In the third quarter of 2024, the S&P 500 finally broadened beyond the Magnificent Seven (Apple, Microsoft, Amazon, Google, Tesla, Meta, and Nvidia). We have been anticipating this wider participation for nearly three quarters. More than 60% of the S&P 500 components beat the index for the period compared to only 25% in the first half of 2024. Also, eight of the eleven industry sectors outperformed the index. The equal-weighted S&P 500 index was up 9.1% versus 5.5% for the market-cap-weighted S&P 500.
The Federal Reserve cut interest rates 50 basis points in September for the first time in four years. As seen below in Table 1 the top two best performing sectors for the quarter were Utilities and REITs, both interest rate bond proxy sectors. The worst performing sectors were Energy, Information Technology, and Communication Services. Oil prices slumped 17% on weak global demand. Technology stocks faded after a torrid start to the year as investors gravitated toward value stocks. Along those lines, the dividend-payers cohort of the S&P 500 index (regardless of yield) rose about 10% and the non-payer cohort rose 7%. Dividend oriented strategies had returns that ranged from 7% to 9% in the third quarter, outpacing the S&P 500 index. Inflows into dividend oriented funds reached a 24-week high during the quarter.
Table 1 (As of 9/30/24)
S&P 500 Sector Performance
Elections on the horizon
The presidential elections are looming in November. For our previous commentary, the race was expected to be Biden versus Trump. However, with a new candidate in the mix, we are frequently asked how our portfolio is positioned and what are the investment implications now for a Harris or Trump victory.
Firstly, it’s important to remember that the Senate and House races have more impact on policy enactment. Current projections have the Senate leaning Republican and the House leaning Democrat, indicating a gridlocked Congress may be the outcome. Keep in mind, not all Biden policies passed despite Democrats controlling both the Senate and the House on his inauguration day. The Trump tax cuts of 2017 are set to expire at the end of 2025, including most provisions. Some, like the child tax credit, have bipartisan support. However, the corporate tax rate may rise but not to the prior 35% levels. The corporate stock buyback tax of 1% has not influenced a slowdown in buybacks, so it is unlikely to be eliminated. Some proposals like no tax on tips seem to have bipartisan support though others, such as taxing unrealized capital gains, seem unlikely to gather traction. Ultimately, it’s health care spending that constitutes a large part of GDP, while also falling under heavy government oversight. The Affordable Care Act, however, seems entrenched now. The hot topic is drug prices, but that too appears unlikely to change as Medicare uses its buying power. Weight loss drug prices are getting more scrutiny but the broadening potential of therapeutic benefits in cardiovascular, kidney, and dementia improvements makes it harder to challenge.
Outlook on the Economy and the Stock Market
US GDP remains resilient with growth in the 2-3% range and a normalizing labor market. While hiring has slowed, layoffs, as measured by jobless claims, also remain low. Consumers at all levels are being more selective in their spending as inflation eats away at their purchasing power. The recent interest rate cut appears preemptive as the labor market could deteriorate quickly.
Earnings for the S&P 500 remain driven by the Magnificent Seven. 2024 will see almost 10% growth in earnings. However, when decomposed further, Magnificent Seven companies are estimated to average 20% growth while the remaining companies of the S&P 500 Index are estimated to show 2.5% average earnings growth. By 2025, index earnings may approach 15%: 19% average growth from Mag 7 and 14% growth from the remaining.
All said, the stock market’s valuation of 21x forward PE seems rich, especially if the economy falters. However, lower interest rates may be the market’s saving grace as they potentially entice fixed-income investors to rotate into income stocks. In the meantime, we are paying particular attention to the fundamental underpinnings of each of our portfolio holdings.
Dividend Growth Scorecard
According to Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, in 3Q 2024, the cumulative dollar value of U.S. common stock dividends per share posted an 8.3 % increase for the trailing twelve months1.
As seen in Table 2, on a year-to-date basis, eleven GICS sectors have seen a dividend increase in 2024. For the year, twenty-eight of our thirty-seven holdings (76%) announced dividend increases of 12.2% on average. All said, it was a busy quarter as nine holdings in our portfolio announced increased dividend payments. From a sector perspective, the Information Technology sector came alive during the quarter and had 3 companies increase dividends ranging from 10-15%. The impact from AI spending and investment was cited from recent quarterly results which were also encouraging to see.
In addition, our sole Communications Services holding increased its dividend by a meaningful 35%! It’s also important to note that the holding is a “Dividend Initiator”, which means the company recently started paying a dividend. While the year has more to go, we are very pleased with our average dividend growth rate. At this point, we remain well ahead of the S&P 500’s 2024 forecast of 6% dividend growth.
Table 2
Brentview Dividend Growth (as of September 30, 2024)
Source: Public company filings
How is Brentview positioning our portfolios?
Brentview’s portfolio is currently balanced with both high and low yielding stocks. However, the overall portfolio yield remains higher than the S&P 500. We also manage portfolio volatility by maintaining a lower portfolio beta. During the quarter we added two new positions across the industrial and information technology sectors. We also eliminated two positions in both the communication services and information technology sectors.
Regarding positioning, our portfolio is structured to benefit from secular macro growth themes while also focusing on a company’s dividend growth profile. We believe Artificial Intelligence is a sustainable growth theme given its importance towards maintaining our global competitive advantage. As part of our research process, we track government economic incentives for industrial policy. For example, the AI value chain theme has ample indirect legislative support as AI’s biggest constraint is the lack of large-scale power sources. The recent passing of the Investment in Infrastructure & Jobs Act (IIJA) and the Advance Acts supported the revitalizing of clean energy, specifically nuclear. To this end, we are bullish on utilities, especially those with renewables and existing nuclear fleets.
During the quarter we also increased our Health Care weighting, as history has shown that this sector does well after an initial interest rate cut. We also raised our Industrials and Materials sector exposure to participate in an upswing in infrastructure spending. Like AI & Nuclear, we believe infrastructure spending is a necessity to maintain our global competitive position.
Sources
This commentary reflects the views of Brentview Investment Management and is subject to change as market and other conditions warrant. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, sector, or index. The commentary should not be seen as a solicitation or offer to buy or sell any securities. The advisor (Brentview Investment Management, LLC), and their employees and clients, may hold or trade the securities mentioned in this commentary. Diversification does not guarantee a profit or eliminate the risk of a loss. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
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