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Market Currents 6/14/24

  • April Showers Brought May Flowers.  Global equities rebounded in May, fully recovering from April’s brief setback and resuming their upward trajectory for the year.  Strong corporate earnings trends and easing inflation concerns, particularly in the US, fueled the resurgence.  Treasury yields fell in May as more stable inflation data improved the outlook for potential interest rate cuts, revitalizing the bond market and contributing to a broad-based rally across asset classes. 
  • Tech Sector Led the Charge.  A handful of Big Tech stocks, fueled by investor enthusiasm for artificial intelligence (AI), are once again dominating the stock market.  Companies like Nvidia, Microsoft, Apple and Meta, each with significant AI initiatives, have seen their valuations soar, now representing a disproportionate share of the S&P 500’s year-to-date returns.  This concentration of gains in a few mega-cap tech names raises concerns about narrowing market leadership breadth and potential vulnerability if investor sentiment shifts.  While their current fundamentals, driven by strong earnings and growth prospects, support the premium valuations, the sustainability of such lofty projections for future earnings growth remains a critical question.      
  • Global Monetary Policy Easing Underway.  The Bank of Canada became the first G7 central bank to cut interest rates, with the European Central Bank quickly following suit.  This shift signals a potential change in the global monetary policy landscape.  Meanwhile, the US Federal Reserve has begun tapering its quantitative tightening (QT) program, reducing the pace of its balance sheet drawdown.  Despite this move, a Fed rate cut is not anticipated until September at the earliest, as policymakers remain vigilant about the trajectory of inflation.    
  • Conflicting Economic Signals.  Recent economic data presents a mixed picture of the US economy.  The May employment report showed a robust addition of 272,000 jobs, the highest in five months, yet the latest ISM Purchasing Managers’ Indices (PMI) for both manufacturing and service sectors dipped below 50, indicating contraction.  For now, the economy appears to be in the “Goldilocks” zone sought by the Federal Reserve: a slowdown in economic activity sufficient to curb inflation, but without triggering a sharp rise in unemployment.  Close attention will be paid to upcoming economic data to ensure that the Fed’s policy tightening does not overshoot its mark and inadvertently cause a prolonged economic downturn. 
  • Market Outlook.  As we approach the halfway mark of 2024 and enter the traditionally quieter summer months, there is time to reflect on the overall strength and resilience displayed by both the stock market and the labor market.  Investor enthusiasm for artificial intelligence has been a major catalyst for market returns, and while the AI boom shows no signs of abating, we remain mindful of the potential for excessive exuberance.  The narrowing market breadth also warrants attention.  Nevertheless, we maintain a constructive outlook for the market overall, underpinned by the continued strength in corporate earnings, moderating inflation, and the global shift towards easier monetary policy.  As always, we remain vigilant in navigating these evolving dynamics on behalf of our clients.