Unexpectedly Intriguing!
18 April 2024
A fortune teller looking into a crystal ball to make a prediction about the S&P 500 Image generated by Microsoft Copilot Designer.

Nearly four weeks ago, we put down a marker for what lay ahead for the S&P 500 based on the index' quarterly dividend futures.

Looking beyond 2024-Q2, you'll see something unusual. There's projected drop-off in quarterly dividends between 2024-Q2 and 2024-Q3. It's unusual because we would ordinarily expect to see the third quarter's anticipated dividends fall in between the projected values for the second and fourth quarters. And since the outlook for the index' dividends in all quarters has been improving, we would have at least expected to see it close the gap between the second and fourth quarter's values.

But it hasn't. If anything, the projected drop-off in the dividends expected to be paid from 2024-Q2 to 2024-Q3 has been remarkably persistent in all the months we have been observing it and has increased in size. That persistence suggests investors have potentially built in expectations of turbulence ahead for dividend paying stocks.

That market turbulence would most likely take place during the upcoming quarter of 2024-Q2, which would subsequently show up in the dividends paid in the following quarter of 2024-Q3.

We're not even three full weeks into 2024-Q2 and the leading edge of that forecast market turbulence would appear to have arrived. The S&P 500 has dropped nearly four percent from the record high level it reached at the end of March 2024. Here's what the S&P 500's quarterly dividend futures look like as of Monday, 15 April 2024:

Past and Projected S&P 500 Quarterly Dividends per Share Futures, 2021-Q4 through 2024-Q4, Snapshot on 15 April 2024

As expected, we've also had to reset the vertical scale of this chart to accommodate the dividends expected to be paid out in 2024-Q2, which has risen from $18.96 to $19.11 per share since our last snapshot.

Meanwhile, the amount of dividends expected to be paid out by S&P 500 firms during 2024-Q3 has decreased, falling from $17.82 to $17.72 during the last four weeks. The projected dividends for 2024-Q4 has likewise fallen, dropping from $18.45 to $18.31 during this interval.

The decline in expectations for the S&P 500's quarterly dividends in these future quarters is a consequence of a change in expectations for how the Federal Reserve will set short term interest rates in the U.S. Four weeks ago, the CME Group's FedWatch Tool indicated investors expected the Fed would launch a series of quarter point rate cuts at six-to-twelve week intervals before the end of 2024-Q2. As of 15 April 2024, the FedWatch Tool projects the Fed will only cut the Federal Funds Rate once during 2024. That cut is anticipated in September.

With U.S. interest rates being held higher for longer, the resulting higher cost of paying interest for borrowing money is expected to reduce the earnings of many of the companies whose stocks make up the S&P 500 index. Those lower earnings, in turn, mean lower dividend payouts.

There is a bright spot in this outlook, for which we also put down a marker with its own cautionary note:

Since quarterly dividends are projected to rise in 2024-Q4, that suggests investors expect this turbulence will be relatively short-lived.

At least, that's the implied expectation at this juncture. The most important thing to remember about the future is that it's subject to change with little notice.

A lot has changed in the last four weeks. Our next planned snapshot of S&P 500 quarterly dividend futures and what they indicate will be in five weeks.

Image Credit: Microsoft Copilot Designer. Prompt: "A fortune teller looking into a crystal ball to make a prediction about the S&P 500".

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