Q2 2024 Market Commentary
Market Overview 2Q24
Market Recap
The first half of 2024 has been dominated by a few mega-cap growth stocks, sending the S&P 500 up +4.28% for the quarter and +15.29% for the first half of the year. Global stocks, as measured by the MSCI ACWI, rose a solid +2.87% for the quarter and +11.30% for the first half.[1] A highly anticipated broadening of the rally to other sectors did not materialize. Beneath the surface, market leadership has been increasingly narrow, and the S&P 500 is the most concentrated in decades with the top 10 stocks representing 37% of the index at quarter end.
The table highlights the outperformance of large-cap growth in the second quarter. The dominance is further highlighted by the equally-weighted S&P 500, which lagged, declining -2.7% for the quarter and rising only +5.0% for the first half.[2] According to Ned Davis Research, only 25% of stocks have outperformed the S&P 500 year-to-date, which puts the index on pace for the lowest percentage since 1973. As a result, the relative stock winners have been concentrated in a handful of mega-caps.
The bond market has experienced several gyrations over the past few quarters as bonds rallied in anticipation of Fed rate cuts, only to be repeatedly disappointed. In turn, bonds as measured by the Bloomberg U.S. Aggregate Index declined -.76% for the first half and is up a modest +2.13% over the past year.[3] Sticky inflation has forced the Federal Reserve to reassert its hawkish tone. At its June meeting, the Fed’s updated dot plot showed that it expects to deliver just one rate cut this year, down from the three cuts they projected in March. Fed Chair Powell remains patient, stating that the first rate cut is “consequential.” This is because the first cut implies a policy shift with a series of cuts likely to follow. Powell is focused on the Fed’s credibility, and he wants to avoid a policy mistake by cutting too soon. Simply put, the path may take longer, but the destination remains the same.
Despite the bond market volatility, extending bond duration offers investors a historic opportunity with real yields at levels not seen since before the Global Financial Crisis. We believe bonds play a renewed diversifying and defensive role in portfolios. We remain bullish, believing that yields have peaked, and we expect the Fed will begin cutting rates later this year.
Technology Sector Dominance
Artificial Intelligence (AI) related technology stocks have been the biggest driver of market returns in 2024. The technology sector now represents 32.4% of the S&P 500, which is up from 28.3% a year ago. As of the end of June, the sector has contributed over 8.5% of the S&P 500’s 15.3% return year-to-date.[4]
The narrow leadership we noted earlier is evident within the technology sector. As highlighted in the chart, within the industries that encompass the tech sector, only semi-conductors (led by Nvidia’s dominance) have posted gains year-to-date. Nvidia has led the AI boom with an eye-popping 150% year-to-date return and alone contributed an astounding 31.3% of the S&P 500’s year-to-date gain.[5]
The biggest tech companies keep getting bigger as AI has seized the attention of investors. As highlighted in the table below, five tech companies, which represent 24.4% of the S&P 500, accounted for 63% of the Index’s return through Q2.
According to research by J.P. Morgan, a steep rise in stock market concentration has always reversed in time with small and mid-cap stocks outperforming. However, there are compelling reasons for the rise of these tech giants. The companies have experienced resilient earnings growth, despite the rapid rise of interest rates over the past two years. They are amongst the only businesses with the financial resources to make the large capital investments required to build out AI-related infrastructure. While market concentration can rise further, a soft-landing environment characterized by declining interest rates and solid earnings growth should help to broaden market leadership.
Current Positioning
We enter the second half of the year with our asset allocation framework favoring risk assets. The second half should bring moderate job gains, a Fed rate cut, easing inflation, and ultimately a favorable environment for the U.S. economy to continue to navigate towards a soft landing. The key drivers remain in place: earnings growth is accelerating, inflation is moderating, and year-end market rallies are typical during presidential election years. Furthermore, the risk of a recession remains low with global GDP forecasted to grow at 3.1% in 2024.[6] Despite the market indices hitting new record highs, the market concentration and narrowing breadth has left the market susceptible to a pullback if the backdrop weakens. Until the environment changes, any choppiness should represent a buying opportunity, rather than the start of protracted market drawdown. We remain overweight U.S. stocks and believe small & mid-caps offer compelling value relative to international stocks. An environment of solid earnings growth and declining interest rates should provide a tailwind for the broadening of market leadership.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Economic factors, market conditions and investment strategies will affect the performance of any portfolio, and there are no assurances that it will match or outperform any benchmark. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.
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{1] Morningstar Direct
[2] Morningstar Direct
[3] Morningstar Direct
[4] Ned Davis Research
[5] YCharts
[6] OECD