2024 Q2 Commentary

John McHugh |

In this weekend's update, we will discuss the 2nd. Quarter highlights, for your perusal.

 

Overview: In Q2, major US equity indices showed a mixed performance, with the standout narrative being the significant contribution of the Magnificent 7 (Mag7) stocks. This group was instrumental in driving both the S&P 500 and the Nasdaq to fresh record highs, most recently observed on June 18th. However, concerns about market breadth were prevalent, with a notable performance gap of nearly 700 basis points emerging between the official S&P 500 index and its equal-weight variant, RSP, which posted a modest 3.0% gain. The breadth issue was underscored by the fact that while over 78% of S&P 500 constituents were above their 50-day moving averages at the end of Q1, this figure dropped to approximately 46% by the end of Q2.

 

WealthTrust Long Term Growth Portfolio Quarterly Top 10

 

Performance Highlights: Big tech stocks soared in Q2, with NVIDIA (NVDA) up 36.7%, Apple (AAPL) rising 22.8%, and Google (GOOGL) increasing by 20.7%. Other notable outperformers included the semiconductor sector, large-cap software, networking and communications, hospitals, multifamily REITs, telecom, and high-performance computing sectors. Conversely, small-cap stocks, drug stores, energy, machinery, road/rail companies, regional banks, insurers, retailers, homebuilders, auto suppliers, chemicals, steel, and food sectors lagged.

 

Treasury and Commodities Update: Treasury yields rose across the curve, with the 10-year yield increasing by approximately 18 basis points quarter-over-quarter, as expectations for multiple 2024 rate cuts diminished. Despite supply concerns, later quarter auctions were well received. The DXY dollar index rose 1.3%, particularly strengthening against the yen, which faced renewed intervention speculation after weakening beyond the 160/$ mark. Gold recorded its third consecutive quarterly gain, rising 4.5% in Q2, while oil prices were slightly weaker, with WTI crude down 2.0% after a significant 16%+ jump in Q1.

 

Key Developments: One of the quarter's major stories was the hawkish repricing of Federal Reserve rate-cut expectations in light of persistent inflation and robust job growth. Fed officials continued to emphasize their "greater confidence" in potentially reducing rates if data indicates a sustainable path back to the 2% inflation target. This shift was solidified after the June FOMC meeting's Summary of Economic Projections (SEP) revealed a median forecast for one rate cut, down from three in the March SEP.

The narrative of a potential soft landing gained momentum in Q2, as continued disinflation coincided with signs of a gradual economic slowdown. May's core CPI came in at 3.4%, the lowest year-over-year level since August 2021, while May's core PCE was at 2.6%, the smallest annual gain since March 2021. Despite expectations of weakening job growth, June's nonfarm payrolls report exceeded consensus. 

Attention increasingly turned to consumer health amid weaker retail sales reports and corporate updates highlighting challenges in an uncertain macro environment. By the end of June, the Citi economic surprise index was at its most negative level since August 2022.

Corporate earnings remained resilient, with Q1 earnings for S&P 500 constituents growing by 5.8%, surpassing the 3.4% expected at the end of the quarter. However, excluding the Magnificent 7, the remaining S&P 500 components saw an average earnings decline of 1.75% year-over-year. Despite this, analysts still forecast double-digit earnings growth for the index in 2024 and a 14%+ increase in 2025. Nevertheless, recent corporate updates have frequently mentioned concerns about more cautious client behavior and value-conscious consumers delaying big-ticket purchases.

 

Outlook: As we conclude Q2, the consensus outlook remains cautiously optimistic. Multiple analysts raised their year-end 2024 S&P 500 targets in June, citing strong big-tech earnings prospects, an anticipated Fed easing cycle, ongoing disinflation, and a favorable economic environment. However, there are also more pessimistic views, such as JP Morgan's Kolanovic, who maintains a bearish stance due to stretched valuations and the risk of decelerating economic growth impacting corporate earnings.

Looking ahead, the bullish case is supported by continued disinflation progress, anticipated (though delayed) Fed rate cuts, ongoing AI optimism, favorable July seasonality, and firm expectations for a soft-landing scenario. On the bearish side, concerns persist about consumer health, potential rising unemployment, bumpy disinflation, sluggish Fed responses, expensive valuations, crowded market positioning, and extremely narrow market breadth.

 

S&P 500 Sector Performance:

  • Outperformers: Technology (+13.61%), Communication Services (+9.11%)
  • Underperformers: Materials (-4.90%), Industrials (-3.26%), Energy (-3.19%), Real Estate (-2.82%), Financials (-2.43%), Healthcare (-1.37%), Consumer Discretionary (+0.45%), Consumer Staples (+0.69%), Utilities (+3.85%)

 

As we navigate the complexities of the market, it remains crucial to stay informed and adaptable, leveraging opportunities while managing risks in this dynamic environment.