The back half of 2024 is off to a decent start for stocks as the second quarter earnings season gets underway.  U.S. stocks, overall, notched a very strong performance in the first half of 2024.  This performance was not distributed equally across sectors, however.  Technology, as it has for several quarters now, carried the rest of the market on its back, with giant technology stocks accounting for much of the gains in the indexes.  So far in July, however, performance has broadened to include other economic sectors, with even out-of-favor small capitalization stocks getting a boost.  The catalyst for this market rotation was the July 11 Consumer Price Index report for June, which showed a price decline of 0.1% month-over-month.  This report bolstered investor confidence that the Federal Reserve will make its first Fed Funds interest rate cut in September and another by the end of the year. With rate cuts on the way, business conditions will likely improve in the second half of the year, supporting higher earnings growth from a wider range of sectors.

GDP Growth Likely to Slow, but Inflation Also Coming Down

Gross Domestic Product (GDP) grew 1.4% in the first quarter of 2024 and probably just a bit more than that in the second quarter. (The 2Q GDP report will be released on July 25^th.)  High interest rates and still-high prices have sapped domestic demand and consumers have tightened their wallets a bit.  Prices continue to rise at a slower rate, however, as indicated by the cooler-than-expected June Consumer Price Index report.  All in all, the economy is in good shape, decelerating gently with inflation falling, equity markets rising and unemployment low.

Housing Market Still Frozen

The spring selling season for residential real estate has been a disappointment, with existing home sales this past spring the lowest since 2011.  Housing continues to be stuck between the unfavorable dynamics of high interest rates, high prices and low inventory. Earlier in the year, there was optimism that Fed rate cuts would bring down the cost of buying enough to jump start the real estate market, but that hasn’t happened.  With the Federal budget deficit for 2024 running close to $2 trillion and the Fed cautious about reducing rates too soon, the housing market has no quick fix and will likely take more time to rebalance itself.  When the housing market does finally thaw, however, consumer spending will likely tick up as home sales increase.

Presidential Election

With President Biden dropping out of the race on Sunday, things on the political front are very fluid now.  We are not expecting major changes to the trajectory of the economy or the markets for the second half of 2024, however.  Historically, daily volatility in the equity markets does increase in the few months before an election, but we think it is best for investors to just maintain their targeted asset allocation through any political ructions.

Second Quarter Earnings

The second quarter earnings season has begun, and analysts are expecting robust earnings growth.  While we see tech earnings coming in very strong, we are also expecting timid commentary by managements around consumer trends.  Many consumers are showing more price sensitivity as they are squeezed a bit by higher interest rates and dwindling savings.  While many business trends show good momentum, we expect managements will be conservative in forecasting their business trajectories through the end of the year due to the uncertainties regarding the election and the timing and magnitude of Fed rate cuts.

As always, we welcome your comments and feedback.  Please contact us if there is anything you would like to discuss about your investments or the markets.