Weekly Investment Update (06/28/2024)

Our next Weekly Investment Update will be published on July 12, and our Quarterly Investment Perspective (QIP) will be published next week.

Economic data this week supports our view that the Fed will cut rates in the coming months. Importantly, the labor market is softening, which should lead to a further reduction in consumer spending and overall economic growth. Continuing jobless claims increased another 18,000 this week, and initial unemployment claims remain well off recent cycle lows. Although not indicative of recessionary conditions, overall slack has been removed from the labor market, as the ratio of job openings to employment (which was two openings per unemployed person at its peak) has returned to prepandemic levels. As those seeking work find that opportunities are less plentiful, the unemployment rate may steadily increase. May capital goods orders and shipments also missed expectations, pointing to an overall cooling of activity. Additionally, core PCE eased to 2.6%, its lowest level since March 2021.

We believe this environment supports our slightly longer than benchmark duration positioning as interest rates should be biased lower, even as less dovish than anticipated Fed policy and higher fiscal deficits prevent a more dramatic drop in yields. The market will surely be drawn to an evolving political landscape, but the fundamental economic backdrop is more important to the medium-term outlook for both fixed income and equities.

Market Concentration and Earnings Growth

What is happening: Market concentration has been a key focus this year, as 10 percentage points of the 15% year-to-date S&P 500 advance has come from just six stocks. Currently, the 10 largest stocks within the S&P 500 represent a historically high 37% of the market capitalization weighted index, relative to the 20-year average of 21%.

Why it matters: Despite a 17% sell-off in Nvidia from recent highs, which resulted in a $430 billion loss in market capitalization early this week, markets overall remain well supported and pushed higher as the week progressed. Additionally, while some technical indicators, including the Relative Strength Index, are signaling the S&P 500 appears stretched at the index level, measures under the surface reveal there are potential opportunities in the broader index. Currently, 68% of stocks in the S&P 500 are above their 200-day moving average, a measure that has declined from 85% since March despite the market advancing higher.

Meanwhile, earnings growth estimates have held steady at 10.8% for 2024 year-end. Notably, expectations for earnings growth in 2025 have inched higher, now sitting at 14.3% year-over-year. Additionally, although earnings growth in recent quarters has been driven by a select few technology stocks, consensus estimates expect a broadening in earnings growth in the second half of the year into sectors such as materials and healthcare. A broadening in earnings growth would likely support market breadth. While we foresee volatility ahead of the U.S. elections, we believe a widening in earnings growth is key to support further gains within the equity market.

President Biden’s Debate Performance Raises Questions

What is happening: The presidential debate on June 27 was the first time that the presumptive presidential nominees have debated before being nominated at their respective national conventions. Many voters were focused on style, rather than substance, given concerns about both candidates’ physical and mental fitness for office. President Biden’s debate performance was broadly viewed to have reinforced voter concerns about his age with Democratic strategists openly mentioning private discussions about replacing Biden on the Democratic ticket at the convention. As a result of the debate, Biden’s odds of being the Democratic nominee dropped from 86% to approximately 60%, according to betting markets.

Why it matters: While historically general election debates have had minimal impacts on elections, this debate may be the exception to the rule given voter concerns about the presumptive nominees. This year’s election already was set to be historic as a sitting president would face an ex-president, and the debate has prompted unprecedented discussions about replacing a presumptive nominee.

However, the path to replacing Biden at the top of the Democratic ticket is challenging, and time is limited. Because Biden already has the votes to become the nominee, he would need to choose to step down to open the way for another candidate. With the debate viewed as a setback for President Biden, it is likely to add to Trump’s recent momentum in the polls. While it is important to note that the U.S. presidential election is not currently a key driver of markets, we expect it to increasingly come into focus and contribute to market volatility in the coming months, especially as investors contemplate an increased probability of a red wave.

In our Quarterly Investment Perspective, which will be published early next week, we discuss the issues that matter most for markets related to the election. One conclusion we draw is that despite the numerous differences between the candidates and parties, there is some consistency on policies related to key drivers of the investment landscape. Both are tough on China and encourage near-shoring, neither party is likely to significantly unwind prior infrastructure spend, and whoever is in power will face difficult decisions on taxation and spending in 2025 with deficits approaching important thresholds and tax cuts set to expire.