Q2 2024 Market Commentary + Outlook

Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, discuss Q2 market performance and what to anticipate in the second half of 2024.

The S&P 500 increased 4.3% during the second quarter of 2024, with five of the index’s 11 underlying sectors gaining as technology and communication services were the top performers. Inflation data and the labor market cooled throughout the quarter, but the Federal Reserve (Fed) held rates steady in Q2, giving little guidance on future rate cuts. International markets fell during the quarter, with the MSCI EAFE losing -0.4%. The European Central Bank (ECB) cut interest rates by 25 bps during the quarter, as inflation fell in the eurozone but continued to plague the UK and Japan. Emerging markets, as measured by the MSCI Emerging Markets Index, gained 5.0% on the quarter as China’s central bank stepped in with a historic rescue package to stabilize China’s property sector and as Taiwan skyrocketed thanks to advancements in semiconductor and chip technology. Fixed income was mostly positive on the quarter, with the Bloomberg US Universal Index rising 0.2% as inflation concerns abated. The US economy continued to expand, but sticky inflation and weakening labor market caused the US consumer to begin reducing spending.

The S&P 500 rose 4.3% throughout the second quarter of 2024, falling in April but gaining over the following two months. Inflation ran hot at the beginning of the quarter, but tamed in the later months, mainly due to declining energy prices. Revised Q1 data released during the quarter showed consumer spending increased at a far slower pace, reflecting a possible slowdown in the resilient US consumer. The labor market also began to show some weakness, with job openings falling more than forecasted and pay growth slowing concurrently during the quarter. Still, the Fed penciled in just one interest rate cut this year, citing the need to see additional moderation in the economy. Throughout the second quarter, manufacturing slowed into contraction territory, as new orders diminished, and high interest rates deterred businesses from investment. Home prices began to stabilize in Q2 as interest rates slowed demand, and as shelter prices make up the largest component of inflation, hopes that this data could help justify impending interest rate cuts were spurred.

Just five of the 11 underlying sectors in the S&P 500 rose in Q2. Technology was the top performer, gaining 13.8% on the heels of artificial intelligence (AI) and chips advancements. Communication services was next, posting 9.4% on the quarter thanks to Meta. Conversely, materials was Q2’s worst performing sector, losing -4.5%, followed by industrials, which lost -2.9%. These sectors fell as companies involved in construction, engineering, and machinery struggled.

Large cap stocks handily outpaced small cap stocks in Q2. Additionally, growth stocks bested value stocks in the second quarter, continuing trends seen over the past years.

International developed markets lagged their domestic counterparts during the quarter, with the MSCI EAFE Index losing -0.4% in Q2. In local currency terms, the index gained 1.0%, but as the dollar strengthened against the euro and yen throughout the quarter, dollar-denominated returns lagged. In the eurozone, business activity grew at the fastest pace in nearly two and a half years and a measure of wholesale prices indicated an expansion. The unemployment rate fell to a record low and inflation continued to trend lower throughout the quarter. In the June meeting, the ECB cut interest rates by 25 basis points, but indicated restrictive monetary policy is still in play and investors should not expect another rate cut soon. In France, President Macron called for snap legislative elections after the EU elections showed a shift toward right-wing and far-right parties, but this effort backfired as left-leaning parties were largely the winners. Within the UK, the unemployment rate rose, and job openings declined for the 22nd consecutive month. Still, rising inflation propped up the value of the pound, and the UK posted one of the strongest returns of the index over Q2. In Japan, yen weakness propelled a rebound in tourism, but inflation continued to accelerate.

Elsewhere, the MSCI Emerging Markets Index gained 5.0% on the quarter. China, the largest constituent of the index, rose 7.1% over the quarter, higher than any developed country. The country’s property crisis and deflationary pressure continued to weigh on the economy throughout the second quarter. Two inflation measures came in below expectations in Q2, as consumer confidence and the housing slump held a lid on prices. Further, the manufacturing sector slipped into contraction territory amid declines in new orders and exports. However, the People’s Bank of China (PBOC) stepped in with a historic rescue package to stabilize the property sector, lowering the minimum down payment requirements, reducing the minimum mortgage interest rates, and pumping 300 billion yuan to institutions to buy vacant apartments. These efforts, coupled with a stronger than expected Q1 expansion, prompted the International Monetary Fund to upgrade China’s 2024 economic growth forecast. Taiwan was the best performing country in Q2, gaining 15.1% thanks to advancements in semiconductor and chip technology, as well as continued optimism around AI. India was also a major contributor, rising over 10.0% in the quarter driven by strong economic growth.

Over the second quarter of the year, the Bloomberg US Aggregate Index ticked up 0.1% and the broader Bloomberg US Universal Index rose 0.2% as the Fed penciled in just one interest rate cut in 2024. This was below the market’s expectations and yields rose slightly in response.

The yield on the 10-year US treasury rose 0.16% during the quarter, ending at 4.36%. The yield curve remained inverted throughout Q2, with the 2-year yield persisting above the 10-year yield. Short duration yields, which are closely tied to Fed rate moves, increased as well, with the 2-year treasury rising 12 basis points and ending the quarter at 4.71%. The yield curve has been inverted for a record amount of time, more than two years. Although inverted yield curves tend to indicate recessions, recession fears are fading, and the Fed may have navigated a soft-landing.

US gross domestic product (GDP) grew at an annualized rate of 1.4% over the first quarter of 2024, the latest period for which data are available. The lower-than-predicted number reflected a possible slowdown for the resilient US consumer, as consumer spending (which has been driving GDP growth in recent years) increased just 2.0% during the first quarter, down from Q4’s 3.3%. Still, the US economy expanded at the fastest pace in more than two years in June.

During the second quarter of 2024, the strong labor market began to show signs of turning over. Despite wage growth coming in hotter-than-expected at the beginning of the quarter, data released later on showed the US added fewer jobs than expected and the unemployment rate rose. Further, unemployment benefits filings hit the highest level since late-August 2023 during the quarter. In May, job opening fell more than forecasted, reaching the lowest level since early 2021, while pay growth slowed concurrently. Since the Fed has continuously noted the importance of seeing labor market weakness before commencing the rate cutting cycle, the turnover in these datapoints incited hopes the Fed would cut interest rates soon.

Inflation continued to show signs of cooling in Q2. The Consumer Price Index (CPI), a key inflation measure for buyers, and the Personal Consumption Expenditure Price Index (PCE), the Fed’s favorite inflation measure, both rose in line with expectations in April. Core PCE, which excludes volatile food and energy prices, came in slightly lower than anticipated due to weaker retail sales. In May, the Producer Price Index (PPI), a key inflation measure for sellers, dropped sharply and CPI fell below expectations, unchanged for the first time in nearly two years thanks to falling gas prices. June CPI came in lower than expected. Year-over-year CPI hit 3.0%, near the lowest level in over three years, and month-over-month CPI fell slightly. Additionally, home prices began to stabilize during the second quarter, as high interest rates slowed demand. With shelter prices making up the largest constituent of inflation, investors hoped the stabilization may justify impending interest rate cuts by the Fed.

Arguably, the Fed may have been able to thread the needle between lowering inflation and maintaining economic stability. Coming off the highest interest rates in nearly 20 years, the US economy has continued to expand into 2024. Looking ahead, US stocks are trading at elevated valuations, but outside of the top names, valuations are more reasonable and interest rate cuts could support higher prices. US growth seems to be stabilizing near 2.0% and companies continue to beat earning expectations, so forward price-earnings ratios appear reasonable. Looking forward, interest rate declines should benefit small cap stocks the most (which are trading at attractive valuations), and although value stocks are attractively priced compared to growth stocks, investors continue to exhibit a strong preference for growth, but this could reverse if interest rates fall.

Developed international stocks are attractively priced and could begin to recover if earnings growth improves and the US dollar weakens. Developed market stocks are trading at the largest discounts to US stocks in over 20 years and growth in Europe and Japan is projected to increase sharply relative to the US in 2025. Inflation is falling rapidly in Europe and the ECB is poised to cut interest rates further this year. Emerging market stocks have started to recover after a slow start to 2024. Strong economic growth is projected, and investors have begun to move back into the region as the forward-looking outlook has improved. Growth in emerging countries looks relatively strong. India, the fastest growing country, is leading the way and China’s economy, the second largest in the world, has experienced stronger growth than initially projected. Emerging markets are projected to have faster earnings growth than the US in 2024 and 2025.

Bond yields likely peaked in the first quarter and future returns look relatively attractive assuming the Fed is done hiking rates. Looking forward, longer duration bonds are well positioned for real return and although short term yields are attractive, yields will likely fall by year-end and short-term bonds may underperform their longer term counterparts after the first few interest rate cuts. Credit spreads are tight, but defaults are low, and the probability of a recession has fallen significantly. The Fed indicated the interest rate hiking cycle is over and they will likely continue reducing bond sales.

This information is for educational purposes and is the opinion of Aldrich Wealth LP (“Aldrich Wealth”). Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Indices are unmanaged and are not available for direct investment and do not include any transaction, management of other fees or costs. Nothing in this commentary should be construed as an investment recommendation. Past performance does not guarantee future results and all investments involve risk. Aldrich Wealth is an investment adviser registered with the US Securities and Exchange Commission.