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Monthly Market Commentary July 2024

Market Commentary

Executive Summary


  • U.S. equity markets were up in July, with the S&P 500 up 1.2% for the month and 16.6% for the year. 
  • Unlike June, returns were not dominated by “Magnificent 7” big-cap tech companies.
  • The NASDAQ was down 1.48% in July, while the small-cap Russell 2000 was up 8.8%. On a year-to-date basis, the Russell 2000 is up 10.92%, and the NASDAQ is up 15.8% as of the end of July.
  • The Market-Weighted S&P 500 was up 1.2%, while the Simple Average S&P 500 was up 4.5%. in July. On a year-to-date basis, the Market-Weighted S&P 500 is up 16.6%, while the Simple Average S&P 500 is up 9.8%.
  • The EAFE index was up 2.9% in July and 8.8% year-to-date.
  • In the first week of July, markets lacked breadth, with “Magnificent Seven” stocks continuing to dominate S&P 500 returns. Good news from Apple and Tesla helped the market increase 2% in July’s first week.
  • The trend changed direction when the soft CPI (Consumer Price Index) on July 11th caused a dramatic market rotation from Big-Cap Tech and Magnificent 7 stocks toward areas underperforming for the last twelve months, such as small-cap and value stocks.
  • Other inflation reports, like the Personal Consumption Expenditure Index (PCE), did not present new info that changed the market narrative.
  • Following weaker job numbers at the beginning of August, futures expect rate cuts at the next three FOMC meetings in 2024.
  • Economic reports, such as the second-quarter US GDP number, showed a slowing but still expanding economy.
  • Earnings reports have been good for the 2nd quarter of 2024.
  • 75% of companies have been reporting quarterly earnings, with 78% beating expectations by an average of 4.5%.
  • The expected earnings growth rate for the second quarter is 11.5% currently, compared to expectations of 8.9% at the end of the second
  • In the first two days of August, the market went from enthusiasm towards Fed actions to concern that the FOMC may be acting too late and that we might see a recession instead of a soft landing.
  • We expect the market to succeed thanks to a relatively solid economic background. Expectations of a possible recession are premature. We are seeing continued earnings growth, with some "backing and filling" following recent gains and continued sector rotation.  Equity declines are expected in any given year. Still, we also feel the "broadening" of the strength of market earnings into sectors beyond tech will contribute to broadening market participation in sectors that have not kept up with the overall S&P 500 in the last 12 months and help to continue an upward trending market.


Fixed Income Markets


  • Bond yields dropped following the inflation report July 11th, and expectations of a cut to the Fed Funds rate increased.
  • The benchmark 10-year treasury yield went from 4.5% at the end of June to 4.1% at the end of July.
  • Futures contracts have gone from a 58% probability of a Fed Funds rate cut at the September Federal Open Market Committee meeting (FOMC) to a 100% probability currently.
  • Yields dropped and markets went up following dovish comments in the FOMC’s statement after the July 31st committee meeting.
  • Jerome Powell's comments following the meeting were considered more dovish than the FOMC statement. Bond yields dropped, and the S&P 500 increased following his comments.   
  • US Treasury Yield curve steepened sharply during July fueled by higher conviction of progress on the inflation front and some political events which increased concerns that the fiscal health of US Government would continue to deteriorate in the coming years.
  • Corporate spreads remained resilient in July as the earnings season continued to unfold, and although there were some notable misses, the negative equity tone did not affect credit markets despite increasing activity in issuance given that total yields continue to attract investors as the credit health of issuers is not expected to deteriorate significantly.
  • US Treasury Yield curve steepened sharply during July fueled by higher conviction of progress on the inflation front and some political events which increased concerns that the fiscal health of US Government would continue to deteriorate in the coming years.
  • Currently, the yield on the 10-year Treasury Bond is down to 3.8%.


Economic Detail


In July, the first advance reading for Q2 GDP showed the US economy grew at 2.8%, well ahead of the consensus of 1.9% and ahead of last quarter's 1.4%. Stocks reacted positively to news that the economy grew faster than expected in the second quarter. The beat was primarily driven by inventory growth and government spending.

In a very volatile month, including the most significant daily increase in the S&P 500 and NASDAQ since 2022, the S&P 500 ended up 1.2% for the month. April has been the only down month so far in 2024. July initially resembled June in that Big-Cap stocks, particularly Technology and the Magnificent 7, dramatically outperformed the rest of the market. US equity performance had the best week of the month, up 2%, with the Information Technology and Communication Services sectors up 4% for the first week, helped by a 27% movement by Tesla and an 8% movement by Apple.

The lack of breadth in participation in the US stock market changed dramatically following the CPI report on July 12th. The Index showed that the first month-to-month price had declined since early 2020, and the annual rate was at 3%.

July 11th inflation news led to bond yields dropping dramatically. The yield on the benchmark 10-year Treasury fell from 4.29% to 4.18% by the end of the week and is currently at 3.80%. The report raised market expectations of a Fed Funds cut at the September FOMC meeting. Futures now put the probability of a rate cut in September at 100%, up from 58% before the inflation report. Subsequent inflation reports later that month, like the PCE, seemed to confirm that inflation was under control.

Confidence in an impending cut in the Fed Funds rate went even higher following the conclusion of the July FOMC meeting on July 31st. The committee left the benchmark Fed Funds rate unchained at 5.25-5.50% as expected, but the market liked the dovish comments from Fed Chairman Jerome Powell. S&P 500 added to its gains as Powell’s speech went on, particularly after he said that the cut in the Fed Funds rate in September was “on the table.” The S&P 500 ended up 1.5% that day. Powell also commented when answering reporters’ questions about dual mandates, inflation, and employment, saying that inflation was closer to their goals so that they would focus more on employment. Futures markets started to price in aggressive Fed actions, causing a continued yield drop, and a re-steepening of the yield curve.

The blended earnings growth rate, which combines actual results for companies that have reported and estimated results for companies yet to report, ended the second quarter at 11.5%, compared to expectations of 8.9%. This quarter the financial sector has been one of the most significant contributors to the increase in earnings growth. The most significant upside earnings surprises came from financials, energy, and healthcare. As we head into the third and fourth quarters of 2024, earnings growth is anticipated to accelerate to 16%, but the cyclical, value, and small-cap stocks are expected to contribute more to this growth than the technology sector. As the contributors to earnings growth broaden, we think this will continue to support the continuation of market rotation and the broadening of market leadership. The Magnificent 7 is no longer the only part of the stock market working.

The market tends to reward companies that report earnings above expectations more than average, while punishing companies that report disappointing earnings more than average.

Reasons for the recent broadening of market participation in July include:

  • Confidence in an impending Fed Funds rate cut.
  • Although the US economy's growth was slowing, it is still expanding (Q2 GDP 2.8%.)
  • Relative earnings growth rates for non-big-tech or Magnificent 7 companies improve as 2024 progresses.
  • More attractive valuations in small-cap and non-tech parts of the market. The P/E of the market-weighted S&P 500 is 20.6 vs the P/E of the equal-weighted S&P 500 is 16.4. 

Conclusion


For most of 2024, “Good news was Bad news,” meaning the market viewed reports of a slowing economy favorably because they indicated a greater probability of the FOMC cutting rates. The viewpoint might be changing now that Fed rate cuts are assured. At the beginning of August, the market was spooked by a July payroll report that added fewer jobs than anticipated, and the US unemployment rate reached 4.3%. US economic and wage growth is coming down, as desired. Still, we think the initial dramatic change in market opinions might be premature at best and is reading too much into one economic report. 

Historically, when the FOMC shifts toward easing rates, it has helped the relative performance of value-oriented cyclical companies and small-cap stocks.

Although technology stocks may still have strong fundamentals, we expect to continue to see greater breadth in future US equity gains, which would be healthy for continued market growth. Admittedly, market breadth could have been better year-to-date than we had thought, but it appears to have changed in July.

We expect more near-term market volatility due to the election, concerns about economic growth, and profit-taking. However, because the long-term positive themes remain intact, the near-term volatility should be viewed as an opportunity to diversify equity exposures into underperforming sectors and market caps and extend the duration of fixed-income investments.