Equity Markets – Flying High Again
Another week and another record-high level reached in the equity markets. The S&P 500 was up 0.6%, while the NASDAQ rose 1.3% and the Magnificent 7 gained 3.4%. Small caps also gained, rising 0.5%. Bond indices were down 0.5% during the week.
Weak Spots in the Economy Continue to Appear
Manufacturing activity continues to fall after rebounding in 2023. Various manufacturing metrics for June came in lower than expected as an ongoing slump in industrial activity continues to stall out in that particular area of the United States economy due to continued high interest rates and weaker demand.
Pending home sales for May fell 2.1%, which was more than forecasted. This was primarily driven by decreased contract signings in the Midwest and South regions of the United States. Mortgage rates continue to be relatively high, putting a damper on demand for residential home purchases.
However, there was a bright spot on the economic calendar this week. The number of job openings in the United States unexpectedly came in higher than anticipated, as the Job Openings and Labor Turnover Survey (JOLTS) release for May increased to 8.1 million, reversing its recent downward trend.
Inflation Continues to Cool
A key inflationary metric, the Core Personal Consumption Expenditures (PCE) deflator, which excludes volatile food and energy prices, edged lower in May to 2.6%, reaching a low that has not been seen since early 2021. This recent release, combined with other weaker economic data, offers hope to investors that a potential rate cut by the Federal Reserve may be in the cards in 2024.
There is some concern mounting regarding the strength of the consumer. Recently, a number of bellwether names had negative announcements. Nike reported an unexpected sales decline and lowered its revenue outlook for 2024. Walgreens announced it could potentially close up to 25% of its United States locations due to faltering sales. General Mills reported lower than expected sales in its product lines. Investors are casting some doubt on the resiliency of the United States consumer who has been an integral part of the economic recovery post COVID.
Second Quarter Earnings Season – High Expectations
As the equity markets continue to hit record-high levels, there is concern regarding the increased concentration of a handful of companies within the equity markets.
Last month, the S&P 500 was up 3.5%, however the equal-weighted version of the S&P 500 was actually down 0.9%. This trend has continued for most of 2024. Currently, the top 10 largest stocks in the S&P 500 constitute 37% of the index. Additionally, the lion’s share of 2024’s earnings growth is expected from a handful of companies. Specifically, the top 20 stocks in the S&P 500 are expected to have 2024 year-over-year earnings growth of 18%, while the remaining stocks are expected to see year-over-year earnings decline of 6%.
For the upcoming second quarter earnings season, equity markets are forecasted to see 10.6% year-over-year earnings growth, primarily led by the Communication Services, Health Care and Technology sectors.
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Sources: BTC Capital Management, S&P Dow Jones Indices, IHS Markit, FactSet
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