Market Summary
The second quarter of 2024 exhibited moderate economic growth, driven by strong consumer spending and robust labor markets. Despite lingering concerns over inflation, the Federal Reserve maintained its cautious stance, opting to keep interest rates steady. With no interest rate decreases during the first half of 2024, economists and investors now speculate that we’ll see the first cut to occur in September. This may possibly be the only rate cut we see for the year.
The global economy showed continued expansion despite nagging inflation worries and rising geopolitical tensions. Although the Federal Reserve has yet to reduce interest rates, other central banks like the European Central bank and Bank of Canada took some modest steps to cut their rates in Q2 of 2024. Key highlights of the second quarter include:
1. Global GDP Growth: Many economies experienced moderate growth, with global GDP increasing by 3.2%. The U.S. economy grew by 2.8%, driven by consumer spending and strong labor market conditions.
2. Inflation Trends: Inflation rates began to stabilize in several major economies. The U.S. saw a slight decline in inflation (as measured by the consumer price index) to 3% for the month of June, while the Eurozone experienced a similar trend, with inflation dropping to 2.5%. Central banks maintained a cautious stance, balancing between curbing inflation and supporting economic growth.
3. Monetary Policy: The Federal Reserve kept interest rates steady at 5.25%, signaling a pause in rate hikes to assess the economic impact.
| INDEX | ASSET CLASS | 2024 YTD |
|---|---|---|
| DJ U.S. TOTAL STOCK MARKET | U.S. STOCKS | 13.61% |
| MSCI AC WORLD EX-USA | INTERNATIONAL STOCKS | 5.83% |
| BLOOMBERG U.S. AGGREGATE BOND | BONDS | -0.71% |
The S&P 500 Index gained 4.28% in Q2 and extended its valuation to 21.01 times its forward price to earnings ratio (P/E) compared to 20.96x at the end of Q1. A higher P/E ratio indicates investors’ willingness to pay more for stocks. Technology stocks continue to represent the largest sector of the broader market and the top ten holdings of the S&P 500 now represent 37% of the index. Their forward P/E ratio currently stands at 30.3x compared to the index’s remaining stocks which trade at 17.6x earnings. This means a relatively small number of stocks are contributing to the overall market being historically more expensive. This was more pronounced as recent as 2020 to 2021 and led to tech stocks being decimated in 2022. Going back more than twenty years, we see this problem was even more glaring during the dot-com bubble when the top 10 stocks traded at over 40x forward P/E. While these levels are not at previous peak levels yet, it is something to be cognizant of, especially if earnings (the “E” of the P/E ratio) don’t grow and stock prices continue to soar. Then the artificial-intelligence bubble will become this generation’s dot-com bubble.
Looking Forward
U.S. politics continue dominate headline news in an already uncertain year as President Joe Biden decided to not seek reelection, leaving Vice President Kamala Harris as the likely candidate for the Democratic Party to face Donald Trump in November’s election. Whoever wins will have to contend with not only the economy and domestic issues, but heighted overseas tension. Middle East conflicts continue to escalate as countries reciprocate attacks and bombings. While these regionalized events are fairly contained, potential issues can evolve as world super powers like the United States, China, and Russia pick sides and offer political, financial, and military support. Even if we avert a calamitous event like World War III, these conflicts are highly disruptive to global trade if they aren’t deescalated.
The Federal Reserve usually does a good job at communicating their concerns and telegraphing their monetary policy changes. All indications seem to point to a rate cut in the third quarter. However, investors will be frenzied if we don’t get the rate cut as expected and they have to quickly reassess their strategy. Even if economists can’t correctly predict the actual month of the first rate cut, the reality is rates will still be coming down over next two years. Some ramifications of lower short-term rates is an appreciation of bond prices, outflow of money from high-yield savings and money market funds to other assets, and lower mortgage rates if long-term rates also drop. With an already low supply of housing, a wave of historically low mortgage rates could spark another house-buying frenzy. It also offers homeowners who’ve bought recently to refinance into lower payments.
In today’s investing environment, it’s important to take the appropriate amount of risk for your situation, be diversified, and continue to rebalance as the market changes. Arriving at the right risk profile can be done by completing a investor profile questionnaire. If you’d like to review your risk profile, contact Key Focus Wealth for a complimentary initial review.
- Source: FactSet, FRB, Refinitiv Datastream, Robert Shiller, Standard & Poor’s, Thomson Reuters, J.P. Morgan Asset Management.
Price-to-earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months as provided by IBES since March 1994 and by FactSet since January 2022. Average P/E and standard deviations are calculated using 30 years of history. Shiller’s P/E uses trailing 10-years of inflation-adjusted earnings as reported by companies. Dividend yield is calculated as the next 12-months consensus dividend divided by most recent price. Price-to-book ratio is the price divided by book value per share. Price-to-cash flow is price divided by NTM cash flow. EY minus Baa yield is the forward earnings yield (consensus analyst estimates of EPS over the next 12 months divided by price) minus the Moody’s Baa seasoned corporate bond yield. Std. dev. over-/under-valued is calculated using the average and standard deviation over 30 years for each measure. *Averages and standard deviations for dividend yield and P/CF are since November 1995 due to data availability. Data are as of June 30, 2024. ↩︎ - The top 10 S&P 500 companies are based on the 10 largest index constituents at the beginning of each month. As of 6/30/2024, the top 10 companies in the index were MSFT (7.0%), AAPL (6.3%), NVDA (6.1%), AMZN (3.6%), META (2.3%), GOOGL (2.3%), GOOG (1.9%), BRK.B (1.7%), LLY (1.5%), JPM (1.3%) and AVGO (1.3%). The remaining stocks represent the rest of the 492 companies in the S&P 500. U.S. Data are as of June 30, 2024. ↩︎
- Market expectations are based off of USD Overnight Index Swaps. *Long-run projections are the rates of growth, unemployment and inflation to which a policymaker expects the economy to converge over the next five to six years in absence of further shocks and under appropriate monetary policy. Forecasts are not a reliable indicator of future performance. Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections or other forward-looking statements, actual events, results or performance may differ materially from those reflected or contemplated. U.S. Data are as of June 30, 2024. ↩︎
