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Economic Update, Second Quarter 2024

s&p500 chart earnings estimates have risen in 2024

Market Review

The benchmark S&P 500 index closed the 2nd quarter up 3.9%, following on the 10.1% gain through March and leaving the broader stock market on course for a welcome second-consecutive year of outsized gains. The index has hit over 30 new all-time closing highs this year after passing the previous record from January, 2022, in January of this year. Corporate earnings beat analyst estimates by over 8% for the 1st quarter, growing slightly over 8% year-over-year. Revenues surprised to the upside by slightly over 1%, growing over 4% versus the prior year. Analysts project earnings will grow over 8% during each of the remaining quarters of 2024, hitting a high of over 12% in the 4th quarter, and growing around 9.5% for the full year and 14% in 2025. The Federal Reserve has left their policy rate at a cycle-high 5.25%-5.50% range for seven consecutive meetings, but inflation has once again begun to moderate toward the central bank’s 2% goal after several elevated data points during the 1st quarter, leading policymakers to offer the guidance that they may be comfortable cutting that policy target once this year.

The Economy

The U.S. economy expanded at a below-trend pace of 1.4% during the 1st quarter, after consensus began the quarter calling for an anemic 0.5% rate of growth. Per the Federal Reserve Bank of Atlanta’s GDPNow model estimate, 2nd quarter growth is tracking at 1.5%, which is slightly below economist projections and in-line with where the consensus outlook began the quarter. Second-quarter inflation readings on the central bank’s preferred Core Personal Consumption Expenditures Deflator moderated versus 1st quarter data prints and continue to ease on a year-over-year basis and demonstrate sizeable long-term progress towards hitting the Federal Reserve’s stated 2% target. Economists anticipate full-year economic growth will hit a trend-like 2.0%-2.5% this year, as the labor market remains healthy and consumer price gains abate. While expected 2024 growth would mark a slight slowdown from 2023’s pace, a decelerating economy is not a soft economy, and more moderate economic growth likely lessens inflationary pressures on consumers and businesses.

Equity Markets

While the S&P 500 has continued to post headline gains, there was a good bit of dispersion in sector performance during the 2nd quarter, with roughly half the sectors in the green and half posting losses. Only two sectors topped the benchmark. Tech topped all sectors, posting a 13.6% advance, headlined by artificial intelligence (A.I.) chipmaker and software provider Nvidia sprinting from a $2 trillion market capitalization to $3 trillion in a mere 30 trading days, and temporarily becoming the world’s largest company by that measure.

Communication Services, which can certainly be categorized as Tech– adjacent and A.I.-adjacent, also topped the index return, rising 9.1%. While investors may be surprised to see a Utility sector (+3.8%) perceived as stodgy as the third-best performer in a rising market, it takes a lot of electricity to power the data centers where all the A.I. computations take place via Cloud computing. With more and more data center capacity scheduled to come on line, electricity production is a growth industry for now. With A.I. the topic of much discussion, the earnings impact will likely come in waves. The initial wave was for hardware providers like Nvidia. The second wave is for providers of A.I. and Cloud computing infrastructure, which would include data center providers, Cloud computing platforms and Utilities and Industrial firms that help link it all together. The third wave will be for companies who channel A.I. usage into revenues.

The fourth and final wave will be for companies who utilize A.I. to become more operationally efficient, and thus profitable. The Consumer sector posted positive returns, showing US households remain on solid footing. More Cyclical sectors like Financials, Energy and Materials posted losses as the outlook for economic growth moderated, while still remaining constructive. Real Estate struggled against a backdrop of rising interest rates, and Healthcare fell into its historical pattern of lagging during presidential election years given the inherent policy uncertainty usage into revenues.

Long-Term View

As earnings estimates are rising, management teams are being measured against a more challenging expectations bar. Typically investors would expect to see company results that top forecasts on both earnings and revenues to generate outperformance in company shares, but that share price “pop” was practically non-existent on average as the market processed 1st quarter results. To be sure, higher expectations can likely be categorized among high-class problems. It would be reasonable to infer that good results can beget further good results, and based on observation over time, management teams that have been executing well tend to keep executing well, barring some exogenous shock or an unforeseen loss of direction.

As ever, volatility remains a feature of the stock market rather than a symptom of something more ominous, and a 5%+ pullback for the S&P 500 during April didn’t preclude the +4.8% move in May and +3.5% move in June. With history as a guide, the S&P 500 typically sees three or four such pullbacks in the course of a calendar year, and an average 14% pullback at some point during the year. Such is the cost of admission for the handsome gains stocks have provided investors over time. Given lofty expectations priced into shares and the gains seen year-to-date, perhaps near-term to medium-term gains will be more of the slow and steady variety, but gains are nonetheless gains.