Global equity markets rose in the third quarter. Shares were supported by generally favorable corporate earnings and expectations that a softening labor market and easing inflation pressures would enable the Federal Reserve (Fed) to begin reducing short-term interest rates. Late in the period, on September 18, the fed funds target rate was reduced by 50 basis points, which was more than some investors expected. Over the third quarter, market volatility increased considerably at times, as some weaker-than-expected economic data raised concerns that the Fed may have made a policy error by not reducing short-term rates sooner. Also, there were periods in which some investors rotated away from high-growth stocks—including artificial intelligence names and other technology-oriented companies that have led the market for some time—into small-caps, cyclicals, and value-oriented stocks. European equity markets were mostly positive in dollar terms. Developed Asian markets were also broadly positive, and Hong Kong shares surged sharply, lifted in part by Chinese stimulus measures intended to bolster the Chinese economy. Emerging equity markets outperformed stocks in developed markets in U.S. dollar terms. Chinese shares also climbed higher alongside increases in the A shares market thanks to brisk gains in September stemming from economic stimulus.
Global fixed income markets were positive in the third quarter. U.S. Treasury bill yields and shorter-term bond yields declined as the Fed reduced the fed funds target rate to the 4.75% to 5.00% range and signaled the potential for more rate cuts. Longer-term U.S. Treasury yields decreased to a lesser degree. As a result, the Treasury yield curve moved from a state of inversion—in which shorter-term bond yields are higher than longer-term bond yields—to a more normal slope, whereby shorter-term yields are generally lower than longer-term yields. In the investment-grade universe, sector performance was broadly positive. High yield corporate bonds slightly underperformed the investment-grade market. In U.S. dollar terms, bonds in developed non-U.S. markets produced gains. Bond yields declined and bond prices rose in many European countries. In the eurozone, the European Central Bank reduced its deposit facility rate by 25 basis points for the second time since early June. In the UK, at the beginning of August, the Bank of England reduced its key interest rate also by 25 basis points, but it held rates steady in September. In Japan, however, the central bank unexpectedly increased the policy rate in late July, resulting in a strengthening of the yen versus the dollar, as investors anticipated more rate increases.
Benchmark Performance
EQUITIES
QTD (%)
YTD (%)
Domestic Stocks – All Cap
Russell 3000 Index
6.23
20.63
Domestic Stocks – Large Cap
Russell 1000 Index
6.08
21.18
International Stocks – Developed and Emerging Markets MSCI All Country World Index ex USA Net
8.06
14.21
International Stocks – Developed Markets MSCI EAFE Index Net
7.26
12.99
FIXED INCOME
Domestic Bonds – Investment Grade Bloomberg U.S. Aggregate Bond Index
5.20
4.45
Domestic Bonds – Short-Term Investment Grade Bloomberg U.S. 1–5 Year Treasury TIPS Index
2.79
4.90
Domestic Bonds – Ultra Short-Term Investment Grade FTSE 3-Month Treasury Bill Index
1.37
4.17
ASSET ALLOCATION POSITIONING
We remain overweight in equities, as there is potential for broadening of earnings growth as the Fed cuts rates. However, concerns remain on peaking AI spending, modest economic growth, and rising geopolitical tensions. Within fixed income, we maintain an overweight to cash relative to bonds. Despite a recent shift downward on the back of Fed easing, cash still provides attractive yields as the yield curve remains inverted and offers liquidity should market opportunities arise.
Within equities, we are neutral between U.S. and international equities. Within the U.S., valuations are elevated, particularly for mega-cap tech stocks. However, monetary policy easing could stimulate broader economic activity and earnings growth. Technology and pharmaceutical innovation remain key differentiators. Valuations and dividend yields for international equities appear to be attractive on a relative basis. An improving European inflation outlook, easing monetary policy, and the Chinese stimulus are supportive. However, economic growth remains weak. Within international markets, we remain overweight to emerging markets stocks. We believe valuations are attractive, monetary policy is easing, and China has signaled a willingness to provide significant monetary and fiscal support.
In the U.S. we are underweight to growth versus value equities. Easing monetary policy has been supportive of rate sensitive sectors and could lead to earnings broadening. Meanwhile, growth stocks face elevated expectations, challenging valuations, and growing AI skepticism.
We remain neutral to U.S. small-cap stocks relative to larger companies. Small-caps offer attractive relative valuations and could continue to benefit from a dovish tilt in Fed expectations. However, small-caps could be challenged by a modest economic growth backdrop. We are overweight to inflation-sensitive real assets equities as Commodity-related equities offer protection against a resurgence in inflation. Oil prices may ultimately be set for structural increases, and some industrial metals could benefit from AI and decarbonization.
Within fixed income, we remain overweight to high yield bonds as we believe overall yield levels remain attractive, fundamentals remain supportive, and default expectations are expected to remain near long-term averages. However, we feel upside beyond a carry from further spread compression is limited. We are neutral to long-term U.S. Treasury bonds as longer term yields remain rangebound as slowing growth and moderating inflation contend with the potential for further Treasury issuance, particularly if recession risks remain moderate. We are broadly neutral to U.S. dollar-hedged international bonds. Most global central banks have begun rate cutting cycles, with the exception of the Bank of Japan. Yields remain attractive on a hedged basis but could fade as the Fed continues to cut.
OUTLOOK
Global equities and fixed income markets experienced gains in the third quarter. While some major equity indexes rose again for the fourth consecutive quarter, we also see indicators of slowing economic growth in measures of unemployment, which is trending up, and manufacturing, which is trending down. On the positive side, corporate earnings remained resilient, and the Fed’s long-awaited September rate cut was more than some investors expected at 50 basis points. With the fed funds target rate set in the 4.75% to 5.00% range, the Personal Consumption Expenditures Index—the Federal Reserve's preferred measure of inflation—fell to 2.2% to close out the quarter, just above the Fed’s 2% target. Meanwhile, other central banks began or continued cutting interest rates as easing inflation supported loosening monetary policy. Japan was a notable exception, however, as the Bank of Japan signaled its commitment to its divergent path of rate hikes as it unexpectedly increased its policy rate in late July. Over the third quarter, Chinese markets responded strongly with the announcement of a new stimulus package very late in the period, which boosted sentiment and equity gains in the region. Additionally, a weaker U.S. dollar favored international markets, especially within emerging markets.
We believe caution surrounding the downward trend in inflation is warranted in the event disinflation pauses, although we are positioned for a broadening market in which we think consumers will benefit from lower interest rates, reasonable real income growth, a favorable profit outlook, and a generally constructive credit environment that includes a now flat yield curve and muted default rates. Recession risk remains a concern given mixed economic indicators, with some financial experts anticipating a successful “soft landing,” and others fearing a near-term recession. Key risks to global markets include a steeper decline in growth, central bank policy surprises, the U.S. election calendar, geopolitical tensions, and the trajectory of Chinese growth. We continue to evaluate long‐term valuations along with the durability of current economic growth as we assess compelling opportunities and potential risks through the remainder of the year.
The views expressed are as of the indicated date, are subject to change without notice, and may differ from those of other T. Rowe Price associates. Information and opinions are derived from proprietary and nonproprietary sources deemed to be reliable; the accuracy of those sources is not guaranteed. This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities; it does not constitute investment advice and should not be relied upon as such. Past performance is not a reliable indicator of future performance. Diversification cannot assure a profit or protect against loss in a declining market. Review index definitions. An investor cannot invest directly in an index. Visit our glossary for a list of financial terms and their definitions.
MARKET RECAP
Markets Surge Amid Rate Cuts and Chinese Stimulus
Global equity markets rose in the third quarter. Shares were supported by generally favorable corporate earnings and expectations that a softening labor market and easing inflation pressures would enable the Federal Reserve (Fed) to begin reducing short-term interest rates. Late in the period, on September 18, the fed funds target rate was reduced by 50 basis points, which was more than some investors expected. Over the third quarter, market volatility increased considerably at times, as some weaker-than-expected economic data raised concerns that the Fed may have made a policy error by not reducing short-term rates sooner. Also, there were periods in which some investors rotated away from high-growth stocks—including artificial intelligence names and other technology-oriented companies that have led the market for some time—into small-caps, cyclicals, and value-oriented stocks. European equity markets were mostly positive in dollar terms. Developed Asian markets were also broadly positive, and Hong Kong shares surged sharply, lifted in part by Chinese stimulus measures intended to bolster the Chinese economy. Emerging equity markets outperformed stocks in developed markets in U.S. dollar terms. Chinese shares also climbed higher alongside increases in the A shares market thanks to brisk gains in September stemming from economic stimulus.
Global fixed income markets were positive in the third quarter. U.S. Treasury bill yields and shorter-term bond yields declined as the Fed reduced the fed funds target rate to the 4.75% to 5.00% range and signaled the potential for more rate cuts. Longer-term U.S. Treasury yields decreased to a lesser degree. As a result, the Treasury yield curve moved from a state of inversion—in which shorter-term bond yields are higher than longer-term bond yields—to a more normal slope, whereby shorter-term yields are generally lower than longer-term yields. In the investment-grade universe, sector performance was broadly positive. High yield corporate bonds slightly underperformed the investment-grade market. In U.S. dollar terms, bonds in developed non-U.S. markets produced gains. Bond yields declined and bond prices rose in many European countries. In the eurozone, the European Central Bank reduced its deposit facility rate by 25 basis points for the second time since early June. In the UK, at the beginning of August, the Bank of England reduced its key interest rate also by 25 basis points, but it held rates steady in September. In Japan, however, the central bank unexpectedly increased the policy rate in late July, resulting in a strengthening of the yen versus the dollar, as investors anticipated more rate increases.
Benchmark Performance
Russell 3000 Index
Russell 1000 Index
MSCI All Country World Index ex USA Net
MSCI EAFE Index Net
Bloomberg U.S. Aggregate Bond Index
Bloomberg U.S. 1–5 Year Treasury TIPS Index
FTSE 3-Month Treasury Bill Index
ASSET ALLOCATION POSITIONING
We remain overweight in equities, as there is potential for broadening of earnings growth as the Fed cuts rates. However, concerns remain on peaking AI spending, modest economic growth, and rising geopolitical tensions. Within fixed income, we maintain an overweight to cash relative to bonds. Despite a recent shift downward on the back of Fed easing, cash still provides attractive yields as the yield curve remains inverted and offers liquidity should market opportunities arise.
Within equities, we are neutral between U.S. and international equities. Within the U.S., valuations are elevated, particularly for mega-cap tech stocks. However, monetary policy easing could stimulate broader economic activity and earnings growth. Technology and pharmaceutical innovation remain key differentiators. Valuations and dividend yields for international equities appear to be attractive on a relative basis. An improving European inflation outlook, easing monetary policy, and the Chinese stimulus are supportive. However, economic growth remains weak. Within international markets, we remain overweight to emerging markets stocks. We believe valuations are attractive, monetary policy is easing, and China has signaled a willingness to provide significant monetary and fiscal support.
In the U.S. we are underweight to growth versus value equities. Easing monetary policy has been supportive of rate sensitive sectors and could lead to earnings broadening. Meanwhile, growth stocks face elevated expectations, challenging valuations, and growing AI skepticism.
We remain neutral to U.S. small-cap stocks relative to larger companies. Small-caps offer attractive relative valuations and could continue to benefit from a dovish tilt in Fed expectations. However, small-caps could be challenged by a modest economic growth backdrop. We are overweight to inflation-sensitive real assets equities as Commodity-related equities offer protection against a resurgence in inflation. Oil prices may ultimately be set for structural increases, and some industrial metals could benefit from AI and decarbonization.
Within fixed income, we remain overweight to high yield bonds as we believe overall yield levels remain attractive, fundamentals remain supportive, and default expectations are expected to remain near long-term averages. However, we feel upside beyond a carry from further spread compression is limited. We are neutral to long-term U.S. Treasury bonds as longer term yields remain rangebound as slowing growth and moderating inflation contend with the potential for further Treasury issuance, particularly if recession risks remain moderate. We are broadly neutral to U.S. dollar-hedged international bonds. Most global central banks have begun rate cutting cycles, with the exception of the Bank of Japan. Yields remain attractive on a hedged basis but could fade as the Fed continues to cut.
OUTLOOK
Global equities and fixed income markets experienced gains in the third quarter. While some major equity indexes rose again for the fourth consecutive quarter, we also see indicators of slowing economic growth in measures of unemployment, which is trending up, and manufacturing, which is trending down. On the positive side, corporate earnings remained resilient, and the Fed’s long-awaited September rate cut was more than some investors expected at 50 basis points. With the fed funds target rate set in the 4.75% to 5.00% range, the Personal Consumption Expenditures Index—the Federal Reserve's preferred measure of inflation—fell to 2.2% to close out the quarter, just above the Fed’s 2% target. Meanwhile, other central banks began or continued cutting interest rates as easing inflation supported loosening monetary policy. Japan was a notable exception, however, as the Bank of Japan signaled its commitment to its divergent path of rate hikes as it unexpectedly increased its policy rate in late July. Over the third quarter, Chinese markets responded strongly with the announcement of a new stimulus package very late in the period, which boosted sentiment and equity gains in the region. Additionally, a weaker U.S. dollar favored international markets, especially within emerging markets.
We believe caution surrounding the downward trend in inflation is warranted in the event disinflation pauses, although we are positioned for a broadening market in which we think consumers will benefit from lower interest rates, reasonable real income growth, a favorable profit outlook, and a generally constructive credit environment that includes a now flat yield curve and muted default rates. Recession risk remains a concern given mixed economic indicators, with some financial experts anticipating a successful “soft landing,” and others fearing a near-term recession. Key risks to global markets include a steeper decline in growth, central bank policy surprises, the U.S. election calendar, geopolitical tensions, and the trajectory of Chinese growth. We continue to evaluate long‐term valuations along with the durability of current economic growth as we assess compelling opportunities and potential risks through the remainder of the year.
The views expressed are as of the indicated date, are subject to change without notice, and may differ from those of other T. Rowe Price associates. Information and opinions are derived from proprietary and nonproprietary sources deemed to be reliable; the accuracy of those sources is not guaranteed. This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities; it does not constitute investment advice and should not be relied upon as such. Past performance is not a reliable indicator of future performance. Diversification cannot assure a profit or protect against loss in a declining market. Review index definitions. An investor cannot invest directly in an index. Visit our glossary for a list of financial terms and their definitions.
202410-3958856