Wind in the Sails

The S&P 500 reached a new high and is now up over 17% on the year. With inflation cooling and interest rates expected to decrease, there is plenty of wind in the sails for stocks. This is especially true considering the large amount of cash still sitting in money market funds. Lower short-term rates could be a strong catalyst for equities, assuming the economy remains stable and the election doesn’t cause significant disruptions. With Q2 earnings reports around the corner, there is hope for positive results beyond the index's largest companies.   

Inflation data for June came in better than expected. For the first time in several years, consumer prices declined on a month-over-month basis, though they are up 3% from last year. Progress is being made, with goods prices continuing to fall and price increases in services and shelter slowly easing. So far, this has not adversely affected the labor market, as unemployment remains near historic lows. The Federal Reserve likely has enough justification to proceed with rate cuts, with markets anticipating two quarter-point cuts for 2024, the first of which is expected in September. With over $6 trillion in money market funds, some cash may flow into equities as short-term rates decline. 

The second quarter earnings season is beginning. Even though the biggest companies are still expected to drive most of the earnings growth this quarter, investors will be tuned in to see how companies expect their earnings to perform in the latter half of the year. The current expectation is that earnings growth for the average stock will significantly improve in the final two quarters, driven by lower input costs and potential productivity gains from AI integration. Evidence supporting this could lead to broader market growth. 

Since the debate in late June, election drama has begun to dominate the headlines. Taking a step back from the daily ups and downs, it’s reassuring that historical data shows the S&P 500 has averaged a 15.8% return in re-election years since 1944, with no down years. Incumbent presidents typically boost the economy with fiscal policy during their re-election campaigns, and this year has been no different. However, we believe meaningful differences can take shape at the sector or company level, depending on the election outcome. Foreign policy, trade, regulation, and taxes will vary based on the winner. As a result, carefully selecting stocks could be particularly beneficial during this time.


Thanks,
Preston May, CBE®
Research Analyst