Q2 2024 Insights
Global financial markets delivered positive returns overall during the second quarter. A resilient U.S. economy, ongoing enthusiasm around generative artificial intelligence, and growing expectations for interest rate cuts were the main drivers of returns for equity and fixed income markets. Throughout the quarter, sectors and styles that had previously done well (e.g., mega-cap technology and consumer stocks) continued to perform well and dominate equity market returns.
In fact, by the end of June, 61% of the year-to-date total return of the S&P 500 Index was attributable to just seven companies, and one-third to Nvidia alone (see Appendix A). This level of concentration is both a function of the index’s structure but also relentless investor appetite for companies at the center of the AI trend. In the short term, however, that translates into underperformance for any portfolio or investment strategy that maintained any level of diversification (be it fixed income, international equities, smaller-cap companies, or even other large-cap stocks that just were not part of the “Magnificent Seven”¹).
However, as we progressed through July and into August, the winds began to shift in equity markets. Earnings season began with high-profile disappointments from several large technology companies (though the bar for their performance had been set impossibly high). Fresh geopolitical uncertainty was injected into the market after President Joe Biden withdrew from the race for the White House and as tensions intensified between Israel and Iran. Additionally, weaker-than-anticipated manufacturing and jobs numbers were published, spooking markets, and raising fears of an impending recession.
We would take this opportunity to remind our clients that volatility is a natural state of financial markets, and while it has risen in recent weeks, it remains well below previous peaks. Volatility provides opportunities for investors to deploy new capital into the markets at more attractive levels, as well as to rebalance portfolio allocations to their long-term, strategic targets. Our core philosophy drives us to remain disciplined and diversified, and to be prudent managers of capital when markets, economies, and politics get turbulent.
Q2 Financial Markets Performance
Equities
Broad-based U.S. stock indices advanced between March and June, but performance among market caps and style diverged in a meaningful way (see Exhibit 1). The Magnificent Seven continued to rise with little resistance amidst strong earnings and outlook statements, despite uncertainty about the economy and interest rates. This dynamic was also a major factor in the significant outperformance of the technology and communication services over all other market sectors, as well as the strong positive returns of large-cap growth stocks vs. all other market caps and styles.
Non-U.S. developed market equity performance was mixed. Despite a 25-basis point interest rate cut by the European Central Bank in June, Eurozone shares declined after the announcement of snap parliamentary elections in France weighed on sentiment. Meanwhile, U.K. equities achieved all-time highs after the local economy posted better-than-expected GDP growth and inflation eased. Japanese stocks were higher in local currency terms, driven by improving corporate profitability, but the precipitous weakening of the Japanese yen turned performance negative for U.S. dollar-denominated investors.
Quarterly gains in emerging market equities outperformed their developed market peers. Low relative valuations of Chinese stocks, optimism about the authorities’ support measures for the housing sector, and President Xi’s reform rhetoric, helped local stocks advance. Weaker-than-expected results for Prime Minister Modi’s party (blocking a supermajority in parliament) provided a boost to Indian shares. Positive AI prospects continued to drive Taiwanese equities higher, while markets in Brazil and Mexico were down the most in U.S. dollar terms. Widespread floods in the former and a newly elected president and legislature in the latter concerned investors and weighed heavily on their currencies.
¹ The “Magnificent Seven” refers to AAPL, AMZN, GOOG + GOOGL, META, MSFT, NVDA, and TSLA.
