Previous week's weekly market wrap

Published June 12, 2024
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Midyear Review: A look back, and our outlook for what's ahead

Key Takeaways:

  • Cooling but positive economic growth and moderating inflation have provided a favorable backdrop for stocks to continue delivering strong performance, with the S&P 500 and Nasdaq both notching record highs this week. 
  • Inflation continues its path lower, with consumer price index (CPI) inflation at 3.0% on a year-over-year basis in June, the lowest reading since March 2021. Wholesale price inflation – measured by the producer price index (PPI) – ticked up to 2.6% in June, higher than expectations for 2.3%1. However, most of the rise was attributable to wider wholesaler margins2, which tend to be sustainable only when end demand is sufficiently strong. Moderating inflation should keep the Federal Reserve (Fed) on track to cut rates by year-end.
  • Earnings season kicked off this week, with high expectations. Year-over-year earnings growth for the S&P 500 is estimated to be 8.8% for the second quarter, which would be the fastest pace since the first quarter of 2022. Earnings growth is expected to broaden, with eight of the 11 sectors projected to report year-over-year growth. Broadening earnings performance is one element that could set the state for lagging sectors to play some catch-up to technology and communications services stocks, which have led markets higher.
  • The labor market shows continued signs of cooling, with the unemployment rate at 4.1%, up from the post-pandemic low of 3.4% and now also above the Fed's forecast of 4.0% unemployment in 2024. A further pickup in unemployment could put downward pressure on wage growth.

Looking back at the first half of the year

U.S. equity markets rose in the first half of 2024, led by a 15.3% gain in large-cap stocks. Enthusiasm around artificial intelligence (AI), along with robust profit growth, has lifted technology and communications services stocks.

Interest rates increased in the first half of the year, pressuring investment-grade bonds. Resilient economic growth supported lower-quality issuers, driving U.S. high-yield bonds and emerging-market debt to modest gains. Following rate hikes to combat inflation, the European Central Bank (ECB) and Bank of Canada (BoC) were the first of the G7 central banks to lower policy rates. After several months of higher-than-expected inflation to begin 2024, U.S. inflation resumed its trend lower in the second quarter.

International stocks gained in the first half of 2024, with emerging-market stocks leading developed international large-cap stocks. Fiscal support from China helped emerging-market stocks, while improving economic growth in Europe and strong corporate profit growth in Japan aided developed international stocks, partially offset by a stronger U.S. dollar.

Economic outlook

 Chart showing job openings and wage growth
Source: FactSet and Edward Jones.

The U.S. economy has cooled from the above-trend growth seen in 2023, as U.S. GDP growth slowed to 1.4% annualized in the first quarter. As we look toward the back half of 2024, we expect economic growth to continue to moderate, driven by a normalization in the labor market and softening consumption.

Following a period of strength, the U.S. labor market has come into better balance, with the unemployment rate rising to 4.1%, the highest since 2021. Leading indicators point to further softening, as job openings and the quits rate (the percentage of employees who voluntarily leave jobs) have fallen to recent lows. Meanwhile, labor supply continues to increase, supported by immigration. A further pickup in unemployment could put some downward pressure on wage growth.

After hotter-than-expected inflation data in the first quarter, recent inflation readings have surprised to the downside. Inflation continued its path lower in June, with consumer price index (CPI) inflation at 3.0% annualized, the lowest reading since March 2021. Core CPI, which excludes more volatile food and energy prices, ticked down to 3.3% annualized. In our view, two potential drivers could move core PCE inflation (2.6% as of the most recent reading) closer to the Fed's 2% target: 1. Shelter and rent components of inflation moderate, especially given that real-time data has already slowed; and 2. Services inflation cools as wage growth slows.

Equity outlook

 Chart showing fourth-quarter 2024 year-over-year earnings growth estimates
Source: FactSet and Edward Jones. 7/10/2024. Year-over-year earnings growth estimates of the S&P 500 & S&P 500 GICS sectors.

We believe technology-focused sectors will continue to play a meaningful role in portfolios. The technology, communication services and consumer discretionary sectors, all of which include mega-cap AI stocks, represent more than half of the S&P 500. These companies have delivered on earnings and also have fortress cash positions, allowing them to reinvest in their businesses and return value to shareholders.

But we continue to believe that market leadership should broaden beyond mega-cap technology. First, while recent earnings growth has come largely from technology-related companies, by the fourth quarter earnings growth will likely be driven equally by other sectors. Second, as we get closer to Fed rate cuts, cyclical areas of the market may play catch-up as lower yields support the economy. And finally, over time, productivity gains and efficiencies from AI will be felt across sectors, in our view.

Historically, stock markets have experienced volatility in the weeks prior to the U.S. election. However, markets typically recover in the weeks following the election. In this election cycle, we expect Congress to remain divided, which means no major new regulation or legislation is likely, regardless of which party wins. Markets typically prefer political gridlock, as it means a more transparent operating environment for companies. Over the long run, markets tend to follow the fundamentals — including inflation, interest rates and economic growth — more so than politics and elections.

Fixed-income outlook

 Chart showing year-over-year change in core PCE inflation
Source: Federal Reserve Bank of St. Louis and June FOMC summary of economic projections.

At its June meeting, the Fed trimmed expectations to one interest-rate cut for this year. We expect moderating inflation to allow the Fed to pivot to rate cuts potentially in September and/or December. As the timing and pace of the cuts becomes clearer, short-term yields should decline, likely steepening the yield curve and leading to higher reinvestment risk for short-term bonds and CDs. We see value in intermediate- and long-term bonds and bond funds, which lock in rates for longer.

A likely Fed pivot to interest-rate cuts should support the economy, which would be favorable for stocks. Bonds typically perform well during Fed rate-cutting cycles, as their prices rise, but they could underperform U.S. mid-cap stocks, which offer a balance of quality and cyclicality to potentially benefit from economic growth.

The resilient economy supports lower-quality issuers, including U.S. high-yield bonds. Credit spreads, which indicate the excess yield above U.S. Treasury bonds to compensate for default risk, are well below historical averages. We see limited opportunity for them to narrow further. Emerging-market debt is more attractive, in our view, as it could benefit more from lower rates due to its higher quality and longer duration.

International outlook

 This chart shows the ratio of the STOXX 600 to the S&P 500
Source: FactSet and Edward Jones. Europe STOXX 600 and S&P 500 Index. Citi Economic Surprise Index for the Eurozone and U.S.

A modest eurozone recovery appears to be underway, as growth picked up more than expected in the first quarter, and timely survey indicators suggest the region’s outlook is improving. Despite unemployment falling to historic lows, inflation pressures have receded, and the ECB has started to ease policy. With eurozone activity rebounding from a lull and U.S. economic activity normalizing after a period of exceptional strength, we believe international developed-market stocks offer catch-up potential and diversification benefits.

In response to an uncertain economic environment and an ongoing real estate crisis, Chinese policymakers have lowered interest rates, allowed banks to keep smaller reserves, and announced measures to absorb some of the excess housing inventory. The policy support sparked a second-quarter rebound in stocks, but we remain cautious on the sustainability of the rally as earnings estimates hover around 2017's earnings numbers.

More central banks began easing policy in the second quarter, with the ECB and BoC lowering interest rates in June. Central banks will likely take a cautious approach to rate cuts to ensure inflation is contained, but we think a multiyear easing cycle will continue to gain steam next year. Lower rates can help drive a recovery in manufacturing activity and benefit cyclical sectors. A Fed pivot toward rate cuts could weigh on the U.S. dollar, helping the performance of international investments.

Election issues and implications

 This chart shows federal debt as a percent of GDP
Source: St. Louis Fed, Congressional Budget Office. Federal debt held by the public.

U.S. budget deficits have run north of 6% of GDP in recent years. We’ve seen larger, rising deficits as a percentage of GDP (mid-1970s, early 1980s, early 1990s, 2008–2010), but these accompanied periods of economic weakness. Today’s sizable deficits are occurring with above-average GDP growth. We believe this could require more fiscal restraint ahead. While the government’s $35 trillion-and-growing debt is an astronomical number, as a percentage of GDP, it’s not yet at a level that limits the government’s ability to borrow at reasonable rates. Favorable economic policies can help delay or lessen those risks, but we think the solution will require fiscal spending and tax adjustments. But we don’t expect either candidate this year to pursue material policies to address long-term debt issues.

We expect the campaign trail to include tough talk on trade with China. The U.S. economy’s growth does not rely dramatically on trade, but the use of tariffs does present an inflationary risk. While such tactics were leveraged during former President Trump’s term, they occurred within a much more benign inflation environment. We think tariff policies will instigate some trade-war anxieties for the markets ahead, but we think domestic consumption and investment trends will be the more powerful influence on economic outcomes.

We expect that the Fed will act solely under the direction of incoming inflation and economic data, but the timing of such moves will likely occur around the election. We also could see some election-driven uncertainty around the future of Fed Chair Jerome Powell’s role (whose term ends in 2026) if Trump were to propose a new Fed chief.

Brian Therien
Investment Strategy

Source: 1 FactSet 2 Bureau of Labor Standards

Weekly market stats

Weekly market stats
INDEXCLOSEWEEKYTD
Dow Jones Industrial Average40,0011.6%6.1%
S&P 500 Index5,6150.9%17.7%
NASDAQ18,3980.2%22.6%
MSCI EAFE*2,418.312.3%8.1%
10-yr Treasury Yield4.18%-0.1%0.3%
Oil ($/bbl)$82.27-1.1%14.8%
Bonds$98.390.8%0.6%

Source: FactSet, 7/12/2024. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *Morningstar Direct 7/14/2024.

The week ahead

Important economic releases this week include housing starts for June and retail sales data.


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Brian Therien

Senior Analyst, Investment Strategy

CFA®

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The Weekly Market Update is published every Friday, after market close. 

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