2024 | 2nd Quarter
2024 Second Quarter Market Commentary
Despite a slow start in April, the equity markets finished with the S&P 500 up 4.5% for the quarter, bringing YTD performance to 15.3%. Q2 began with the S&P down 3.9% in April, [the only negative month for U.S. equities this year], then stocks resumed their upward trend in May and June. Strong Q1 earnings, a cooling labor market, and the Fed’s reduction to its quantitative tightening (QT) program, reassured investors that inflation appears to be on a slow, downward trend and this Q2 data contributed to positive sentiment.
The mega cap dominance trend continued, both Q1 earnings growth and Q2 performance were driven by the Technology (up 13.8% in Q2, 28.2% YTD) and Communication Services (up 9.4% in Q2, 26.7% YTD) sectors. NVIDIA, Apple, and Alphabet were all among the top performing stocks for the quarter, as the market’s appetite for artificial intelligence (AI) related stocks continued. Small Cap and Mid Cap both lagged, down over 2% for the quarter, reversing the broadening of returns we saw in Q1.
As central banks around the world began cutting interest rates, a stronger dollar weighed on International Developed stocks (up 0.7% in Q2, 5.75% YTD). Emerging Markets (up 5.2% in Q2, 7.7% YTD) rebounded from a weak Q1 to outperform U.S. Large Cap for the quarter. For the year, both continue to lag U.S. equities, with less exposure to the tech-related sectors that have been driving performance.
The U.S. ten-year Treasury yield rose 16 basis points for the quarter, finishing at 4.36%. Yields helped offset the small price depreciation in bonds, with the Bloomberg Aggregate up 0.8% for the quarter, bringing YTD performance to -0.7%. With default rates remaining stable, High Yield continued to lead the bond market, up 2.6% for the year.
As we look ahead to the third quarter, we’ll be keeping an eye on Q2 earnings results. Analysts expect a broadening of earnings growth, which year-to-date has been driven by the AI “picks and shovels” – manufacturers of chips, servers, and data centers. For AI to continue to be a driver of market returns in the long term, we’ll need to see earnings growth spread from chipmakers like NVDIA to the software developers powered by AI, and the eventual adopters of AI across all sectors, that will use AI to cut costs and improve efficiency and margins.
The third quarter will bring two meetings of the Federal Open Market Committee (FOMC). Markets expect the Fed to cut interest rates by 25 basis points at their September meeting, to a range of 5.00% - 5.25%. If inflation data continues to soften and the labor market continues to cool, we could see another cut in December. Lower interest rates would also provide a boost to Small and Mid-Cap companies, who are more debt-dependent than their Large Cap counterparts.
This quarter will also see the Republican and Democratic National Conventions. As we approach the presidential election in November, markets and specific sectors tied to policy (traditional energy, clean energy, and financials) could see increased volatility. We’ve previously discussed the U.S. deficit and the fact that the path we are currently on is unsustainable. The government’s annual debt service cost (the amount of money the government spends to pay its creditors) is currently more than defense spending, and close to the total budget for Medicare. At some point, lawmakers will have to address this, which they will likely do in the form of higher taxes and reduced spending. With the 2017 Tax Cuts and Jobs Act set to expire in 2025, with a lame duck divided Congress, don’t expect any significant tax law changes, punting the fight until next year. The next 18 months are an opportune time to review opportunities for Roth IRA conversions and estate planning.
As always, feel free to contact us with questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Daniel A. Morris, M.S.
Co-Chief Investment Officer
Joseph K. Champness
Director
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
James V. Kelly, CFA®
Director
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