The US stock market has shown remarkable resilience and performance in the first half of 2024. Despite various economic challenges and fluctuating interest rate expectations, major indices have posted significant gains, buoyed by strong corporate earnings and the robust performance of key sectors. US equities continued their rally into the first quarter of 2024. The S&P 500 posted its fifth gain in the last six quarters, marking a second consecutive double-digit quarterly percentage increase and the best performance to start to a year since 2019. The Nasdaq nearly achieved its fourth double-digit percentage gain in five quarters, showcasing the strength in technology stocks driven by the AI secular growth theme. This trend has notably benefited big tech and momentum stocks, especially the AI darling Nvidia, which showed its rocket ship potential jumping more than 125% YTD so far, but it was not the only strong performer. As of now, the S&P 500 is up over 10%, the Nasdaq has risen over 12%, and the Dow has seen a modest increase of 2%. This positive momentum reflects a broader investor confidence in the market, despite ongoing economic uncertainties and the always looming threat of a recession.
However, all has not been rosy on the economic side – interest rates have experienced significant fluctuations in recent months. The 10-year Treasury yield started the year below 4%. Following three consecutive higher-than-expected inflation readings, the relief of multiple rate cut expectations were reduced from three to potentially zero. This shift caused the 10-year yield to surge as high as 4.7%, a substantial increase of approximately 20%. Recent softer-than-expected labor market data, including rising jobless claims and a cooler end-of-week jobs report, have slightly eased concerns about overheating inflation, bringing the 10-year yield down by 20 basis points. It is clear inflation remains a critical concern, with recent readings indicating that the desired reduction in inflation has not yet been achieved. The Federal Reserve, in its latest policy meeting, decided to hold interest rates steady, expressing less confidence in achieving its inflation target this year. The debate has since shifted from when rate cuts will begin to whether they will happen at all this year.
Yet, even with these rate expectation revisions and pressure on consumer spending, we continue to see the stock market relatively unphased so far. Though we finally experienced our first 5% pullback in late April, the market rebounded like it never happened, jumping back to all-time highs in less than a month, for which we largely have strong earnings to thank. Corporate earnings for the first quarter of 2024 have generally exceeded expectations. Approximately 95% of S&P 500 companies have reported their earnings, with nearly 80% surpassing earnings expectations, which is above the long-term average of 77%. Earnings growth for the quarter is now forecasted at 6%, up from the initial expectation of 3.5%. This has brought a bit more confidence that this bull market that started in late 2022 has more room to run, but to do so, earnings will need to continue to shine.
Despite the persistent challenges of inflation and interest rate uncertainty, the US stock market has demonstrated a robust ability to adapt and grow. The market’s ability to withstand adjustments in Fed expectations without significant downturns is a positive sign for investors. Looking ahead, we expect to continue to see this tug of war between corporate earnings and a softening economy. Momentum will likely swing back and forth, and as we have come to know, we will likely get pullbacks, and that is healthy. What we should expect, though, is an increase in volatility. In a given year, we typically see 3-4 5% pullbacks. Thus far, we have seen one pullback that just barely eclipsed 5%. More notable is that most years, even in the strongest of bull markets, experience at least one period of 10+% pullbacks. This is not to say a big pullback will happen soon – it may or it may not, but as Noble laureate Robert Melton said, trying to time or predict the market in the short-term is a “fool’s errand.”
John Webb
Private Wealth Advisor
Pinnacle Asset Management
Raymond James Financial Services
Kidd Private Wealth Group
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