INSIGHTS

July 16, 2024

Market Outlook

Second Quarter 2024

The economy continues to cool but has not contracted or fallen into recession.

Large, high-quality US growth stocks continued to make gains amid an economy that is gradually slowing yet not retrenching. The technology and communication sectors lifted the S&P 500 Index in the second quarter and are the only two sectors outperforming its 15% year-to-date return, indicating a small number of stocks are propelling this index. The emergence of artificial intelligence (AI) as an investable industry has contributed to strength in the US technology and communication sectors.

Long considered a proxy for US stocks, the S&P 500 Index has become very concentrated, with the ten largest names accounting for 37% of the index. The S&P 500 Equal Weighted Index is up a more modest 5% for the first half of the year and is a better indication of the “average” stock within the largecapitalization US stock universe.

Size continues to be a top performing factor for stocks. Large companies tend to have less reliance on credit, greater profitability, and more financial flexibility, leading to better fundamentals and performance. Small and medium-sized US companies continue to struggle to produce earnings growth against a backdrop of higher rates. Earnings for these companies are expected to be down between 1% and 2% in 2024. Bonds continue to move sideways as longer-term rates have generally done the same, staying within a very small range

As economic activity and labor supply have normalized, the risks between inflation and unemployment have found a better balance, allowing the Fed to patiently consider the timing of their first interest rate cut. Considerable progress has been made stabilizing prices, and supply chains have largely been repaired. Yet the Fed remains cautious and methodical regarding loosening interest rate policy. Waiting too long to cut rates jeopardizes economic growth and jobs while moving too quickly could reignite inflation.

The unemployment rate has been slowly rising to a cycle high of 4.1% from 3.6% one year ago and the first time over 4% since January 2022. Continuing jobless claims are at a three-year high and also rising. Fortunately, prime age (ages 25-54) employment participation is at an all-time high of 83.7%, even exceeding pre-pandemic levels, providing a strong foundation for the economy.

The economy continues to cool but has not contracted or fallen into recession. Economic consensus calls for GDP to grow by just under 2% in 2024. Wage growth has slowed and consumers are starting to show caution as evidenced by tepid monthly retail sales in 2024. The housing industry has stalled due to a lack of affordability. Government support for GDP is waning while corporate capital spending has slowed outside of artificial intelligence spending. The lagged impact of fiscal stimulus is finally fading.

One of the main market risks going forward is the wide disparity between the two US presidential candidates’ foreign and domestic policies. Tariffs, corporate tax policy, fiscal spending policy and Fed independence are of particular interest to investors. Trump’s policies are seen as inflationary by the market, increasing the deficit further by extending the 2017 tax cuts and imposing a tariff on goods coming into the country. The Biden administration has generally embraced globalism, yet more deficit spending is planned—also inflationary. Neither party seems interested in reducing our sizable deficit, likely leading to higher debt and interest rates in the medium to long term.

The S&P 500 Technology sector has been an incredible driver of returns, the best performing sector over the past one, five, and ten years, vastly outperforming all other sectors. Consequently, technology companies now comprise over one third of the index. While the sector is expected to grow earnings around 20% in 2024 and carries a high valuation multiple, the average stock is expected to grow around 7% and is reasonably valued, a vast dichotomy and an indication of the size, dominance and efficiency of some of the largest US companies. Yet some of the slower growing companies, smaller companies, and foreign companies offer better values, and deserve a place in a well-constructed portfolio. Going forward, attention to diversification and balance between stocks and bonds becomes paramount as portions of the market become outsized.

Disclosures

Tandem Wealth Advisors LLC (“Tandem”) is an SEC-registered investment adviser.

The information published herein is provided for informational purposes only and does not constitute an offer of investment advisory services. All information is subject to change without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. No investment process is free of risk, and investors may lose all their investments. Past performance is not indicative of current or future performance and is not a guarantee. The opinions expressed in this document may not fit your risk and return preferences. The information provided is obtained from sources believed to be reliable, but we cannot attest to its accuracy. Past performance is not necessarily indicative of future returns.

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Index Definitions

The S&P 500 Index measures the performance of the large-cap segment of the US equity market. The S&P MidCap 400 Index measures the performance of the mid-cap segment of the US equity market. The S&P SmallCap 600 Index measures the performance of the small-cap segment of the US equity market. The Nasdaq 100 is a basket of the 100 largest, most actively traded US companies listed on the Nasdaq stock exchange. The Russell 2000 Index measures the performance of the small-cap segment of the US equity market. The MSCI World Ex USA Index captures large- and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The MSCI Emerging Markets Index captures more than 1,400 large- and mid-cap securities in 24 countries spanning across five regions. The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays Investment Grade Corporates index measures the investment-grade, fixed-rate, taxable corporate bond market. The Bloomberg Barclays Corporate High Yield Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. The Bloomberg Barclays Investment Grade US Convertibles Index tracks the performance of investment-grade, USD-denominated convertible securities. S&P 500 Sectors measure segments of the US stock market as defined by GICS®. All index performance data sourced from Bloomberg.