So far in 2024, hotter-than-expected economic data and record S&P 500 closing levels have left many consensus views from the end of last year in tatters. Investors expected equities to reel from a long list of potential pitfalls, but instead, US large cap has continued the resilience it has shown in recent years. As investors take a beat to reassess, we consider what could slow down the US large cap train in the near term and what trends could help determine whether we are entering an expansionary cycle.
At the start of the year, investor concerns included tightening liquidity, a weaker consumer due to the prolonged effect of higher interest rates, and the knock-on effects of diminishing corporate earnings. Instead, the impact of rising rates was only evident in small pockets (such as lower-income households), and US equities surged despite delayed expectations for the first Federal Reserve rate hike. The S&P 500 Index is off to a roaring start this year with a first quarter return of 10.56% (Figure 1).
With inflation normalizing in the 2%-3% range, and economic growth reaccelerating faster than predicted, investors are left wondering if the overused phrase “soft landing” should be substituted for “no landing,” as low levels of volatility remain and the labor market is still very healthy. Despite our strong start, we believe markets will have to deal with bouts of uncertainty due to several risks that have not been priced in:
While our comments so far are aimed broadly at US large caps, it should be noted that the so-called Magnificent 7 powered much of the S&P 500’s gains last year. Since the start of the year, three of the seven (Apple, Tesla, and Alphabet) have experienced far weaker returns (negative in the case of Apple and Tesla), signaling a possible end or, at the very least, a repositioning of how investors view these tech titans. We believe it might be time for attention to revert to the other 493 stocks, where some overlooked segments are favorably positioned across the quality/valuation continuum. For a more in-depth look at this, please see Unlocking Opportunities in the Forgotten 493 Stocks.
Markets have become used to the resilience of equities despite a wide range of shocks, and the previous concerns of a recession have largely been quieted. However, we note that despite a slew of healthy economic data prints, there is still relatively below-trend growth. We continue to evaluate whether we are entering an expansionary cycle. Before making that call, we will closely assess the risks above and may even want to see a bit of a pullback (as evidence that these risks are priced in) before constructively moving forward. In the meantime, we remain cautiously optimistic with domestic equities, especially after a healthy return in the first quarter of 2024.