Wealth Management Insights for Q2 2024

Second quarter 2024

The S&P 500 gained 3.9% in the second quarter, bringing first-half gains to 14.5%. Artificial intelligence pacesetter Nvidia gained 149% during the first half of 2024, setting the tone for a market in which a small number of stocks drove the market higher. The quarter finished with the S&P and NASDAQ both near all-time highs. The rally took place amidst a dramatic reduction in rate cut expectations as inflation remained above Fed targets and job growth stayed strong. Bond prices generally fell year-to-date, as rising Treasury issuance and the Fed staying “higher for longer” served as a recipe for higher interest rates.

At Nixon Peabody Trust Company, we continuously evaluate real-time economic data and short- and long-term forecasts to build customized strategies that grow your assets. If the flood of financial headlines leaves you a bit confused, turn to us. You can be confident that we’ve designed a portfolio-positioning strategy to maximize your success.

Second quarter in review

The S&P 500, as a capitalization-weighted index, is increasingly dominated by a small number of stocks. The Magnificent 7 represents 34% of the S&P 500, up from 21% in early 2023, and represented 61% of year-to-date 2024 returns. The US stock market may seem to be booming, but beneath the surface, most stocks have either fallen or stagnated this year. The boom in Magnificent 7 stocks has masked weakness in many broad equity indices. The equal-weighted S&P 500, which includes the same constituents as the capitalization-weighted S&P 500 but at a fixed weight of 0.2%, gained only 4.1% year-to-date. The gap between the cap-weighted and equal-weighted index was the widest first-half margin since 1990.

Bond prices were mixed in Q2, with the Bloomberg Aggregate Index slightly higher but Treasury Bills weakening. Ten-year Treasury yields rose to 4.4%.

Technology and communications were the top-performing S&P 500 sectors in Q2 and year-to-date, materials and industrials were the worst-performing sectors. Real estate and materials are lagging year-to-date.

United States small company and developed international stocks lost ground in the quarter and trailed US large-cap stocks by a wide margin for the year. Emerging markets stocks rebounded strongly during the quarter.

Corporate earnings

Earnings growth was slightly better than expected, with mid-single-digit S&P earnings growth and positive revenue growth. However, the earnings picture also amplified the narrowness of the market. After removing the Magnificent 7, the remaining S&P constituents experienced an earnings contraction. Earnings estimates for 2024 rely heavily on strong results for the second half of the year. We will be watching this factor carefully, given indications of more cautious household and business spending behavior.

The euro area is experiencing a gradual but inconsistent recovery, coupled with volatile bouts of inflation and political turbulence. Disinflation will likely resume, giving the European Central Bank room to cut rates again before year-end.

China has also experienced a disappointing economic rebound, with policy actions enough to stabilize the economy and boost manufacturing but insufficient to meaningfully improve the outlook for consumer spending and the troubled real estate sector.

Employment

Job growth has exceeded expectations for much of the past year. However, there are abundant signs of slowing momentum in the job market. Unemployment is at the highest level since the end of 2021, job openings have fallen dramatically from post-pandemic peaks, and wage pressures appear to be easing. Although payrolls rose 206,000 in June, prior months were revised downward. Measurement challenges, including uncertainty about the impact of immigration, make it harder for the Fed and economists to have complete conviction in their evaluation of the job market trajectory.

Inflation

May core CPI came in at 3.4%, the lowest year-over-year level since August 2021. The Fed’s preferred measure for inflation, the core PCE, at 2.6%, represented the smallest annual gain since March 2021. Although inflation is moving toward the Fed’s 2% target, it’s expected to remain above target until late 2025 or 2026. Housing-related inflation remains high, with high interest rates a barrier to existing home sales and housing starts. Although rents began to fall in much of the country last year, the pace of change has been uneven and has leveled off in some regions.

With costs for everyday goods considerably higher than pre-pandemic levels, many low- and middle-income consumers may be experiencing financial stress, which may challenge consumer spending in the second half of the year.

Fed policy

Investors expect one-to-two rate cuts this year, a sharp decline from the six cuts expected at the start of the year. Although the Fed appears reluctant to declare “mission accomplished” in the quest to bring inflation levels closer to its target, rate cuts remain far more likely than rate hikes, and the Fed is now behind other central banks that already have cut rates. The US economy does not appear to be heading into recession, but the slowdown in housing, cracks in consumer spending, and signs of a less robust labor market make it likely that the Fed will cut rates before year-end.

Elections

More than half the world’s countries will have held elections in 2024. Taiwan, India, Mexico, France, and the UK have already done so, and the US election will be the capstone of perhaps the busiest election calendar in history. The heated rhetoric that accompanies election years can trigger investors to abandon the stock market and move to cash. Historically, that temptation has been counterproductive. There have been 24 elections since the beginning of the S&P 500; in 20 of those election years, the S&P 500 has delivered positive performance. The down years had little to do with the election cycle: in three of the four years, the economy was enduring painful recessions, and the fourth was during the start of World War II.

Elections do have varied consequences, and we will continue to assess the impacts of election outcomes on different countries and industries.

Portfolio positioning

The dominance of the Magnificent 7, alongside the muted performance of the rest of the market, is consistent with a slowing but still expansionary economy. If high interest rates or tight monetary policy is holding back the vast majority of stocks, the broad market may very well rise once rates begin to fall. Moderate economic growth, declining inflation, and an easing Fed is typically a good backdrop for stocks and bonds. However, the Fed’s failure to cut rates, continued earnings disappointments, or a geopolitical event could present a risk to this economic outlook. We have positioned portfolios to benefit from a continuation and broadening of the stock market rally while including conservative bond holdings to diversify portfolios in the event of a weakening investment environment.

If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to us or any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you.

For more of our thoughts on investing, read Dan’s recent article for Kiplinger Advisor Collective here.