Investors Celebrate First Half Stock Market Performance
The U.S. stock market has gotten off to a very strong start in 2024. In the first six months of the year, the S&P 500 stock index gained 14.5%. Since 1953, the average performance of the S&P 500 in the first half of the year is just 4.72%. The tech-heavy NASDAQ index – which contains Big Tech heavyweights such as NVIDIA, Alphabet (Google), Meta (Facebook) and Tesla, among others – rose 18.1%.
In 2023, the S&P 500 gained 24.2% while the NASDAQ rose a hefty 43.4%. Much of last year’s stellar performance was driven by the Magnificent 7. This is the collective name given by Wall Street to seven U.S. companies that have become the industry leaders within the artificial intelligence (AI) movement: NVIDIA, Meta, Tesla, Amazon, Alphabet, Microsoft and Apple. These companies either directly create AI technology or are expected to significantly benefit from AI technology. In 2023, each of these seven companies’ stock rose an average 111.3%. The best performer of the group was NVIDIA, whose stock rose 239% last year.
So far in 2024, AI continues to be a major catalyst for the U.S. stock market. Five of the Magnificent 7 companies – NVIDIA, Meta, Amazon, Alphabet and Microsoft – accounted for 63% of the S&P 500’s 14.5% gain in the first half of the year. These five companies, all heavily imbedded in the AI movement, are symbolic of the global rush by companies to develop AI and machine-learning applications. According to Bloomberg Intelligence, global spending on AI hardware, software and services is expected to reach $1.3 trillion by 2032, compared to just $40 billion in 2022. This equates to a compound annual growth rate of 42% on AI-related spending.
But there are several uncertainties that Wall Street must navigate through in the second half of this year. First, is the Nov. 5 presidential election, now less than four months away. Though former-President Trump is the presumptive Republican nominee, who exactly will represent the Democratic party is now in a state of flux. Calls for Biden to drop out of the campaign have steadily increased since his June 27 debate performance. If Biden does drop out of the race, who might replace him could further complicate the political and economic landscape.
And then there’s inflation. On Thursday, the Department of Labor released its Consumer Price Index (CPI) for the month of June. On the positive side, consumer prices fell by 0.1% from May – the first monthly decline in 49 months. The national inflation rate, which represents the rise in consumer prices over the past 12 months, was reported at 3%. This was below the 3.1% that Wall Street had forecast and below the 3.4% inflation rate reported in May.
Despite the good news, inflation still remains a significant challenge for most Americans. Since February 2021, the start of the inflationary cycle, consumer prices have risen a cumulative 19%. The cost of shelter, which accounts for a large portion of consumer take-home dollars, is still 5.4% higher than 12 months ago. Energy prices, another major household expense, also remains a highly volatile sector.
How the inflationary landscape pans out over the next six months will ultimately determine how fast the Federal Reserve can begin lowering interest rates. Between March 2022 and July 2023, the Fed raised the benchmark fed funds rate from near-0% to its current level between 5.2%-5.5%. This is the highest fed funds rate in 43 years.
The Fed rapidly raised the fed funds rate to help tame soaring inflation. The Fed hopes that by raising interest rates, it will help reduce spending by making it more expensive for consumers and businesses to buy goods and services on credit. As spending falls, inflationary pressures should likely ease.
After Thursday’s better-than-expected CPI report, Wall Street now projects a 91% chance of at least one 0.25% cut to the fed funds rate at the Fed’s September meeting. This would lower the fed funds rate to a range between 5%-5.25%. Wall Street further expects an additional one to two 0.25% rate reductions by the end of the year.
No one knows for sure how the stock market will perform during the second half of the year. But, so far, investors have been handsomely rewarded.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Quad Cities Investment Group and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Quad Cities Investment Group unless a client service agreement is in place.
