What's Set to Drive the S&P 500 This Fall
As 2024 began, investors and analysts expressed concerns about the significant gains in the S&P 500, which had been driven by a narrow set of stocks, predominantly in the tech sector. Notably, stocks like Nvidia (NVDA) saw impressive early-year gains as investors rallied around the potential of artificial intelligence (AI). However, tech stocks’ momentum began to fade over the year, particularly as the Federal Reserve started implementing interest rate cuts to stimulate the broader economy. As a result, by the close of September, other sectors, such as utilities and real estate, began capturing more investor attention as rates declined, hinting at a broader-based recovery that could drive the index through the fall.
The Federal Reserve's interest rate policy is a significant factor likely to influence the S&P 500's performance in the coming months. Lower interest rates traditionally benefit sectors such as real estate and utilities, as borrowing costs decrease, making these sectors more attractive to investors. Utilities, which were up 18.5% for the third quarter, and real estate, up 16.3%, benefited directly from these dynamics. With continued Fed cuts likely, these sectors may sustain their momentum, drawing more capital as investors seek alternatives to the now-overbought tech stocks.
Two notable risks could alter this trajectory: potential supply chain disruptions from a port strike that started at the end of September and growing geopolitical tension in the Middle East. If unresolved, the strike could hinder the distribution of goods, negatively impacting various industries reliant on timely logistics. Meanwhile, an escalation in the Middle East could heighten oil price volatility, potentially weighing down the energy sector and increasing overall market uncertainty. Despite these risks, the S&P 500 index showed resilience, closing the third quarter with a 20.8% gain year-to-date—a testament to investor optimism that, for now, outweighs concerns of a possible downturn.
Looking ahead, the fourth quarter may see more diversified gains within the S&P 500 as investors continue reallocating funds from tech to other sectors that could benefit from lower interest rates. With tech up just 1.44% in the third quarter, the spotlight may shift to stocks with lower price-earnings ratios and stable dividend payouts. The utility sector, for example, holds appeal due to its predictable cash flows, especially as companies like Vistra (VST) and Constellation Energy (CEG) benefit from infrastructure growth aimed at supporting AI technology. As the Fed's rate cuts ripple through the economy, sectors that had previously lagged behind tech could emerge as new drivers of the S&P 500’s performance, signaling a broadening of market gains through the end of the year.
