S&P 500 jumps 5.5% in Q3, having best year since 1997

Key points

• The S&P 500 is off to its best start through three quarters since 1997.

• The Russell 2000 had a strong Q3, up 8.9%.

• The Dow Jones also soared in Q3, gaining 8.2%.

Despite bouts of volatility, the markets enjoyed a strong month of September and third quarter.

With the third quarter in the books, the S&P 500 has gained 20.8% through the first three quarters of 2024, which is the best return to this point for the large-cap index since 1997, according to FactSet data, as reported by CNN.

In 1997, the S&P 500 was up 27.8% through the third quarter and ended the year with a 31.0% gain. That full year return for 1997 also marks the last time the S&P 500 ended a calendar year with a return of more than 30%.

The S&P 500’s performance through three quarters was lifted by a 5.5% return in Q3 and a 2% rise in the month of September. But it was not even the top performer among the major indexes.

S&P 500 extends its winning streak in September

September is historically one of the worst months of the year for stocks, with a negative average return over the years. But this past September bucked the trend, despite some volatility earlier in the month that saw the S&P 500 have its worst week of the year from September 9-13, when it dropped 4.2%.

It quickly recovered, buoyed by disinflation and the Fed’s 50-basis-point rate cut on September 18. The S&P 500 finished September with a sold 2.0% return, the fifth straight month that the large-cap index has posted gains. It ended the month at 5,762, an all-time high.

The Nasdaq Composite also had a good month, rising 2.7% in September, however, it lagged the S&P 500 in Q3.

The Nasdaq returned 2.3% in the third quarter, which was the lowest return of all the major indexes. That should come as no surprise as many overpriced tech stocks came back down to earth in Q3, as the investors cashed out and looked for better deals elsewhere. Still, the Nasdaq is up 21.2% YTD, higher than the S&P 500.

Small caps and Dow soar in Q3

Small cap stocks were biggest winners in the quarter, as the Russell 2000 rose 8.9% in Q3. Beaten down small caps, which had trailed large caps for most of the past two years, got some love from investors last quarter, as they rotated out of overvalued tech stocks into cheaper small caps.

Most of the migration to small caps occurred in July and August, as the rally slowed in September, with the Russell 2000 up just 0.5% last month. The Russell 2000 is now up 10% YTD.

The blue-chip Dow Jones Industrial Average was nearly as strong in Q3, rising 8.3% in the quarter. It got a solid boost in September when it rose 1.8% and ended the month at an all-time high of 42,330.

The Dow Jones, through the end of September, was up 12.3%.

Can the markets keep winning in Q4?

While the fourth quarter has been historically strong for the markets, particularly in presidential elections years, it would be futile to try and prognosticate whether or not the markets can continue to churn out gains.

Few, if any, of the experts predicted that the markets would be performing as well as they have in 2024, and it would be equally difficult to do so now.

A few things that we do know is that we can expect more volatility leading up to the election as uncertainty grows, but things will start to settle down after all the votes are counted.

It is also likely that rates are going to continue to come down, which should create more investment and help corporate earnings. It should be particularly good for small cap stocks, as the rotation continues.

“Given that technology comprises roughly one-third of the S&P 500 Index, this could portend an ongoing scenario in which the S&P struggles versus other market averages,” wrote Thomas Herrick, chief market strategist at Cary Street Partners in his recent Street Smarts commentary. “This is all part and parcel of improved breadth and rotation within the equity market, which is the lifeblood of a sustainable uptrend. In fact, this scenario is essentially what we saw in Q3. Relative to the cap-weighted S&P, equal-weighted S&P outperformed. The opportunity set going forward is more favorable toward small caps, equal weight large cap strategies, and market sectors such as, but not limited to, financials. Rotation is the most important pivot going on in equities.”