Second Quarter 2024 Review

By White Pine Wealth Management

Executive Summary

• The U.S. stock markets continued to churn higher in the second quarter of 2024, with the S&P 500 Total Return Index rising 4.3% in Q2. Since the most recent market trough on October 12, 2022, the S&P 500 rose 53% through 6/30/24¹.

• As we saw through most of 2023 and early 2024, market gains in the 2^nd quarter were primarily driven by a small number of large technology companies. Due to high levels of market concentration, most diversified portfolios have continued to gain on an absolute basis, while trailing the major market indices on a relative basis. The Nasdaq Composite, which is heavily populated by a select group of “Mega Cap” stocks, outperformed the S&P 500 in the 2^nd quarter, with an 8.5% advance. In contrast, the Russell 2000, which lacks any exposure to these “Mega-Cap” Growth stocks actually declined -3.3% in the 2^nd quarter¹.
• Across major sectors, Technology and Communication Services had the strongest 2^nd quarter performances, rising 13.8% and 9.4% respectively. They also happen to be the only two sectors that are beating the market on a trailing 12-month basis⁵. The worst performing sectors were Industrials and Materials, falling -2.9% and -4.5% respectively².

• Outside the U.S., the Sensex (India) and Hang Seng (Hong Kong) had the strongest showing in the 2^nd quarter, rising 7.3% and 7.1% respectively, while the Bolsa (Mexico) and the CAC 40 (France) fared the worst, with -8.6% and -8.9% respective declines. Despite wildly different outcomes within specific countries, the MSCI EAFE index of Developed Markets excluding the U.S. and Canada ended the quarter flat².

• In the bond markets, the Treasury Yield Curve remains inverted, but to a lesser extent than at the outset of the Federal Reserve’s rate hiking program, as longer rates rose faster than short-term rates. The yield on 10-year U.S. Treasuries began the year at 3.88% and finished the 2^nd quarter at 4.36%³. Accordingly, bond prices generally fell. After a strong showing in 2023, investment-grade corporate bonds gave back -0.49% in total return through the first half of the year¹. As of June 30th, the yield on 2-year Treasuries was 4.71%⁴. Across major fixed income asset classes, Leveraged Loans and Asset-Backed Securities had the strongest showing year-to-date through June 30^th, with total returns of 4.62% and 3.09% respectively, while Long-Term 30-Year Treasuries suffered a -6.20% total return¹.

Third Quarter 2024 Outlook

The following are some of the main themes we’re watching as we move into the second half of 2024. It is far from certain how the rest of the year will unfold, but each of these themes could present different investment opportunities, depending on how they resolve.

• The Presidential Election: In this highly polarized political environment, the 2024 election will trigger emotions for many, regardless of the outcome, but history suggests that investors would do well to not let emotions influence investment decisions. The last time the S&P500 index fell during an election year where one of the candidates was running for re-election was 1940, and the average annual return during the last 10 of these presidential re-election years has been 17.4%⁵. While the prospect of a new administration and accompanying policy changes should always warrant investor attention, historically, stocks have risen regardless of the party in office⁵.

• The Federal Reserve: The Fed’s Open Market Committee (FOMC) is set to meet four more times in the second half of 2024. While earlier hopes of multiple rate cuts in 2024 have been tempered, the prevailing opinion among investors is that at least one rate cut is still in the cards before the calendar turns. For now at least, the work of balancing a growing economy with the need to keep inflation at a palatable level continues.

• Artificial Intelligence: A.I. has continued to be a major driver of stock market performance through the first half of 2024 due to the potential for it to revolutionize productivity. However, the time horizon for the benefits of A.I. to fully materialize and the ultimate magnitude of those benefits are largely unknown. As such, the biggest beneficiaries of this burgeoning technology so far have been a small number of “picks and shovels” companies that provide the high-end chips that enable advanced computing and very large technology companies with vast cash balances that could be deployed in the future application of A.I. This has contributed to historic levels of market concentration but new investment opportunities across a broader set of businesses should begin to materialize as this new technology unfolds.

• Market Concentration: At the end of the 2^nd quarter, the weight of the 10 largest stocks in the S&P 500 index by market capitalization stood at 37%¹. For context, the combined weight of the top 10 stocks at the height of the dot-com bubble in early 2000 was about 27%. While current levels of market concentration may seem like history repeating itself, it is important to note that the 10 largest stocks today also account for 31% of the S&P 500’s total earnings, and the average annual growth in earnings of these same stocks has been 264% over the last 12 months². In contrast, many of the most popular stocks at the height of the dot-com bubble had low or non-existent earnings. Consequently, the average forward P/E ratio of the 50 largest companies in the S&P 500 in March of 2000 was 45.3, compared to a 24.8 average forward earnings multiple of the 10 largest stocks today². While today’s largest stocks have continued to post strong earnings numbers, forward estimates for the 2^nd quarter suggest that earnings growth may soon be enjoyed by a wider breadth of companies⁵.

As always, White Pine Wealth Management believes that a long term outlook and a diversified portfolio that aligns with an investor’s needs and risk tolerance is the best approach to meeting client goals. We welcome a conversation if you have questions about your specific investments.

Performance data provided by ¹JP Morgan Asset Management, ²Strategas, ³YCharts, ⁴Black Diamond, ⁵Hightower Investment Solutions, as of 6/30/2024