What Worked in the Second Quarter

By Clear Perspective Advisors on July 11, 2024

Second Quarter Market Performance

Markets performed well once again in the second quarter with the S&P 500 gaining 4.3% and the Nasdaq gaining 8.5%. The second quarter marked the second lowest S&P 500 gain through the last seven quarters, beating only the Q3 2023 -3.3% return. From the end of Q2 2023 to Q2 2024, the S&P 500 was up 23% and the Nasdaq gained 29.6%. Since the start of 2023 through Q2 2024, the S&P 500 is up 42.6%, with the Nasdaq up a whopping 70.8%.

The focus on artificial intelligence and cybersecurity continued to dominate the investment community. As a result, technology was the top performing sector in the quarter, gaining 13.8%, followed by communication services, up 9.4%, and utilities, up 4.7%. The tech and communication sectors are the only two beating the market on a trailing twelve-month basis, up 41.8% and 44.9%, respectively.

Treasury yields rose across the curve in the quarter and steepened – meaning long term rates moved higher than short term rates. The 30-year Treasury yield rose 19 bps, the 10-year rose 16 bps and the 2-year rose 9 bps. Year-over-year, the 2-year yield is down 17 bps, while the 10-year yield is up 55 bps. Investors are weighing pending policy rate cuts from the Fed, along with inflation possibly remaining higher and stickier for longer.

Chart 1: S&P 500 Fell 4% in April, Then Returned Over 8% From May to June[1]

Mag 7, Once Again

The driver of market performance in the second quarter was once again mega-cap tech. Nvidia (NVDA), Apple (AAPL), Google (GOOGL) and Microsoft (MSFT) contributed 104% to the benchmark’s total return in the quarter, with NVDA alone accounting for 44% of the index’s return. NVDA gained 36% in the quarter. If that was not enough, out of the 20 top performing stocks in the S&P 500 in the quarter, 80% were in the tech sector.

The top 10 names in the S&P 500 maintain a 37.5% weighting, an all-time high, and well above the 1999-2000 weighting of 26.7%. These 10 companies generate 31% of total S&P 500 net income, below the 2020 peak of ~37% and 2000 peak of 46%. YTD, the top 10 names accounted for 77% of S&P 500 returns, coming in second only to 2007. The S&P 500 market-cap-weighted index versus the equal-weighted index tells the entire story: the highly weighed tech focused names have been pushing the index higher this year, outperforming the equal-weight index by 13%.

Mega-cap tech has been the main beneficiary of the AI trade. These companies also have billions in cash and cash equivalents, making them numb to higher borrowing costs. They are expected to increase capex spending 37% y/y in 2024, to nearly $200 billion, investing in new cloud computing and AI technologies. The expectation of lower interest rates in the near future is also a benefit for further growth. Tech will likely remain favorable for the rest of 2024, but we expect other sectors to catch up owing to solid fundamentals and cheap valuations – industrials, financials, consumer/housing and energy.

Chart 2: The Magnificent 7 Is Outperforming the S&P 500 by 30% YTD[2]

No Love for Value

Value indices have struggled on a relative basis to growth. Over the past year, the Russell 1000 Growth index (RLG) is up 40%, with the Russell 1000 Value index (RLV) up only 11%. Comparing the current environment to history, the performance of growth relative to value has never been larger, along with strong divergence across the two indexes relative to the S&P 500. That said, value actually beat growth by 180 bps in the second quarter on a simple average return basis but lagged by 910 bps on a cap-weighted basis, another example of mega-cap tech’s massive pull.

Given the heavy influence from technology, growth was the story in the first half of 2024. Interestingly, valuations are not as stretched as they were in the early 2000s. As of June, the average NTM P/E of the largest 50 companies in the S&P 500 is 24.8, relative to 45.3 in March 2000. Companies are also a lot more profitable today than they were in 2000.

The second half of 2024 is likely to bring further slowing of inflation, possible Fed rate cuts and one of the most anticipated U.S. presidential elections in history. We have slowed from the 4.9% torrid pace in GDP in Q3 2023 but remain elevated at 2%. We are watching for continued signals of slower growth, especially in the labor market and in the services sector of the economy (which is 70% of consumption). We believe in a 2% GDP world this year, where S&P 500 earnings will grow 8-10%. While we are favorable on technology, we see better value elsewhere – sectors where earnings will support a broader market in the back half of 2024.

Charts 3 & 4: Growth Is More in Favor Than Value at One of the Highest Rates in History[3]

[1] Source: FactSet. As of July 8, 2024.

[2] Source: FactSet. As of July 8, 2024.

[3] Source: FactSet. As of July 8, 2024.