2024 Midyear Economic and Market Outlook
What's in store for the second half?
Get analysis and expectations from Commonwealth's Investment Management and Research team.
A Shifting Landscape
At the midpoint of 2024, the economic landscape may be shifting gears. Earlier in the year, we saw a robust job market and increased consumer spending, along with steady growth in gross domestic product (GDP). Now, there are signs of a potential slowdown on the horizon—job and wage growth aren't as hot, and consumer confidence is wavering. The good news? Slower growth could help get those stubborn inflation numbers under control.
Despite the uncertain economic terrain, the financial markets continue to offer opportunities. The S&P 500 recently hit new peaks, propelled by earnings from heavy hitters in the technology sector. Mid- and small-caps are also gaining traction, signaling a more balanced earnings journey by year-end. And while shifting rate expectations created a bumpy road for fixed income, the second half of the year presents a variety of paths across government, corporate, and municipal bonds.
Of course, we can't ignore the potential risks, like the upcoming election and geopolitical tensions that could lead to market volatility. But overall, the fundamentals seem solid. For most investors, a well-diversified portfolio aligned with their goals and time horizons can help smoothly steer them forward.
Analyst Hot Takes
Is inflation here to stay? Karen McColl, SVP, wealth management, and members of our Investment Management and Research team talk higher for longer and the road ahead.
All eyes are on the Magnificent Seven, but Karen McColl, SVP, wealth management, and members of our Investment Management and Research team, say a more balanced market may be in sight.
Click the headings below for a topical overview of our expectations for the second half.
The economic journey in 2024 has taken an unexpected course. Despite inflationary pressures and rising rates, sturdy consumer spending—propelled by a robust job market—sustained growth. But there may be bumps in the road ahead. There are signs of cooling labor and consumer confidence, business investment may see monetary policy headwinds, and government spending could moderate amid election uncertainty. On the other hand, net exports could provide a tailwind in the second half. And while the pace of economic growth has slowed, slower growth is still growth. Overall, the economic landscape seems headed toward a soft landing.
Source: Commonwealth
In 2023, the economic landscape defied expectations for a recession, with corporations reporting better-than-anticipated profits, driving stock market gains. This positive momentum extended into early 2024, propelled by strong performance from a handful of large-cap tech stocks known as the Magnificent Seven. The path ahead for markets will hinge on the push and pull between earnings growth and stock valuations. The forecast calls for elevated growth and a modest decline in valuations. Looking at the S&P 500, we expect to see mid- and small-cap companies gaining ground on the so-called Magnificent Seven. Given that, a more balanced market may emerge, with the S&P 500 continuing to rise in the second half of 2024.
Source: J.P. Morgan Guide to the Markets, as of May 31, 2024
The beginning of the year saw stickier-than-expected inflation and rising rates, creating headwinds for rate-sensitive assets. Still, the fixed income space has continued to find its footing. Higher-quality sectors (e.g., Treasuries and investment-grade corporates) offer some of the highest yields investors have seen in years, while tightening spreads have contributed to the outperformance of below-investment-grade securities. Of course, this landscape may face potential twists and turns ahead. But the movement in interest rates and some dispersion in asset class performance will create pockets of opportunity for the savvy fixed income investor.
Source: J.P. Morgan Guide to the Markets, as of May 31, 2024
All indices are Bloomberg, except for emerging market debt and leveraged loans: EMD (USD): J.P. Morgan EMIGLOBAL Diversified Index; EMD (LCL): J.P. Morgan GBI-EM Global Diversified Index; EM Corp.: J.P. Morgan CEMBI Broad Diversified; Leveraged Loans: JPM Leveraged Loan Index; Euro IG: Bloomberg Euro Aggregate Corporate Index; Euro HY: Bloomberg Pan-European High Yield Index.
While well-known economic factors like inflation have dominated headlines, the evolving geopolitical landscape brings its own set of risks and opportunities to navigate. The high-stakes 2024 U.S. presidential election could spark volatility as rhetoric intensifies, although history shows stocks tend to go up no matter the power-sharing agreement in Washington. Globally, simmering conflicts with Russia and Ukraine and Israel and Hamas, as well as U.S.-China tensions over trade, bear watching. Though the path ahead is unsettled, markets have priced in expectations for these events. Staying vigilant to shifts in expectations while capitalizing on opportunities will be key to weathering the geopolitical uncertainties.
Sources: Truist IAG, Strategas
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Diversification does not assure a profit or protect against loss in declining markets. Bonds are subject to availability and market conditions; some have call features that may affect income. Bond prices and yields are inversely related: when the price goes up, the yield goes down, and vice versa. Market risk is a consideration if sold or redeemed before maturity.
The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The MSCI ACWI ex USA is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. It does not include the United States. The ICE BofA Merrill Lynch US High Yield Index tracks the performance of U.S. dollar-denominated below investment-grade corporate debt publicly issued in the U.S. domestic market. The Bloomberg US Corporate Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes U.S. dollar-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers. The Bloomberg U.S. Municipal Bond Index is a flagship measure of the U.S. municipal tax-exempt investment-grade bond market. It includes general obligation and revenue bonds, which both can be pre-refunded years later and get reclassified as such.
The Magnificent 7 (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla) are a group of seven companies commonly recognized for their market dominance, technological impact, and changes to consumer behavior and economic trends.
The risk-free rate is the interest rate an investor can expect to earn on a theoretical investment that carries zero risk. In practice, the risk-free rate is commonly considered to be equal to the interest paid on a 10-year highly rated government Treasury note, generally the safest investment an investor can make. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, they offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk.
Investments are subject to risk, including the loss of principal. Past performance is no guarantee of future results.
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product.
