Key takeaways
Stocks recovered from an April setback, with the S&P 500 reaching new record highs in recent weeks.
Technology stocks continue to lead the market’s rally.
Investors still anticipate Federal Reserve interest rate cuts this year.
As 2024’s second quarter concludes, the U.S. stock market is still on a tear. The benchmark S&P 500 reached new highs in June and is on course for its fifth quarterly gain in the last six quarters. Notably, apart from an April downturn, positive market momentum has come with limited volatility. Through June 21, 2024, it had been 377 days since the market incurred a daily loss of at least 2.05%, the longest stretch avoiding a sizable daily loss since the 2008 financial crisis.1
Entering 2024, capital markets priced in several federal funds target rate cuts, beginning early in the year. The Fed signaled the potential for such cuts as early as late last year, as its efforts to slow inflation appeared largely successful. However, inflation improvement has stalled, with the Consumer Price Index holding above 3%,2 exceeding the Fed’s comfort level. “But based on market expectations now, the most we’ll see in terms of 2024 rate cuts is likely to be one or two,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
“The general outlook for the S&P 500 as a whole remains strong,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “Earnings forecasts for the rest of the year appear solid, so that should create a supportive environment for equities.”
The lack of Fed stimulus has not thwarted investor enthusiasm, according to Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “Consumer spending and business capital expenditures continue, and that’s why markets remain bullish.” Freedman notes that much corporate spending is focused on technology, particularly with businesses seeking ways to incorporate artificial intelligence (AI) advances.
Earlier in the year, the market appeared to transition from one driven mainly by technology-oriented stocks to a market featuring broader participation by sectors that, in 2023, significantly lagged technology’s performance. Yet by June, market momentum reverted back to a familiar pattern, with information technology and communication services stocks far outpacing the rest of the market.3 “Stocks in June rallied on narrowing breadth,” says Haworth. “Things are going well for the largest companies, but there are concerns that it isn’t going as well for every part of the market.”
“What keeps driving the markets to new highs are companies that are insensitive to persistently higher interest rates,” says Haworth. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.”
Other sectors that lagged technology in 2023 have made gains in 2024, including utilities, financials and consumer discretionary stocks, all up about 10% year-to-date. While those represent respectable returns, they still significantly trail the leading tech-related sectors.3
The impact of higher interest rates is reflected at the bottom end of the scale for S&P 500 sector performance. The interest-rate sensitive real estate sector, for example, is the only S&P 500 sector in negative territory year-to-date.
“The general outlook for the S&P 500 as a whole remains strong,” says Haworth. “Earnings forecasts for the rest of the year appear solid, so that should create a supportive environment for equities.”
The S&P 500 index of large-cap stocks topped 5,000 for the first time in February and, after a pause in April, continued to scale new heights in June. The Dow Jones Industrial Average recently topped 40,000 for the first time ever, though it has since dropped below that level.
The environment has been less beneficial for smaller stocks. “The Fed’s interest rate policy matters meaningfully to smaller companies that likely must borrow more to fund operations and business growth,” says Haworth. “As a result, small-cap stocks are under more pressure in the current environment.”
Investors appeared to recognize this based on stock market results in 2023 and 2024, comparing the S&P 500 to the Russell MidCap Index and the Russell 2000 small-cap stock index.4
What are the keys to a sustained bull market? Three primary considerations deserve attention:
“It remains a constructive stock market,” says Haworth. “Earnings are still moving in a positive direction, consumer spending has held up, and it still seems clear that at some point, a rate cut will be the Fed’s next interest rate move.” In addition, Haworth points out that a high inflation environment featuring continued economic growth tends to benefit equities.
The biggest potential concern in the current environment is valuation. “Stocks that have dominated the market in the past one year-plus may be reaching challenging valuation levels,” says Haworth. “Investors may consider diversifying with an equal-weighted S&P 500 exchange-traded fund.” Such a fund puts less emphasis on the largest stocks in the Index compared to a traditional S&P 500 fund.
Freedman encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman. “Markets will do things at the exact opposite time you expect them to.” Freedman says investors can follow a more productive path. “Our best advice is having a plan, a programmatic approach to investing. That takes the emotion out of it.”
Haworth says for those who still have a sense of caution about the stock market, “consider putting a portion of your portfolio to work in equities in a systematic way, such as dollar-cost averaging available cash over a series of months.”
Check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.
The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
Stocks are shares of publicly traded companies can be bought and sold. These transactions occur on exchanges and over-the-counter (OTC) marketplaces. The activity of pricing, buying and selling stocks is all activity that occurs in what is generally called “the stock market.”
Stocks frequently move up and down. Between November 2023 and June 2024, the stock market moved higher (following a generally downward trend between August and October 2023), except for a modest setback in April 2024.1 The market’s strength over the bulk of that period reflected, in part, expectations of a major change in Federal Reserve (Fed) monetary policy. The Fed indicated that it may begin cutting its short-term, federal funds target rate in 2024.3 That’s a major shift from Fed policy that saw 11 consecutive rate hikes between March 2022 and July 2023, a move designed to slow what had been a surging inflation rate. “The Fed’s interest rate stance is a prime consideration for equity investors in today’s market,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Yet it appears that investors may have to wait until later in 2024 to see any Fed rate cuts.”
These three indices are frequently quoted on daily news reports reflecting daily performance of the stock market. The Dow Jones Industrial Average, perhaps the most quoted index, reflects the performance of 30 prominent stocks listed on U.S. exchanges. The Standard & Poor’s 500 tracks a broader universe of 500 large U.S. stocks. The NASDAQ Composite Index provides a measure of performance of 2,500 stocks listed on the National Association of Securities Dealers (NASD) Automated Quotations exchange. These represent small-, mid- and large-cap stocks. Investors often track these indices, particularly over time, to measure broader stock market performance.
With inflation retreating and interest rate cuts likely coming later this year, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
A fresh look at managing your cash and investments in today’s changing interest rate environment can help support your pursuit of the goals that matter most to you.
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