Q2 2024 Market Review

Key Takeaways

• US stocks extended a bull market, with the S&P 500 reaching a series of record highs in the year’s first half, led by technology stocks.
• Core inflation fell slightly but remained above 3% in the US; the Fed kept rates steady, while central banks in Europe and Canada cut interest rates.
• Small cap and value stocks lagged the market, while high-profitability stocks outperformed, a reminder of the benefits of pursuing multiple premiums.

The beginning of 2024 started out a lot like the end of 2023, with markets rising amid talk of a potential decrease in US inflation and interest rate cuts from the Federal Reserve that could follow. But much like last year, those expectations remained unfulfilled, as core inflation fell slightly but held above 3% and the Fed stood pat on interest rates.1 US stocks as measured by the S&P 500 rose to a series of record highs in the year’s first half, and the benchmark 10-year US Treasury bond yield approached 5% in the spring before retreating.2

The Fed held a key measure, the federal funds rate, steady through June at 5.25%, the highest level in more than two decades, with officials citing an effort to cool persistently high inflation.3 Meanwhile, the European Central Bank cut rates for the first time since 2019, as did the Bank of Canada.4 US core inflation was 3.4% in May, a multiyear low but still well above the Fed’s 2% target. However, it has moved in the direction policymakers have said they’d like to see it go—lower—though they indicated at their meeting in June that they expect just one rate cut before the end of the year.5

Against this backdrop, US stocks extended a bull market that began in late 2022, with the S&P 500 index gaining 14.6% through June 14 and notching new all-time highs. Record levels may lead some investors to wonder whether it’s a good time to sell, but historical data can help allay such concerns. Periodic record setting should be expected for an asset class with positive expected returns. As Exhibit 1 shows, the average return for weeks following these new highs was 0.26%—very close to the average return of 0.22% across all weeks. As long as investors demand positive returns in exchange for holding stocks, a new market high doesn’t mean the market is going to tumble.

EXHIBIT 1: Setting the Records Straight

Past performance is no guarantee of future results. Indices are not available for direct investment.

The strong rally in the technology sector in 2023 continued into the new year. The tech-heavy Nasdaq, after gaining 44.6% last year, has risen 18.1% this year, vs. the S&P 500’s 14.6% gain. Nvidia remained the biggest driver of gains in the tech sector through the end of May, as demand remained strong for chips used to power cutting-edge AI applications.6 But expecting Nvidia and the rest of the so-called Magnificent 7 tech stocks to outperform the broader market is to bet on them further exceeding the market’s expectations.7 Simply meeting expectations may result in returns more in line with the market, consistent with the history of top US stocks.

Global stock markets reached multiyear highs, with the MSCI All Country World Index rising 10.6% through mid-June.8 Developed international stocks, as represented by the MSCI World ex USA Index, added 4.4%, and emerging markets stocks, as represented by the MSCI Emerging Markets Index, were up 6.4%.

US Treasuries were little changed for the year, with the 10-year Treasury bond falling 1.0%. However, yields (which rise when prices fall) remained higher than they have been for most of the past decade. The 10-year Treasury yield touched 4.7% in April, after nearly reaching 5% last October for the first time since 2007, before pulling back to 4.2% as of June 14.9

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Footnotes

1. Inflation data as defined by the Consumer Price Index (CPI) from the US Bureau of Labor Statistics; the “Consumer Price Index for All Urban Consumers: All Items Less Food & Energy” is an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy. This measurement, known as “Core CPI,” is widely used by economists because food and energy have very volatile prices. Source: Federal Reserve Bank of St. Louis.
2. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved; Caroline Valetkevitch, “Nasdaq, S&P 500 post all-time closing highs for 4th day as tech boosts,” Reuters, June 13, 2024.
3. The federal funds rate is the overnight interest rate at which one depository institution (like a bank) lends to another institution some of its funds that are held at the Federal Reserve; “Federal Reserve issues FOMC statement,” Federal Reserve, June 2024.
4. Jenni Reid, “European Central Bank cuts interest rates for the first time since 2019,” CNBC, June 6, 2024; “Bank of Canada reduces policy rate by 25 basis points,” Bank of Canada, June 2024.
5. “Federal Reserve Board and Federal Open Market Committee release economic projections from the June 11-12 FOMC meeting,” Federal Reserve, June 2024.
6. Asa Fitch, “Nvidia’s Sales Triple, Signaling AI Boom’s Staying Power,” Wall Street Journal, May 23, 2024.
7. The Magnificent 7 stocks include Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. Named securities may be held in accounts managed by Dimensional.
8. MSCI data © MSCI 2024, all rights reserved.
9. Return based on the Bloomberg US Treasury Bond Index. Bloomberg data provided by Bloomberg Finance LP. Source for US Treasuries: US Treasury.