Commentators and pundits seem to be running out of superlatives to describe the market rally that has been largely uninterrupted since November 2023. The second quarter of 2024 followed suit with another leg higher following a sentiment reversal driven by a string of better-than-expected data reports. Wide-ranging data showed economic growth has been resilient in Q2 based on early reports—the corporate sector is healthy, consumer spending has moderated, inflation has ticked lower, all while the labor market remains resilient.
Reports released last week suggest economic growth is consolidating around lower levels with the final Q1 GDP print on Thursday showing the US economy expanded at a modest 1.4% annualized rate, while the Atlanta Fed’s GDPNow forecasting tool suggests Q2 is growing around 2.7%, revised lower from 3.0% the week prior. The economic backdrop is moderating but has given the Federal Reserve more options as they navigate future monetary policy. According to several FOMC members, the risks to monetary policy have become more two-sided, highlighting the challenge between balancing price increases (higher policy rates) with any weakness in economic growth or the labor market (lower policy rates).
To close the second quarter, equity markets as measured by the S&P 500 closed the week lower by 0.1% but held quarterly gains up 4.3% and year-to-date returns up 15.3%. Following a challenging April which traded lower by 4.1%, May (up 5.0%) and June (up 3.6%) more than offset the losses to push the S&P 500 Index to new all-time highs. Dating back to October 31 and the subsequent Fed rate pivot, the S&P 500 is now 31.5% higher. Other than a brief period in April, the volatility index—otherwise known as the fear gauge—has been anchored in the low teens suggesting a robust risk-on sentiment.
On the fixed income side, the US Aggregate Bond Index closed the week down 0.7%, while the quarter ended higher by just 0.1%, driven by modestly rising rates across the yield curve. Fixed income has struggled to find footing year-to-date and has traded lower 0.7% with income gains (higher starting yields) unable to offset the duration (rate change) drag. Following a difficult April (down 2.5%), the fixed income index posted 1.7% gains in May and 1.0% in June. Investors continue to watch the correlation between equities and fixed income. As rates have less impact on equity values, lower correlation between stocks and bonds is improving the diversification benefit of a well-rounded portfolio.
Q2 marked another solid quarter for the equity markets with the S&P 500 rising 4.3%, pushing the index to the 6th best first half dating back to the 1960’s. The ongoing bull run saw another nine new all-time closing highs in the quarter, with the index surpassing 5,500 on several occasions. The S&P 500’s current bull run has added more than $16T in market value since a closing low of 3,577 on Oct. 12, 2022. A strong first half typically bodes well for full-year returns, but there are notable risks to fiscal and monetary policy in the second half that could pose potential challenges to the market’s momentum.
The major themes driving Q2 equity performance remain largely the same. Technology and communication services continue to lead, while value and cyclical sectors trail. Similarly, from a style box perspective, large market cap and growth-oriented companies powered higher as the rest of the market (small cap, value) traded lower in Q2. Of note, the small cap Russell 2000 Index traded 3.3% lower in the quarter and is only up 1.7% year-to-date. Market leadership has narrowed again in Q2 – an equal-weight index of the same companies, which makes no distinction by market cap, has trailed the S&P 500 by 10% since the beginning of January, marking the widest underperformance in the first six months of the year ever.
S&P 500 Index Constituents: Best and Worst YTD Performers
Source: Bloomberg/S&P. As of June 30, 2024.
AI chipmaker Nvidia contributed the most to the S&P 500’s year-to-date rally. Even with a recent pullback, it rallied roughly 150% on a total return basis. Runners-up are Constellation Energy, rising nearly 76%, followed by General Electric (58%), Eli Lilly (56%), and Micron Technology (55%). On the other side of the ledger, Walgreens Boots Alliance was the worst performer, shedding 52% thus far in 2024, closely followed by Lululemon (-40%) and Intel (-39%). In terms of index-point contributions, Nvidia still holds the top spot, adding 4.6% while Microsoft (1.5%), Alphabet (1.2%), Amazon (1.0%), Meta (0.9%) and Apple (0.7%) round out the top places. Ultimately in Q2, the biggest companies got even bigger.
US Inflation Cools While Consumer Spending Rebounds
Change in Core PCE Index (MoM)
Source: Bloomberg, Bureau of Economic Analysis.
Finally, a quick word on the Fed’s preferred price gauge—the personal consumption expenditures (PCE) index. The PCE was flat in May, while the core measure excluding food and energy increased 0.1%. This was the smallest monthly increase since late 2020. In the same report, the Bureau of Economic Analysis showed real personal income rose 0.5%, above expectations, while real spending ticked higher by 0.2%, slightly below expectations. The report offered hope that price pressures can be tamed without lasting damage to consumers, giving the Fed more flexibility in maneuvering monetary policy.
– Written by Eric Schmitz, CFA