Written by Jaaims Analysts
Published 5 August 2024
After an impressive 26.3% return in 2023, the S&P 500 has added another 15.3% in the first half of 2024, marking the 16th strongest start to a year since 1950. The index has risen in seven of the past eight months, experiencing only one relatively modest setback of 5.5%, which was quickly recovered. However, in recent days the market has experienced its second-largest drawdown of the year, exacerbated by a disappointing jobs report. This sparked investor fears that the Federal Reserve’s decision to keep interest rates unchanged might have been a mistake, potentially leading the economy toward a recession. However, it’s worth noting that when the Fed met last time, the discussion was more geared towards rising rates, highlighting the current indecision and volatility among economists and market participants. Currently, the S&P 500 is 5.7% below its all-time high, while the Dow is down by 3.9%. As noted earlier, the market has been strong this year, and pullbacks are a natural part of a healthy functioning market.
Amidst all this, the second-quarter earnings season has shown strong results so far. Of the 75% of S&P 500 companies that have reported earnings, 78% have exceeded expectations, according to FactSet data. This rate is above the five-year average of 77%. The blended earnings growth rate for the S&P 500, combining actual results and estimates for companies yet to report, is 11.5%, the highest since the fourth quarter of 2021. Notable companies reporting this week include Walt Disney, Caterpillar, Costco, Eli Lilly, and Super Micro Computer.
Looking ahead, the broader market outlook remains positive. Historical data suggests that strong first halves often lead to further gains by year-end, despite normal corrections. Since 1950, there have been 27 instances where the S&P 500 achieved a first-half total return of more than 10% and in 24 of these instances (89%), the market continued to rise in the second half, with average returns of 9%. Typically, the deepest pullback during the second half averaged 9% also, illustrating the market’s tendency to advance despite periodic setbacks.
Our view is that the bull market still remains in play. The median price gain during previous bull markets since 1950 is 108%, and these have tended to last four to five years. Since the current bull market commenced in October 2022, the S&P 500 is up 50%.
Our greater message is that U.S. economic growth is now cooling from the post-pandemic stimulus boom, but it is not weak. The easing in economic and inflation trends should allow the Fed to cut rates one or two times this year, likely starting in September. Importantly, the stock market has typically risen in the 6- to 12-month period following the first rate cut.
Jaaims portfolio positioning largely remains unchanged. Our commodity positions in Australia have taken a hit, notably Fortescue Metals Group (FMG), Rio Tinto (RIO), and BHP (BHP). However, we remain committed to these positions as these operations shed their Nickel projects, dive deeper into copper, and we anticipate a recovery in the iron ore price in the second half of the year. Moreover, we foresee the AI wave continuing with more upside potential, as nearly every company globally will use AI in some capacity in the years to come.