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Summer 2024 Investment Outlook – July 23
Is the growth momentum sustainable?
Market News
Market analysis
July 1, 2024
Number of the week:
1.4%
The annualized growth of the gross domestic product in 2024’s first quarter.
Term of the week:
The S&P CoreLogic Case-Shiller Home Price Index
Measures the value of single-family housing within the United States. The index is a composite of single-family home price indices for the nine U.S. Census divisions and is calculated monthly.
Quote of the week:
U.S. consumer spending continues to moderate, though solid incomes and easing inflation are positives. The gross domestic product grew 1.4% annualized in the first quarter on greater investment and a downward revision in consumer spending. Personal income data for May indicates consumer incomes and spending growth remain solid. Wages grew 5.1% over the past year, matching the increase in spending. The Personal Consumption Expenditures Price Index slowed to 2.6% year-over-year as the rise in goods prices continues to decelerate.
― Robert Haworth, CFA, Senior Vice President, Senior Investment Strategy Director, U.S. Bank
Global economy
Quick take: U.S. consumers remain relatively healthy, with spending and income growth remaining even. The housing market appears undersupplied, but activity is modest. Economic data is ticking up in Japan while French elections are raising near-term uncertainty.
Our view: The global economy continues to see moderating growth, especially across manufacturing activity, and inflation continues to decelerate.
- U.S. consumer spending continues to moderate, though solid incomes and easing inflation are positives. The gross domestic product grew 1.4% annualized in the first quarter on greater investment and a downward revision in consumer spending. Personal income data for May indicates consumer incomes and spending growth remain solid. Wages grew 5.1% over the past year, matching the increase in spending. The Personal Consumption Expenditures Price Index slowed to 2.6% year-over-year as the rise in goods prices continues to decelerate. Nevertheless, consumer surveys indicate continuing frustration. The Conference Board Consumer Confidence Index and Michigan Consumer Sentiment Index both slipped slightly from their May levels on still elevated prices and concerns regarding a slowing labor market.
- The housing market remains challenging. Low inventories are keeping prices high while elevated interest rates are dampening transaction activity and construction. The S&P Core Logic Case-Shiller Home Price Index rose 7.2% for the year ending in April, slightly slower than the revised 7.5% pace in March. New homes sales slowed to a 619,000 annualized pace in May and pending home sales are down 6.6% over last year.
- Economic data improved in Japan, with retail sales climbing 3% year-over-year in May and Tokyo inflation rising 2.3% for the year ending in June. After slowing in prior months, the economy appears on a constructive trend as consumers benefit from higher wages and an end to the prior decades of deflation.
- Early polls indicate the National Rally party won the first round of voting for the French National Assembly. Projections suggest the party will take 34% of the vote, well ahead of President Macron’s centrist Renaissance party vote tally around 21%. These results will set up the runoff election July 7 to seat the French National Assembly. A change in power in the lower house would likely result in a change in Prime Minister, who sets domestic policy. The president is still responsible for foreign policy and relationships.
Equity markets
Quick take: U.S. equities begin the third quarter on the heels of robust and broad-based year-to-date performance, bolstered by large technology stocks.
Our view: Waning inflation, moderating interest rates and stable earnings projections are providing valuation support and a basis for U.S. equities to trend higher. Near term, the S&P 500 is subject to some consolidation following strong year-to-date returns and elevated valuations.
- S&P 500 year-to-date performance is positive, led by artificial intelligence (AI)-related companies. The index ended the first half up 14.5%, with 10 of 11 sectors posting year-to-date gains. The technology-oriented NASDAQ Composite advanced 18.1% in the first two quarters.
- Large companies are outpacing smaller companies. The 20 largest S&P 500 companies by market capitalization ended the first half up 39%, outpacing the index by more than a two-to-one margin, led by the 149% gain of AI bellwether NVIDIA.
- Second quarter results are an upcoming catalyst. The second quarter reporting period unofficially begins July 12. For the quarter, expectations are for year-over-year revenue and earnings growth of 4.4% and 8.6%, respectively, according to FactSet.
- Consensus earnings projections for 2024 and 2025 reflect strong year-over-year growth. As of June 30, analysts forecast earnings of roughly $244 per share for full-year 2024 and $277 in 2025 for S&P 500 companies, according to Bloomberg, FactSet and S&P Cap IQ, reflecting respective 10% and 14% year-over-year growth. At current price levels, the broad index trades at 22.4 times the 2024 estimate and 19.9 times 2025 expectations, both at the high side of 25-year historical averages. The absence of ramping inflation and rising interest rates support elevated market valuations.
- Opportunities exist in all market environments. Fast is getting faster, and speed, scale and efficiencies do not occur without technology. This suggests continued upside to the Information Technology and Communication Services sectors. Similarly, defensive/income-oriented sectors such as Real Estate, Consumer Staples, Industrials and select Healthcare companies should respond favorably to an eventual less-restrictive Federal Reserve (Fed) policy stance.
Bond markets
Quick take: Treasury yields drifted higher last week despite slowing inflation data. The increase in Treasury yields pressured bond prices last week but only partially offset broad gains in June.
Our view: High-quality bonds are an important component of well-diversified portfolios and offer compelling income return opportunities. Yet, shifts in investor sentiment tied to inflation unease and fiscal spending concerns risk temporary swings in bond prices.
- Inflation slowed toward the Fed’s price stability goal, but more progress is needed for cuts later this year. Friday’s release of Personal Consumption Expenditures Price Index data showed inflation easing but still above the Fed’s target. San Fransisco Fed President Mary Daly referenced the data as evidence monetary policy is working, saying, “We have growth slowing, spending slowing, the labor market slowing, inflation coming down. That’s how monetary policy works.” Bond yields price in one to two 0.25% rate cuts later this year; stabilizing bond prices depends on upcoming economic data continuing to gradually cool in line with Fed expectations. Job creation data, reflected in this Friday’s payroll report, will garner attention, given Atlanta Fed President Raphael Bostic’s comments last week. He said labor market and inflation risks are becoming more balanced, but noted, “I’m just going to let the data show me what happens.”
- Corporate and municipal bonds delivered similar returns to Treasuries last week. Corporate bond valuations remain somewhat high by historical standards, but strong investor demand continues to backstop prices. Below-average incremental yields over Treasuries on corporate bonds implies investors anticipate more benign credit conditions ahead with fewer defaults. High yield municipal bonds also have incremental yield spreads over Treasuries below long-term averages, but municipal bonds’ tax-free income magnifies the yield benefit of these lower-quality bonds. Investment-grade municipal bond yields have increased relative to Treasuries in recent months due primarily to heavy issuance, which increased bond supply. This presents a compelling opportunity for investors subject to tax to earn meaningful yields from high-quality bonds.
Real assets
Quick take: Real assets mostly traded well versus the S&P 500 last week despite an increase in fixed income yields. Real Estate performed the best, with broad-based participation among sub-sectors. Infrastructure posted modest gains despite losses in the utilities sector. Commodities were the worst-performing sector, led lower by the agricultural products.
Our view: Diversified publicly traded real estate investment trusts remain inexpensive relative to private real estate. Tangible assets with stable cash flows present relative opportunities if currently strong investor sentiment erodes. Commodities may be compelling due to their potential for inflation protection.
- Real Estate outperformed the S&P 500 by 1.1% last week. Data center and industrial properties posted the strongest returns while cell towers and office companies fared the worst. Only cell towers posted negative returns. Publicly traded real estate continues to trade at discounts to private markets (individual properties).
- Infrastructure stocks beat the broader market by 0.1% last week. Midstream energy and toll roads led gains while utilities and railroads were the worst performers.
- Crude oil prices rose 1.1% last week despite increases in domestic inventories of crude and refined products. Over a longer-term horizon, the crude market appears undersupplied, which should act as a tailwind to prices. However, we acknowledge downside risk to prices if tensions in the Middle East de-escalate or if economic growth disappoints.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. 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. The Michigan Consumer Sentiment Index is a monthly survey of consumer confidence levels in the United States conducted by the University of Michigan. The survey is based on telephone interviews that gather information on consumer expectations for the economy. The Personal Consumption Expenditures (PCE) Price Index is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. It is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior. The Conference Board is a nonprofit research organization that distributes vital economic information to its peer-to-peer business members. The S&P CoreLogic Case-Shiller Home Price Index measures the value of single-family housing within the United States. The index is a composite of single-family home price indices for the nine U.S. Census divisions and is calculated monthly.
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Equal Housing Lender. Deposit products offered by U.S. Bank National Association. Member FDIC. Credit products are offered by U.S. Bank National Association and subject to normal credit approval.