Mid-Year Market Commentary
“A strong economy in a fragile world.” That is the title of JP Morgan’s Mid-Year Outlook. This sentiment seems to appropriately capture how many Americans (and citizens across the globe) are feeling about markets, the economy, and the state of the world in general. As we objectively look across the economic landscape, much of it looks relatively sanguine. Household incomes are growing, unemployment is low, corporate profits are high, inflation is abating, and the direction of interest rates is expected to be lower. Despite all of these positives, there are numerous risks lurking—the growing US deficit being one, geopolitical risks being another.
Of course, as we’ve talked about plenty of times in various Wolf Group Capital Advisor blogs, the markets trade on the difference between expectations and reality. And the economic reality of most markets and economies since January of 2023 has been much better than what they were expected to be 18 months ago. If we can transport ourselves back 19 months ago, the most common question as we approached 2023 was about how deep of a recession we will have as opposed to whether we would have a recession. Now that we are more than halfway through 2024, and after more than a year and a half of solid economic data, talk of a recession has mostly dissipated.
Back to the initial comment—why is it that many individuals feel positive about their own situation but feel much less confident when it comes to matters of their own country’s economy, the global economy, or the world in general? It is a strange phenomenon; however, sentiment usually does not match the fundamentals, with sentiment uniformly being much worse. Many surveys have attempted to pinpoint the nature of this gap, which, according to a recent Fed survey, has approximately doubled over the past 5 years. While there is no shortage of opinions, it seems as though the increased inflation since 2020 has contributed greatly to consumer confidence taking a hit. Another aspect that is casting doubt across the average consumer is the interest rate environment. While quite interesting, we view the pervasiveness of individuals having confidence about their own situations versus severe pessimism about global economic, market and political matters as something that needs much more research and thoughtfulness to isolate and determine the true nature of the disconnect.
On the bright side, switching from the individual consumer to the corporate side, 2024 earnings are looking robust and CEO confidence is high. In addition, as reported by FactSet, earning expectations for Q4 of 2024 are set to broaden out and involve companies from outside of Amazon, Google/Alphabet, Meta and Nvidia. The following chart shows the vast difference between the narrowness of earnings in the first half of this year relative to the expectation of earnings broadening out in the 4th quarter of 2024:
When reviewing the above chart, two main takeaways come to mind. One is that a broadening earnings profile is considered healthy for markets and the economy as a whole. The other is that the stock price appreciation for the four above names has not been driven by pure speculation. Earnings growth has been powering many of the top performing technology names in the index.
Overall, FactSet points out the expected blended earnings growth rate for the bellwether index in Q2 2024 is 9.7%. If this growth rate does indeed hold, it will be the highest year-over-year earnings growth rate since Q4 2021. With blended quarterly earnings growth rates of 7.4% for Q3 and 17.0% for Q4 expected by FactSet, 2024 is shaping up to be another strong year of earnings growth. With the expectation of broadening in mind and with valuations for growth-oriented companies looking a bit stretched, it stands to reason that value stocks are relatively attractive. The following chart from Franklin Templeton reinforces the notion that valuations matter for long-term returns:
Based on the above, even though the temptation to chase the returns of the “Magnificent Seven” is real, we do want to stay broad and diversified in our client portfolios. Our take on the first half of the year was that the market was getting somewhat complacent, and that volatility was overly subdued. Although less than a month of data does not prove that opinion correct, we can see from the market’s wild gyrations in July that volatility has indeed picked up substantially. In the first six months of the year, there was only one instance where the index rose or fell by more than 2%. Since July has started, we’ve seen multiple instances of the major indices moving by more than 2%.
Although the above four of the “Magnificent Seven” contributed more than 50% of the index’s 15.3% 1st half return, we find it prudent to continue owning the “other 496” names in the index. As evidenced by the initial chart in the article, the anticipated 15.6% 4th quarter growth rate of the other 496 companies in the S&P 500 is significantly higher than what we’ve been seeing and this broadening out of fundamental earnings growth to non-technology companies should benefit owners of broadly diversified equity portfolios.
Sincerely,
Managing Director, CIO
About Wolf Group Capital Advisors
At Wolf Group Capital Advisors, a comprehensive wealth management firm and Registered Investment Advisor (RIA) based in the Washington, D.C. metropolitan area, nothing is more important than the fiduciary responsibility we have in managing your wealth. Taking the utmost care, we focus on providing advice tailored to your specific circumstances. With more than two decades advising U.S. expatriates and non-US citizens employed by international organizations, we are qualified in investment strategies addressing global issues. Empathy and curiosity—combined with our experience in life planning and investment management—enable you to explore a wider set of possibilities that can lead to a fulfilling life you’ve worked hard to attain.
Disclosure:
The information presented is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
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