August and September, known for their “seasonally weak” reputation, lived up to their historical trend as the two worst-performing months on average since 1970. Continuing this pattern, both months marked declines for major U.S. equity benchmarks, contributing to their first quarter in the red since Q3 2022. Among these, the Dow Jones Industrials stood out as the best relative performer in both September and Q3, while the Russell Microcap and Russell 2000 indices fared the worst.
Nasdaq-100 and S&P 500, reaching within 5% of their prior all-time highs in July, experienced a recent downturn, resulting in the Nasdaq-100 standing +41% from its 52-week lows. In contrast, the Russell Microcap Index broke a 15-month support level to a new low, and the Russell 2000 resided in the lower third of its prior 15-month trading range by the end of September.
The dominance of a small group of mega-cap companies, known as the “Magnificent 7,” significantly influenced large-cap benchmarks, with a 43% and 27% weighting in the Nasdaq 100 and S&P 500, respectively. Consequently, cap-weighted benchmarks outperformed their equal-weight counterparts, with the Nasdaq-100’s YTD total return nearly double that of its equal-weight index.
Sector performance revealed a divergence, with Communications and Technology posting strong YTD gains of +40.4% and +34.7%, while defensive sectors like Utilities and Consumer Staples experienced declines. September saw declines in ten of the eleven S&P 500 sectors, with Energy and Communications outperforming, while Utilities, REITs, and Healthcare lagged.
The performance disparity extended within sectors, with large-cap sectors like Communications, Technology, and Discretionary outperforming their small-cap Russell 2000 benchmarks. Conversely, small-cap Energy and Industrials benchmarks outperformed their large-cap S&P 500 counterparts.
In the rates complex, UST 30YR and UST 10YR Yields surged in Q3, marking their largest quarterly gains in over 14 years and reaching multi-year highs. A bear steepener in the 10s, 2s UST spread was evident, closing the quarter at -47bps. Global central bank actions, along with U.S. Treasury issuance and a credit rating downgrade, contributed to rising yields.
Commodities experienced a mixed performance, with energy prices soaring due to supply cuts, while precious metals and industrial metals showed varied results. The U.S. Dollar Index (DXY) gained modestly in Q3, recording eleven consecutive weekly gains and reaching fresh 2023 highs, impacting currencies inversely correlated to the S&P 500.
FactSet projections indicated a decline in Q3 earnings for the S&P 500, marking the fourth straight quarter of year-over-year declines. Analysts anticipated growth in Q4 2023 and Q1 2024, with valuations supported by expected 2024 earnings growth of 12.2%