With equity markets providing strong returns in the first half of the year, and inflation resuming a downward trend, what could a strong U.S. economy mean for the rest of 2024?
Q2 2024 in Review
Equity markets have continued their positive momentum in the second quarter of 2024, just at a slower pace than what was experienced in Q1 2024. So far in 2024 the S&P 500 has set 37 new all-time highs at last count (1). And while equity markets did fall by over 5% in April, that pullback was short lived with U.S. Equities finishing the quarter ending in June near new all-time highs.
Equity and Fixed Income Markets
While the first quarter of 2024 saw positive equity returns across all asset classes, the second quarter results were mixed. U.S. Equities were broadly up 3.48% this quarter, adding to the 10.24% returns in Q1, but not all asset classes participated. Growth stocks continued to perform well due to continued spending on artificial intelligence infrastructure, while Value stocks were marginally negative for the quarter. Emerging Market equities surprisingly provided some of the strongest returns, up over 5% for the quarter, while Developed International stocks were down less than 1%. Fixed Income assets have provided lackluster results year to date, with slightly positive returns across most sectors and slightly negative returns for longer duration Treasury’s:
Source: Morningstar, data as of June 30, 2024.
A Tale of Two Quarters
While the first quarter of 2024 saw positive and significant returns across all equity asset classes, the second quarter’s equity performance was concentrated in the largest seven technology stocks Microsoft, Apple, NVIDIA, Amazon, Meta (Facebook), Google, and Tesla. The below chart shows that while these names did not contribute much to the strong equity returns experience in the first three months of this year, these positions dominated returns in the quarter ending in June.
Source: Alliance Bernstein, Capital Markets Outlook Q3 2024.
Waiting on the Fed…
While equity markets have provided strong returns in the first half of 2024, higher than expected inflation readings at the beginning of the year caused the market rally to narrow to this select list of names in the second quarter. Fortunately, more recent data has shown inflation has resumed its downward trend, which means rate cuts are likely in the coming months.
In January, markets were expecting the Fed to cut interest rates five times this year. And while those expectations have been reduced to two rate cuts by year-end, falling interest rates should be a tail wind for a broader selection of equities in the second half of 2024.
What a Strong Economy Now Means for the Rest of 2024
The U.S. economy continues to expand at rates almost double that of other major economies due to the strength of the American consumer, who are benefiting from a tight labor market. The United States has added more than 2.6 million jobs over the past 12 months, while jobless claims data shows business are hesitant to lay off workers (2). Additionally, with labor force participation for workers between the ages of 18-64 at record highs, employed consumers will likely maintain the ability to spend in the second half of 2024.
Partly due to a resilient consumer, corporate profits and earnings are also strong with corporate earnings expected to accelerate in the second half of 2024 and into 2025. After a flat year for earnings in 2023, analysts are projecting corporate earnings growth of over 11% for large U.S. companies in 2024 and 14% in 2025.
Source: Capital Group Outlook, June 2024.
And while the above chart shows valuations are above their 10-year average in Large Cap U.S. stocks, other areas of the market like European and Emerging Market equities are trading at valuations below their longer-term averages.
Equity markets have had a very strong first half of 2024 with large cap technology stocks pushing equity markets to new highs in the second quarter. Fed rate cuts, resilient U.S. consumers and strong corporate earnings have the potential to help diversified portfolios, holding more fairly valued Large, Small and International equities and quality bonds to continued gains in the second half of 2024.
As we move into the second half of 2024, we’ll continue to monitor the financial markets, provide timely updates to you, and adjust portfolios as needed. In the meantime, don’t hesitate to reach out to us with questions.
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