longer than auto company management teams anticipate, if 2025 surprises to the upside in any material way, it could be enough to broaden earnings.
Like the auto industry, the aerospace industry has several downstream manufacturing and industrial support segments. We continue to see significant headwinds within aerospace, largely due to ongoing production issues at Boeing Co. While aerospace market performance has benefited from the inclusion of defense stocks, the air freight & logistics and passenger airlines industries paint a somewhat bleaker picture of aerospace since the ISM Manufacturing Index contraction in November 2022 (Figure 3).
Figure 3. Economic Data Comparison
Aerospace manufacturing performance stalls on stymied earnings growth
| Return (12/1/22 - 10/31/24) | 2024 Earnings Growth | 2025 Earnings Growth | |
| S&P 1500 Composite Index | 20.10% | 7.80% | 15.30% |
| S&P 1500 Air Freight & Logistics | -1.60% | -3.50% | 15.70% |
| S&P 1500 Passenger Airlines | 13.70% | -13.10% | 29.40% |
| The Boeing Company | -8.20% | n/a | n/a |
As of 10/31/2024. Source: Bloomberg L.P.
Aerospace manufacturing has been in contraction for two years and investors have been in limbo for some time. On October 31, 2023, consensus expected the air freight & logistics industry to grow earnings by nearly 15% in 2024, and positive growth for passenger airlines. However, as negative earnings revisions crept in throughout 2024, it took a toll on investor sentiment and returns suffered as a result; reaffirming our conviction that earnings drive price in the long run.
For market leadership to shift away from mega-cap tech toward a broader manufacturing rebound, we believe it will require an improvement in earnings guidance. While Fed rate cuts may not be enough to build the EV grid or assemble more airplane parts, fiscal stimulus measures could be a catalyst for investors in 2025.
For more information, please contact your PNC advisor.
Figure 1. Monthly Change in the U.S. Dollar Index (%)
The October international equity market pullback was underpinned by a stronger U.S. dollar (view image)
Date |
US Dollar Index Monthly Change |
11/2021 |
1.99 |
2/2022 |
0.17 |
5/2022 |
-1.17 |
8/2022 |
2.64 |
11/2022 |
5 |
2/2023 |
2.72 |
5/2023 |
2.62 |
8/2023 |
1.73 |
11/2023 |
-2.97 |
2/2024 |
0.85 |
5/2024 |
-1.46 |
8/2024 |
-2.3 |
As of 10/31/2024. Source: Bloomberg L.P.
Figure 2: Consensus Earnings Growth Estimates
Earnings growth continues to languish ex-mega cap tech
| Earnings Growth | |||
| Q3 2024 | 2024 | 2025 | |
| S&P 500 | 5.2 | 9.4 | 15.2 |
| S&P 500 ex-Magnificent 7 | 2.1 | 4.4 | 13.8 |
| S&P 400 MidCap® | -7 | -5.4 | 15 |
| Russell 2000® | 5.8 | 14.8 | 51.1 |
| Russell 2000 ex-Biotechnology | -5 | -2.6 | 34 |
| MSCI World ex USA | 4.8 | 4.5 | 7.5 |
| MSCI Emerging Markets | 6.1 | 15.3 | 11.4 |
As of 10/31/2024. Source: FactSet®. FactSet® is a registered trademark of FactSet Research Systems Inc. and its affiliates.
Figure 3: Aerospace Manufacturing Returns
Aerospace manufacturing performance stalls on stymied earnings growth
| Return (12/1/22 - 10/31/24) | 2024 Earnings Growth | 2025 Earnings Growth | |
| S&P 1500 Composite Index | 20.10% | 7.80% | 15.30% |
| S&P 1500 Air Freight & Logistics | -1.60% | -3.50% | 15.70% |
| S&P 1500 Passenger Airlines | 13.70% | -13.10% | 29.40% |
| The Boeing Company | -8.20% | n/a | n/a |
As of 10/31/2024. Source: Bloomberg L.P.
