2024 May Market Update
Equity markets rebounded to new all-time highs in May (with the Dow Jones Industrial Average touching the symbolically significant “40,000” milestone) before softening to close the month. Corporate earnings and the overall economy remain resilient and support the optimism that has driven markets higher through the first five months of the year. Artificial Intelligence-related names continue to lead indices higher, although market participation has slowly broadened over the past few months. However, roughly 45% of the companies in the S&P 500 index are still trading at lower share prices than they were at the beginning of the year.
Much of this year has been a struggle between the positives of better-than-expected earnings offset by the realization that economic strength justifies “higher for longer” interest rates. As we have seen for much of the past two years, corporate earnings for the 1st Quarter surpassed expectations. Unlike previous quarters, these earnings “beats” were accompanied by increases in forward estimates, a sign that analysts have increased faith in the durability of economic strength. Strength has also been more widespread than experienced over the past few earnings periods, which could offer fundamental support for broadening market participation.
The current backdrop reminds us that the “economy is not the market” over relatively short periods, even if they do eventually sync up over time. A significantly narrower set of companies drives stock market indices than are included in the broad measurements (such as GDP) used to gauge the strength of the U.S. economy. Furthermore, the companies in the S&P 500, in aggregate, generate nearly half of their revenues overseas, in contrast to the inherently domestic focus of GDP. Over the past two years, the earnings strength of a handful of mega-cap, technology-oriented names have helped the S&P 500 shrug off countless macroeconomic and geopolitical threats over the past two years. While the stock market and the U.S. economy are linked, it’s important to remember that they are not intertwined.
In what may seem a paradoxical reaction, recent strength in economic data has increased stock volatility, as it has provided justification for the Federal Reserve to delay potential rate cuts. The past few weeks have shown how high the bar has risen for what is considered “good” economic data. Reports demonstrating economic strength have stoked market fears of higher rates for even longer, while negative data has been interpreted as a sign of weakness and an impending slowdown.
Rather than join short-term traders in seeking a perfect “goldilocks” update, we find little value in tethering to day-to-day reactions. Sentiment swings have been significant this year, but short-term oscillations have yet to durably knock markets off their upward trajectory over the past several quarters. Unsurprisingly, corporate fundamentals, such as earnings and revenues, have proven significantly less volatile than the whims of short-term traders. History continues to show that there is no more reliable driver of stock prices than the trajectory of corporate earnings. As famed money manager Peter Lynch once wrote, “earnings make or break and investment…what the stock price does today, tomorrow, or next week is only a distraction.”
We are not saying that macroeconomic data should be ignored. Much can be gleaned from understanding pockets of strength and weakness in the economy. For example, investors should remain cautious of companies highly leveraged to discretionary consumer spending, which has been strong since the pandemic but is now showing signs of slowing. These warning signs have spurred the country’s biggest retailers to announce widespread price reductions over the past few weeks to attract increasingly price-sensitive customers. Or consider last year when understanding the effect of rising rates and a weakening commercial real estate market could have helped to sidestep problematic regional bank exposure.
Innumerable forces influence investment markets, pushing and pulling individual companies and the overall market. Investors focused on a single “driving force” or headline might find themselves woefully misallocated. For example, since the Presidential election in 2020, the top performing sectors in the S&P 500 index are Energy and Financials. One focused solely on politics likely would have avoided these sectors, given both were under intense scrutiny from Democratic party policies. Similarly, one who sold off equities influenced by the historical recessionary implications of an inverted yield curve may have missed all the other signals suggesting economic resilience. We instead advocate a wider focus on what the broader picture suggests while maintaining healthy respect for currently unknown potential influences (such as the pandemic in 2020). History has long supported the benefits of diversified portfolios positioned to weather a myriad of possible outcomes. Here at The Wise Investor Group, we will always seek this balance in your portfolios and look forward to continuing to help you achieve your financial goals!
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the Wise Investor Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance may not be indicative of future results.
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