3rd Quarter 2024 Client Letter

I hope you and your family members are safe and enjoying my favorite time of the year Fall.
We hoped to stay in North Carolina at our home of 20 years to watch the leaves change as we have done for so many seasons. Unfortunately, this year hurricane Helene caused devastation across the Southeastern United States. Living in South Florida I have lived through so many devastating storms but never losing all forms of communication. We were stuck and could not reach family or friends for several days. When we finally made contact so many had reached out to my children to find out if they heard from us. I want to thank all the clients that reached out to check on us. This holiday season we will be supporting various charities in North Carolina on behalf of our clients. There are so many in need and certainly with the temperature changing many do not have power and will need heavier clothing among other necessities.

The markets delivered a strong total return through the first three quarters of 2024, yet earnings expectations have not kept pace with this growth. As a result, the price-to-earnings (P/E) ratio for the Index based on 2024 earnings estimates has risen, expanding from 20.2 at the beginning of the year to 24.8 by the end of September. The various equity markets have had a variety of historical values, including:

1973–1985: The P/E ratio was close to 10x.
1985–1992: The P/E ratio increased, reaching 25.93x in 1992.
1995: The P/E ratio fell to 14.89x.
1999: The P/E ratio peaked at 24.4x.
2009: The P/E ratio reached 123.73x, the highest in US history.
2024: The forward 12-month P/E ratio to date 24.8, above the 5-year, 10-year, 15-year, 20-year, and 25-year averages.

I wanted to offer some history if you are not familiar or aware of how equity markets valuations are measured. As you are aware since October 2023 when sentiment and the economy changed rapidly, I made you aware of a new bull market emerging. Not only are fundamentals changing but the FOMC policy seemed to shift. With this recent move in lowering interest rates this has also added to the fuel of the equity market rally. However, through the first three quarters of 2024, we’ve seen a shift toward a more broad-based rally, as 36% of companies have surpassed the Index’s performance. Notably, the third quarter demonstrated even greater inclusivity, with 65.9% of S&P 500 Index constituents exceeding the overall Index’s return over the quarter. We believe this trend toward more widespread market participation will continue—a welcome change from last year’s narrow gains.

Let us look further at equity market valuations and how the upcoming election and policy could help or hurt this amazing equity market rally.

In 2018 the top tax rate on corporate profits was cut from 35% to 21%. This 21% tax rate is the lowest tax rate on corporate profits since the Great Depression. We use pre-tax profits to judge stock values because the corporate tax rate moves up and down with the political cycle and pre-tax profits are a true reflection of economic activity, not just tax rate changes. This could be a repeat of what happened in the late 1990s, when stocks rose in spite of the fact that they were overvalued, or it could be explained by an expectation that tax rates will stay low, and possibly be cut again. Using newly revised after-tax profits, instead of pre-tax profits, this may suggest that stocks are fairly valued today. And if President Trump were to win the election, and cut the corporate tax rate further as he has suggested (to 15%, from 21%) then there’s a case for stocks being mildly undervalued. (In theory, cutting the tax rate to 15%, which means companies would get to keep 85 cents on the dollar rather than 79 cents, translates into an 8% increase in aftertax profits). However, there is also a risk of corporate tax increases, both in the near future as well as beyond. Vice President Harris’s campaign has mentioned lifting the rate to 28%, which would translate into a 9% reduction in after-tax profits. It is hard to look at the federal budget situation and think the US government won’t be raising tax rates in the future. Many would prefer spending cuts, but we don’t live in a world where policymakers do what we want. In a worst-case scenario, tax rates could go up on both corporate profits as well as investors’ capital gains. Net, net, what does this all mean? At the very best, upward revisions to profits mean stocks aren’t as overvalued.

I believe every solid relationship should center on open communication. You have several options to access the information you need to know about your portfolio, my firm, Raymond James and the financial markets. In addition to our in-person meetings and one-on-one calls, we'll also communicate with you through other channels, such as our website, newsletters and social media. You have already been receiving regular updates and emails from me. These communications are designed to provide you with insight into the ever-evolving financial markets and help build the confidence that comes from working with an experienced advisory team. If you haven't already done so, I encourage you to go to my website to learn more about my firm and access some of the recent research and articles available to you. I also utilize social media channels such as Linkedln. If you already have an account on Linkedln consider following me. These channels provide an excellent way for me to keep you up to date with relevant, timely news. Please let me know how you prefer to receive important communications and how frequently. We'll do our best to deliver. Guiding you toward financial independence is a collaborative process, and I hope you feel comfortable reaching out to me whenever you have questions, concerns or even new ideas to help me better serve you.

Regards,

Elliot Weissmark, CFP®, CPFA
Senior Vice President, Investments

Any opinion are those of Elliot Weissmark, CFP® CPFA and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.