Highs and Hurdles

Halfway through the year, the S&P 500 is just a hair below its all-time high. This performance has been driven by the gradual easing of inflation, continued strength in the labor market, and momentum in the development and rollout of artificial intelligence (AI). Though the outlook for the latter half of the year looks promising, thanks to strong expectations for corporate earnings, there will be hurdles along the way.

With the campaign season in full swing, the number of potential outcomes is unprecedented. Over the next four months, the markets will try to predict a winner. While markets usually disregard most election noise over time, the differences between candidates on key issues suggest a significant yet temporary impact on industry and company levels. It is important to remember that markets dislike uncertainty above all else. Once a winner is clear, companies and investors can return to business as usual.  

So far this year, the S&P 500 has returned just over 15%, with the 10 largest companies accounting for about two-thirds of this performance. The average stock has not performed as well; specifically, the equal-weight S&P 500, which treats each company equally regardless of its size, is up just under 5%. This narrow concentration of growth is driven by explosive fundamental advancement in companies tied to AI development. On its own, Nvidia accounts for roughly 28% of the index’s return. Its stock is up nearly 150% YTD, with an average earnings growth of 471% year-over-year over the last two quarters. Although this growth will slow, it is expected to remain impressive. 

Looking ahead, there’s hope that earnings growth can broaden beyond AI developers. As growth rates slow for the technology titans, forecasters expect increased growth rates for the average stock. Optimism is focused on increasing profit margins through better cost management, productivity improvements, and the potential benefit of AI integration for ordinary companies. Earnings growth for the entire S&P 500 is expected to hit 12% this year and another 12% next year. Achieving these growth rates is crucial for sustainable progress.

We remain focused on owning companies that are sustainably growing earnings and dividends by executing a well-defined strategy. Some companies are developing AI, some are working to adopt it, and others have growth strategies entirely outside that framework. With higher interest rates and a slow but growing economy, stock picking is critical. Only the companies that can deliver on their plans will be rewarded.  


Thanks,
Preston May, CBE®
Research Analyst