Summer 2024 Market Commentary
By Marc Usem and the Affiance Financial Investment Committee
Large Cap Tech Pulls Further Ahead
The second quarter of 2024 saw the broad U.S. market gain 4.3%, while international developed stocks were flat. After trailing most of the year, emerging market stocks staged a relief rally of 4.4%, largely due to a rebound in Chinese shares during the month of May. The largest AI-focused tech stocks continued to drive the S&P 500 higher during the quarter, led by Nvidia, Apple, and Alphabet. In contrast, the equal-weighted S&P 500 actually slid by -2.6% during the quarter, along with mid-cap stocks (-3.5%) and small-cap stocks (-3.2%). Strong economic growth and moderately elevated inflation have delayed rate cuts by the Fed and buoyed current treasury rates. As a result, bonds have been mostly flat for the quarter and the year.
The large-cap AI technology stock boom has led to strong index-based market returns this year and has taken the S&P 500 to new record highs. The S&P 500 has hit 31 all-time closing highs in 2024, a record surpassed only by 2021 in this century. The S&P 500 jumped 15.2% during the first half of 2024, similar to last year’s 16.9% first-half gain. History shows that strong first-half gains tend to be a hallmark of strong full-year gains. We found that in the past 98 years, 83% of years with a positive first half end with gains. Of course, past performance is no guarantee of future returns - we face Fed interest rate policy decisions and a highly contested Presidential election in the second half of the year.
We have commented in the past that election years tend to be weaker during the first half of the year, with firmer returns found after mid-year. Clearly, this year has been an exception. The large-cap AI tech theme has dominated investor allocations, and also driven the large-cap differences versus other capitalizations and geographies to the widest point since the great recession in 2008. We have some concern that the narrowness of the market’s advance could lead to increased volatility if market leaders falter. An additional risk is the potential for the perceived lack of benefit to diversification, driving further stock index concentration. We would not be surprised to see a stock market pullback during the fall, similar to last year, as we approach the election. Continued market gains will then depend on inflation progress, Fed policy, and investor confidence in returns to AI.
Stock market valuations, while above recent averages, remain far below the dot-com highs of 2001. Today’s price to operating earnings ratio (P/E ratio) for the S&P 500 is about 24. The dot-com high was over 46, and the average since the market bottom in March of 2009 is 21.5. Stocks can trade modestly higher due to a combination of P/E ratio expansion and earnings growth without reaching the extremes of prior cycles. That being said, advances will likely be predicated on the largest tech and AI stocks showing sales and earnings growth that meet or exceed current market expectations. We believe the AI phenomenon represents a significant technological advancement with endurance, but gains will not be linear as companies work to incorporate the technology and monetize its benefits over time.
The Fed’s dance with inflation is not over, and they have kept rates flat at 5.25% for the past 12 months. During this period, inflation, as measured by the Fed’s preferred Personal Consumption Expenditures (PCE) index, has declined slowly but steadily from 3.2 to 2.6%. GDP has continued to grow, at 1.4% in the first quarter of the year with consensus forecasts for 2.1% in the second quarter. This trend likely further delays a Fed rate cut unless economic conditions deteriorate. We do not believe a rate cut is a requirement for further stock market advances, as long as corporate fundamentals remain strong and inflation does not surprise on the upside.
As we enter the second half of the year, we know we can’t control the ups and downs of markets, but we can rely on our disciplined investment processes to provide well-designed, tax-efficient, globally diversified portfolios that suit our clients’ investment planning needs.
Thank you for your continued confidence in our work.
Sources: Bloomberg, Morningstar, Philadelphia Fed, U.S. Bureau of Economic Analysis, YCharts
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.
