Investment Outlook June 2024

June 30, 2024

The market continues to make new short-term highs, with the S&P 500 surpassing its previous high reached in January 2022, but this good news masks a tale of two markets- one in which a shortlist of stocks has soared and one in which a great majority of S&P 500 stocks are still well below their previous highs. Our economy, too, is viewed as two different markets; depending on who is surveyed, inflation and growth expectations are split dramatically. While the different perceptions of 2024 certainly depend on your vantage point, we understand why such disparate views could prevail right now, especially with the uncertainty of an upcoming election. However, the hard data leads us to a positive outlook for the market based on an economy that can continue to support earnings growth for the next year across a range of industries.

Inflation peaked in June 2022 and has been steadily decreasing globally. We have long held the final leg would be bumpy, but the most recent reading continued to fall to 3.3% – the lowest reading since the spring of 2021. Consumers are skeptical; the most recent University of Michigan sentiment survey fell as consumers reported continued worries about the strength of the broad economy and, in particular, inflation. Wage growth is another data point that is reflecting strength but is not embraced by consumers.  These pay increases have now surpassed inflation, meaning workers’ earnings are up more than prices.  This should leave consumers feeling comfortable managing household expenses even as they have increased, with some extra left in their pocket. Many households, though, report that food and household prices have gone up meaningfully, and they view their higher paycheck as an earned raise, not an ability to pay higher prices for their essential goods. It has been forty years since any of us have lived in a post-inflation environment, and people are certainly adjusting to the ongoing financial impact on their lives.  Current sentiment seems to reflect the frustration of higher absolute prices, not a data-supported assessment of our economic trends. When we do look at the data so far this year, we see an economy still growing and improving, while absorbing higher prices.   We also see households with strengthening balance sheets, enjoying more buying power than they have had in the past decade.

Despite this positive economic data, part of the mixed views on our economy can be attributed to our Federal Reserve.  After signaling rate reductions last year, the Fed has held steady, unconvinced by the inflation and employment data so far this year.  While the Fed reports it wants to achieve a soft landing, the Fed may risk waiting too long to lower rates. The path of economic data is rarely steady and clear – it is the Fed’s job to anticipate and predict.  If companies delay investment and hiring, waiting for lower rates, the Fed risks stalling the stable growth we are enjoying. We believe the Fed’s pause continues to tighten conditions in the U.S., making growth more difficult for some industries, but we do expect lower rates by year-end.

It is reasonable to have differing views on the Fed’s current strategy and in the markets, it is easier to understand the opposing outlooks. First, we have observed that some investors simply don’t acknowledge the growth in their portfolios as real. Focusing on just a few data points, they anticipate a weakening economy and expect a market correction at any time. Conversely, we see some investors who do not own any of the short list of market-leading stocks and these investors don’t see the market as strong; their portfolios have not participated in the market gains, as most individual stocks have actually had muted returns over the past two years. In fact, when we take apart the major indices, we note that a short list of mega-cap sized stocks dominates the returns since the market bottom. The equal-weighted S&P 500, which reduces the effects of the mega-cap stocks, is up by barely 5% since year-end 2021, hardly a bullish run due for a correction. Even with those mega-cap stocks included, the S&P 500 is only making a new high 2 1/2 years after its previous high- not an overly exuberant run by historical experience. When we look at both the price movement and the current valuations of most stocks in the market today, we don’t see an over-valued landscape. Stock-by-stock, we see opportunities for additional earnings growth and stock appreciation yet to come.

Ultimately, we think the disconnect between economic fundamentals and market sentiment is a positive for the future. Markets frequently do well when investors underestimate the path of economic growth.  We are invested for continued growth in the U.S. and declining rates.  We also know that the next six months will bring plenty of political headlines that may buffet the market in the short term, but once our election is determined, we see this bull market continuing for some time.

Please see our important disclosure.