The first six months of 2024 in the domestic equity markets mirrored how 2023 finished, with the S&P 500 up by nearly 15%. This strong performance widened the gap between domestic and foreign stocks, with the U.S. outperforming by over 10%. One of the driving factors in this disparity is the heavier weighting of the
technology sector in the S&P 500, which is approximately 30%, compared to 15% in the EAFE index. The tech-heavy NASDAQ index even bested the S&P 500 for the first six months in 2024 by 3%, for a return of almost 18%, led by the artificial intelligence (AI) theme which we believe is very real. AI stocks outperformed the rest of the market, but in the second quarter, AI valuations became seriously disconnected from the rest. The question in our mind is what companies will be able to monetize this theme and how quickly, as stock prices are already anticipating large current and future profits.
Chart Source: Sindreu, J. (2024) The quarter that split the market, in six charts, The Wall Street Journal. Available at: https://www.wsj.com/finance/stocks/the-quarter-that-split-the-market-in-six-charts-2967f139
Large, high-quality company stocks are once again outperforming small and medium-sized companies by over 10% year-to-date (ytd), thanks to strong balance sheets, less reliance on debt, and robust earnings. Growth stocks continue to beat value stocks as investors are comfortable paying a premium for profitable growth, not just top-line increases. From a ytd sector perspective, communication services and technology stocks are leading the way for the S&P 500, while real estate and consumer discretionary are among the worst-performing sectors, with real estate posting negative returns.
Defying expectations, the U.S. economy has shown remarkable resilience, fending off a highly anticipated recession. While unemployment has risen slightly to 4.0% from 3.4%, it remains low by historical standards. There are still 8 million job openings according to the JOLTs (job opening labor turnover survey). With strong employment, U.S. consumers continue to spend on services like travel, entertainment, and experiences. Only recently are we beginning to see very modest signs of weakness and some trade downs, but this is completely normal, and we view it as a sign of fatigue more than stress. Despite this adjustment, retail sales remain robust, growing over 2% year-over-year.
Due to the steadfastness of the U.S. consumer, inflation has been stubborn as it slowly comes down from almost 8% in 2022. Current measures of inflation are less than 3%, but still short of the Federal Reserve’s 2% target. Interest rates, as measured by the 10-year Treasury, have increased by 40 basis points (0.40%) to 4.3% in 2024 due to persistent and longer-lasting inflation. However, it’s important to note that these rates are down 40 basis points from their April highs. The credit market also paints a cautiously optimistic picture. Credit spreads have actually tightened by 8bps this year, indicating no significant stress. However, there is no doubt that higher interest rates have adversely affected the housing market. Existing home sales are down 3% year-over-year, marking their slowest pace since 2011 from February through May, as mortgage rates have more than doubled since 2022, reaching their highest rate since 2001. While a lack of overall supply has kept prices steady in some areas, weariness and fatigue are undoubtedly setting in.
Given the run in the equity market over the past 18 months, led by technology stocks, some are making lazy comparisons to the late 1990s and the dot com bubble. We do not see those comparisons as valid at all. Companies in 2024 have real and rising earnings, strong revenue growth, and lower debt levels. We do submit that equity valuations are elevated somewhat above historical averages. We suspect this is due to investors hoping for future interest rate cuts and close to double-digit earnings growth. To that end, the bar has been raised and we strongly expect the outperformance reward for stocks beating earnings estimates to be smaller than average for the upcoming quarter. We remain constructive on equity markets for the rest of 2024, but our expectations are realistic, and therefore we do not expect returns in the back half of the year to come close to matching the first half.
Insights
Quarterly Review: Q2 2024
The first six months of 2024 in the domestic equity markets mirrored how 2023 finished, with the S&P 500 up by nearly 15%. This strong performance widened the gap between domestic and foreign stocks, with the U.S. outperforming by over 10%. One of the driving factors in this disparity is the heavier weighting of the
technology sector in the S&P 500, which is approximately 30%, compared to 15% in the EAFE index. The tech-heavy NASDAQ index even bested the S&P 500 for the first six months in 2024 by 3%, for a return of almost 18%, led by the artificial intelligence (AI) theme which we believe is very real. AI stocks outperformed the rest of the market, but in the second quarter, AI valuations became seriously disconnected from the rest. The question in our mind is what companies will be able to monetize this theme and how quickly, as stock prices are already anticipating large current and future profits.
Chart Source: Sindreu, J. (2024) The quarter that split the market, in six charts, The Wall Street Journal. Available at: https://www.wsj.com/finance/stocks/the-quarter-that-split-the-market-in-six-charts-2967f139
Large, high-quality company stocks are once again outperforming small and medium-sized companies by over 10% year-to-date (ytd), thanks to strong balance sheets, less reliance on debt, and robust earnings. Growth stocks continue to beat value stocks as investors are comfortable paying a premium for profitable growth, not just top-line increases. From a ytd sector perspective, communication services and technology stocks are leading the way for the S&P 500, while real estate and consumer discretionary are among the worst-performing sectors, with real estate posting negative returns.
Defying expectations, the U.S. economy has shown remarkable resilience, fending off a highly anticipated recession. While unemployment has risen slightly to 4.0% from 3.4%, it remains low by historical standards. There are still 8 million job openings according to the JOLTs (job opening labor turnover survey). With strong employment, U.S. consumers continue to spend on services like travel, entertainment, and experiences. Only recently are we beginning to see very modest signs of weakness and some trade downs, but this is completely normal, and we view it as a sign of fatigue more than stress. Despite this adjustment, retail sales remain robust, growing over 2% year-over-year.
Due to the steadfastness of the U.S. consumer, inflation has been stubborn as it slowly comes down from almost 8% in 2022. Current measures of inflation are less than 3%, but still short of the Federal Reserve’s 2% target. Interest rates, as measured by the 10-year Treasury, have increased by 40 basis points (0.40%) to 4.3% in 2024 due to persistent and longer-lasting inflation. However, it’s important to note that these rates are down 40 basis points from their April highs. The credit market also paints a cautiously optimistic picture. Credit spreads have actually tightened by 8bps this year, indicating no significant stress. However, there is no doubt that higher interest rates have adversely affected the housing market. Existing home sales are down 3% year-over-year, marking their slowest pace since 2011 from February through May, as mortgage rates have more than doubled since 2022, reaching their highest rate since 2001. While a lack of overall supply has kept prices steady in some areas, weariness and fatigue are undoubtedly setting in.
Given the run in the equity market over the past 18 months, led by technology stocks, some are making lazy comparisons to the late 1990s and the dot com bubble. We do not see those comparisons as valid at all. Companies in 2024 have real and rising earnings, strong revenue growth, and lower debt levels. We do submit that equity valuations are elevated somewhat above historical averages. We suspect this is due to investors hoping for future interest rate cuts and close to double-digit earnings growth. To that end, the bar has been raised and we strongly expect the outperformance reward for stocks beating earnings estimates to be smaller than average for the upcoming quarter. We remain constructive on equity markets for the rest of 2024, but our expectations are realistic, and therefore we do not expect returns in the back half of the year to come close to matching the first half.