The third quarter of 2024 has been extremely volatile for the U.S. stock market. Recession concerns, geopolitical tensions, the fading craze for AI (artificial intelligence), and uncertainty over the upcoming elections have kept investors uneasy.

However, optimism about potential Fed rate cuts provided some support to the market. As a result, investors shifted away from technology stocks, favoring smaller companies and sectors that stand to benefit more from interest rate reductions.

The S&P 500, the Dow Jones, the Nasdaq Composite and the Russell 2000 have added 5.1%, 8.2%, 2.2% and 8.6%, respectively in the third quarter. In fact, the S&P 500 emerged stronger in the third quarter, touching a series of new record highs. The index wrapped up its best quarter since the fourth quarter of 2021. Let’s delve a little deeper.

First Fed Rate Cut in 4 Years

The quarter can be highlighted by the first Fed rate cut in four years. After holding the rates at a 23-year high for 14 consecutive months since July 2023, Federal Reserve Chair Jerome Powell kicked off the new rate cycle era by initiating a 50 basis points cut in interest rates. The move was bolstered by cooling inflation and signs of a slowing labor market.  

The central bank projects two more rate cuts of 50 bps in its final two meetings this year, due in November and December. It also indicates another 100-bp rate cut next year and a 50-bps cut in 2026, which means four rate cuts in 2025 and two in 2026.

China Unveils Major Monetary Stimulus

On Sept. 24, China's central bank, the People’s Bank of China (PBOC), announced a broad range of monetary stimulus measures aimed at boosting the world's second-largest economy. This move indicates growing concerns within Xi Jinping's administration over the nation’s slowing growth and declining investor confidence.

Bloomberg Economics believes that the stimulus is expected to provide a modest boost to growth, estimated at around 0.2 percentage points in 2024, with most of the impact expected in 2025.

BoJ Hikes Rates Second Time Since 2007

The Bank of Japan (BOJ) has raised its benchmark interest rate in August and announced plans to reduce bond purchases, marking a significant shift toward monetary policy normalization. Japan’s central bank raised its policy rate to approximately 0.25%, from a range of 0 to 0.1%. This is the second rate hike by BoJ since 2007. Simultaneously, the central bank expects its holdings of government bonds to decrease by 7% to 8% over the next two years.

ECB Rate Cut

European Central Bank (ECB) slashed rates for the second time in three months in September. The reduction, to 3.5% from 3.75%, came on the heels of slowing inflation.  The bank also intends to bolster the region's sagging economy.

Will Q3 Earnings Season Be a Tough Period?

Estimates for 2024 Q3 have come down since the start of the period, with the magnitude of estimate cuts significantly bigger than what we had seen in the comparable periods of the year's first two quarters, as quoted on Earnings Trends issued on Sept. 25, 2024. This negative shift in the revisions trend reverses the prior favorable development on this front in recent quarters.

Top-Performing ETF Sectors of Q3

Against this backdrop, below we highlight a few winning exchange-traded fund (ETF) sectors of the third quarter of 2024.

Telecom ETF

SPDR S&P Telecom ETF (XTL) – Up 31.25%

Fed rate cut optimism probably went in favor of the telecom sector. The fund’s top holding, Lumen Technologies LUMN stock, has surged 36.1% in the past month (as of Sept. 27, 2024). The second-highest holding Frontier Communications FYBR stock has soared 25.6% past month.

China Tech ETF

KraneShares Hang Seng TECH Index ETF (KTEC) – Up 28.9%

Chinese stimulus and some investors’ favoritism for the Chinese tech stocks made the space a winner. The underlying Hang Seng TECH Index captures the 30 largest companies rapidly growing technology sector in Hong Kong. The ETF charges 69 bps in fees.

International Technology ETF

First Trust Dow Jones International Internet ETF (FDNI) – Up 28.0%

International tech stocks have been in fine fettle due to global monetary policy easing. Since low rates are beneficial for growth sectors like technology, such an environment bodes well for international Internet stocks and ETFs. In general, Chinese stimulus and a Fed rate cut went in favor of the broader emerging market investing (read: Emerging Market ETFs Roar Back to New Heights).

Thailand ETF

iShares MSCI Thailand ETF (THD) – Up 27.4%

China's economic stimulus should benefit several Thai industries indirectly and provide positive sentiment in the capital and money markets, per some analysts. "If the Chinese economy recovers, it will boost Thailand's growth because China is Thailand's second-largest market after the United States, accounting for 15.5% of the country's total export value," said the Asia Plus Securities brokerage in a research note, as quoted on Bangkok Post.

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KraneShares Hang Seng TECH Index ETF (KTEC): ETF Research Reports

iShares MSCI Thailand ETF (THD): ETF Research Reports

SPDR S&P Telecom ETF (XTL): ETF Research Reports

First Trust Dow Jones International Internet ETF (FDNI): ETF Research Reports

Lumen Technologies, Inc. (LUMN) : Free Stock Analysis Report

Frontier Communications Parent, Inc. (FYBR) : Free Stock Analysis Report

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