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Second Quarter Market Update: Top Heavy Returns Drive U.S. Performance


U.S. Markets

Equities got off to a rocky start in April with a small pullback of about 5.5% in the S&P 500. However, sentiment quicky changed in May and June as a continuation of solid economic data combined with tamer inflation gave a boost to stocks and propelled the S&P to new all-time highs the last two months.  For the quarter, the S&P 500 total return rose 4.3% after a stunning 10.6% rise in the first quarter.  Looking at the sector breakdown of the index, we see that half of the economic sectors actually fell in the quarter, three were up modestly and the top two (technology and communications) drove most of the growth in the quarter, a trend that played out for much of 2023.

Smaller sized companies are more affected by interest rates and those stocks turned negative in the quarter as it became apparent that Fed rate cuts were no longer imminent. 


As noted, the quarter saw returns consolidated in just a few sectors within the S&P 500, which was a change from the first quarter’s broad stock participation. The top stocks forecasted to benefit from the artificial intelligence mega trend pulled away from the rest of the market in the second quarter, creating large gains in the technology and communication services sectors.

As of quarter end, the top 10 stocks of the S&P 500 represented 37% of the market cap weighting of the S&P 500. These same 10 names also accounted for 27% of the earning contribution of the index.

If we look at the returns and sector weighting of the S&P 500, you can see how profound the technology sector’s returns have been on the overall S&P 500 index.

And for good measure, we provide you with another way of showing the same phenomena.  Morningstar tracks U.S. stock performance in categories of growth, blend, value and large, mid and small cap size.  The below graphic is a good visual representation of how the mega-cap growth stocks are clearly leading the market in both the year and most recent quarter.  This contrasts with the initial broadening of stock participation we observed in the first quarter of the year.  


The valuation of the S&P 500 on forward earnings stands at 21.0 times (price to forward earnings ratio).  This is expensive from a historical standpoint, but still not as high as the internet craze of 2000 where the P/E multiple was 25.2 times.  Over the last 30 years, according to J.P. Morgan, the S&P 500 multiple has an average P/E ratio of 16.7x.  However, it can be argued that the index of 30 years ago (top weighted stocks were Exxon, Coke, Walmart, Raytheon, Merck, P&G, and GE) is nothing like the higher growth constituents in the S&P 500 today, namely technology stocks.   Moving from a more industrial-led index to a technology-led one could be a reason to dismiss the comparison of today’s valuation versus historical averages.

Others have excluded the top ten names from the benchmark to show lower valuation or give all 500 stocks of the index equal weight and look at the valuation from that vantage point.  Indeed, the equally weighted S&P 500 multiple is much lower at 16.0x, but the index is market weighted so we must acknowledge that overall, the index is above historical averages.

Regardless of where you stand on the current valuation of the S&P 500 index, we cannot dispute that the market has been up significantly over the last twelve and six months and has reached new highs multiple times this year already.   Therefore, any perceived risk to earnings growth (secular, geopolitical, economic) could create a recipe for a correction, which is normal after such an impressive performance run.    

International Equities

Returns outside of the U.S. were modest in comparison with emerging markets up 5.0% during the quarter and 7.5% so far in 2024.  The main contributor to emerging market returns was one stock in one country (Taiwan Semiconductor).   

In Europe, the big news in June was that the European Central Bank started cutting rates by a quarter of a percent. That should have been positive for risk assets, however, developed international markets fell slightly in the second quarter.  We believe this is due, in part, to elections and deficit concerns.  The U.K. recently voted in Sir Keir Starmer as their new Prime Minister and President Macron of France called for an election in the national assembly.  Fear that one of Europe’s largest economies could be run by the far right likely created equity market instability in the Eurozone region.  

Our decision to underweight international equities has been a relative benefit to client portfolios over the past few years as U.S. equities have been the star of the markets.  We have been below our baseline historical weight since 2020, favoring U.S. equities.   Our international equity exposure is also below that of all country world index (ACWI).  


The fixed income market fluctuated during the quarter as it responded to data and the Fed’s trajectory of monetary policy.  Bond markets recovered slightly in the second quarter as better inflation prints and renewed confidence in interest rate cuts drove down bond yields from their highs of the year in April.  The yield on the 10-year Treasury note fell more than 0.30 percentage points from the peak in April, ending the quarter at 4.37%.  As yields fall, bond prices rise, so bond holders receive some price appreciation on their bonds during the quarter.  The benchmark Barclays Aggregate Index was up a modest 0.1% for the quarter.  

Municipal Bond Market

Municipal bonds saw modest negative returns for the quarter due to a rise in their yields, bucking the trend seen in treasuries. Summer demand will be helped by the July rollover flows. The outlook for municipal bonds remains good despite the year’s slow start.  Credit fundamentals continue to be strong, with record-high reserves by states and municipalities buffering any slowdown in the economy that may (or may not) occur.  New issuance of municipal bonds in the first half of 2024 was $239 billion, very strong and up more than 30% from the same six months a year ago.  That strong supply was immediately met with strong demand.

We have often discussed how attractive municipal bonds are for income versus treasury bonds. Municipal bonds offer an attractive taxable-equivalent yield (TEY) opportunity, as the interest earned is exempt from regular federal taxation and in some cases state taxes as well.  To compare municipal bonds to treasury bonds you need to put them on an equal basis (tax equivalent yields).  The chart below shows how both highly rated (AAA) and lower quality municipal bonds (BBB) have a much better yield.  The middle line in the graphic displays AAA municipal bond tax equivalent yields, which are well above those of treasury notes across the entire curve from short to long term. The further you move out the yield curves, the better the tax-equivalent yields for municipals.  

We continue to expect a much better year for fixed income where investors are finally earning income from improved rates that are nearly 3x what they were during the near-zero rate environment of the pandemic.  We are in a more normal environment and expect as the Fed cuts later in 2024, we will get steady income and some price appreciation, as well.

Until the Fed cuts rates, which they will do at some point, the shorter end of the curve is still attractive, and cash is still paying a 5.0% yield.   We don’t expect this to last much longer as the chances of a Fed cut in September look pretty good to us, and even better in December (the FOMC meeting is one day after presidential elections in November, and we suspect they will step aside that month).


Job growth has slowed in the most recent months as the Fed’s tightening policies are having their intended effects.  The latest report for June showed 206,000 new jobs created.  The bigger surprise was the revision to the numbers in May and April.  The jobs report initially showed growth of 175,000 in April and 272,000 in May.  The revised figures are much lower at 108,000 and 218,000.  That removes 111,000 of reported jobs from figures.  

Perhaps the downwardly revised payroll figures reported one and two months later is why wage growth is also on a downward trend, growing 3.9% in June.

Unemployment ticked up to 4.1% in the June reading.  This data point is important to how the Federal Reserve thinks about rate cuts.  If the Fed can see a path of inflation slowing reaching back to the 2.0% target in addition to a meaningful uptick in unemployment (say 4-5%), then it has more confidence that consumer weakness can also keep inflation down.


After an uptick in inflation in the first quarter 2024, the numbers for April and May proved to calm investors and please the Fed, though not enough to lower rates yet.

The May personal consumption expenditure (PCE) report showed price growth of 2.6%, similar to the core PCE (excluding food/energy).  This is still above the Fed’s 2.0% target but moving in the right direction.  The PCE rate in May was flat in April, showing no price increase. 

Another inflation measure, the May Consumer Price Index (CPI), was up 3.3% year-over year and core CPI (ex food/energy) came in at 3.4%.  From the previous month of April, CPI was flat in May, a pleasant surprise.  As you can see from the table below, after a few months of accelerating growth, we have seen two solid readings of slowing and no growth.  The next CPI reading for June will be released this Friday, July 12th.


Our previous quarterly writing discussed the Federal Reserve’s plan to cut rates three times in 2024.  Those plans changed as higher inflation data was reported in subsequent months.  Chairman Powell noted at the May FOMC meeting that it is likely going to take longer to get to the Fed’s target inflation rate of 2.0% and thus, keep rates unchanged until they see more progress.  The market is now assuming one rate cut at the September meeting.  The Fed has always been data dependent and could very well change its tune again if the data is pointing to higher prices, or materially lower inflation.  Time will tell, but the data certainly is pointing to a slowdown on both the inflation and the jobs front, so we expect we will be only a few months away from the start of a rate-cutting cycle.  Other economic data listed below also points to a slow-down in the economy.

Other important economic data points during the quarter are highlighted below.  Most of it shows the economy cooling.  It’s hard to see this as equity markets (S&P 500 and NASDAQ) hit new highs, however the rise is really created from a handful of stocks.  The underlying sectors outside of technology and AI-related beneficiaries are experiencing slower growth and these statistics below illustrate that point.                                


  • PPI – May producer prices fell 0.2%.    Goods fell 0.8% and services were flat.
  • ISM Manufacturing – the manufacturing index in May contracted for the second month in a row with a reading of 48.7.
  • ISM Service – this index stayed in expansion territory (over 50) with a reading of 51.4% in May
  • Retail Sales – rose a modest 0.1% in May from April and fell 0.1% stripping out auto sales.   
  • Consumer Confidence – weakened slightly in June to 100.4 from the 101.3 level in May.
  • U.S. Leading Economic Indicators – the Conference Board LEI fell in May by -0.5% to a reading of 101.2.  
  • Housing Starts – fell 5.5% in May seasonally adjusted versus a month ago and fell 19.3% versus a year ago to an annual rate of 1.27M homes.
  • GDP – the revised first quarter GDP was 1.4% final revision to 4Q 2024 GDP was posted at 3.4% growth


We are a few weeks away from the start of corporate earnings season where we will get first-hand information on where CEOs think the consumer and economy are headed.  With valuations stretched for many of the technology companies driving the market thus far, it will be interesting to see if the earnings growth can keep up with the lofty multiples and move markets higher.  We don’t expect to see much more valuation expansion than we’ve already seen for the rest of this year.  Thus, we expect any market rise in the second half of 2024 to be derived from continued earnings growth.  

We have another Fed meeting on July 31st and then a break in August.  We’ll still hear commentary from Fed officials at the Jackson Hole conference in mid-August. Market pundits are assuming no rate cut until the FOMC meeting in September (data dependent, of course).   

We recognize that the market jump started the year with a stellar performance in the first quarter and, for the most part added to that strength in the second quarter.  We would not be surprised to see some volatility in the third quarter as we have multiple elections around the globe including the U.S., which is getting more unsettled as we near party conventions.  Any uncertainty surrounding geopolitical leadership could send indexes off their all-time highs.  While we are still constructive on both equity and bond markets, we recognize that equities have already delivered stellar performance in just six months.  

Overall, we are off to a great start to 2024. We would not be surprised if a modest pullback occurred between now and the November elections but would view it as a buying opportunity.  If you would like to have further discussions with our team, one-on-one, please do not hesitate to contact us.


1 FactSet, Standard & Poor’s, J.P. Morgan Guide to the Markets – U.S. Data are as of June 30, 2024.   The top 10 S&P 500 companies are based on the 10 largest index constituents at the beginning of each month. As of 6/30/2024, the top 10 companies in the index were MSFT (7.0%), AAPL (6.3%), NVDA (6.1%), AMZN (3.6%), META (2.3%), GOOGL (2.3%), GOOG (1.9%), BRK.B (1.7%), LLY (1.5%), JPM (1.3%) and AVGO (1.3%). The remaining stocks represent the rest of the 492 companies in the S&P 500.