Markets Score, Elections Roar

July 08, 2024

With the S&P 500 Index up double digits through June, any periods of volatility may be prudent opportunities to deploy excess cash where applicable, while maintaining a focus on quality assets and long-term allocation targets.

In Short

  • The S&P 500 Index gained +3.6% in June, led by Nvidia, Microsoft and Apple. Nvidia briefly surpassed Microsoft as the world’s most valuable company at a market cap of over $3 trillion.
  • Index concentration could be seen as a potential risk to the broader market, with the market cap-weighted S&P 500 Index outperforming the equal-weighted index for the year following a second-quarter technology surge.
  • Central banks like the ECB and Swiss National Bank have begun lowering rates, while the Federal Reserve remains cautious due to mixed U.S. economic data.
  • The U.S. presidential election may increase market volatility, as exhibited by recent elections in India, Mexico, the U.K. and France.
  • Any periods of volatility may be prudent opportunities to deploy excess cash where applicable, while maintaining a focus on quality assets and long-term allocation targets.

Markets Defy Gravity with AI Tailwinds

U.S equity markets continued to defy expectations to close out the first half of the year, with the S&P 500 Index returning +3.6% in June and +15.3% year-to-date. Mega-cap technology stocks led the way again, with more than half of the S&P 500’s Index gain driven by three individual stocks: Nvidia, Microsoft and Apple. Nvidia was in the spotlight as a leader of the artificial intelligence boom, briefly becoming the world’s most valuable company over Microsoft at a market cap of over $3 trillion, with the stock up over +150% during the first half of the year.

Index concentration could be a potential risk to the broader market, as the market cap-weighted S&P 500 Index continues to outperform the equal-weighted index so far this year. In fact, the S&P equal-weighted index was down -2.6% in the second quarter, while the market-weighted index was up +4.3%, marking the widest gap in quarterly performance since Q1 2020. As Q2 earnings season approaches, the question remains if strong earnings growth by mega-cap tech names can continue to keep pace with valuations. As of the end of the month, the Q2 2024 blended earnings growth for the S&P 500 Index is expected to crest +9% year-over-year, the highest YoY metric since Q1 2022 and a higher bar compared to recent quarters. Highlighting secular growth themes within tech, according to Factset, the six largest stocks in the index (Amazon, Apple, Google, Meta, Microsoft and Nvidia) are expected to grow EPS by +30% year-over-year, while the other 494 stocks are expected to grow +5%.

S&P 500 Index Contribution to Returns: January 2023 – June 2024

Markets Score, Elections Roar

Source: Bloomberg as of June 30, 2024. Top 10 stocks are the top contributing stocks to returns to the S&P 500 Total return from January 2023 – June 2024: NVIDIA Corporation, Microsoft Corporation, Apple Inc,, Inc. Meta Platforms Inc, Alphabet Inc, Broadcom Inc, Eli Lily and Company, Tesla, Inc, JPMorgan Chase & Co.

Central Banks Walk a Tightrope

For economies across the globe, the tug of war between inflation and growth has continued and could be more prolonged than anticipated at the start of the year. However, some central banks have seen convincing evidence that hotter prices have cooled to an appropriate level to make cuts. Specifically, the European Central Bank (ECB), Swiss National Bank and the Bank of Canada have all begun to lower policy rates this year. Across the pond, the Bank of England kept its target rate at 5.25% in June—despite inflation falling to target—but hinted that policymakers could be ready to cut interest rates as soon as August. Meanwhile, the Federal Reserve (Fed) has held steady while U.S. economic data remains mixed, with perhaps two interest rate cuts priced in for the end of the year.

Our base case is that the U.S. will avoid a recession, but various factors remain to consider as the year unfolds. Inflation is cooling, but sticky. The labor market has been resilient, but there are some signs of cracks; for example, job vacancies have started to come down without a substantial move in the unemployment rate. Based on historical data, lower job vacancy rates tend to be accompanied by bigger moves in the unemployment rate1; as firms are impacted by higher interest rates, not only do they look to hire less, but they also may need to cut existing jobs. We believe the Fed has two goals, price stability and full employment, and one toolkit in monetary policy, and so it continues to walk a tightrope. More encouraging was the May core Personal Consumption Expenditure (PCE) reading, which continued to cool, while the final read of Q1 U.S. GDP came in at an annualized rate of +1.4%, reflecting a still-strong level of growth in a high interest rate environment, with a general trend of disinflation. While these are favorable signs, we think the data-dependent central bank has made it clear that it is willing to be patient on the road to its inflation target.

While the potential for monetary policy errors is seen as a near-term risk, the U.S. presidential election in November remains a key risk as well. Though the S&P 500 Index typically posts a positive (+16%) return in the year following a presidential election regardless of which party controls the White House, a potential rise in volatility in the coming months for markets will be an area to watch as election day draws near.

Policy and Politics

With the S&P 500 Index up double digits through June and edging out 31 all-time highs, 2024 has been the strongest start to an election year ever. As mentioned in our March publication, going back to 1970, the S&P 500 Index has finished higher in the 12 months following an all-time high 75% of the time, with an average gain of +8.8%. As investors round the corner on the second half of 2024, the focus is shifting to the November U.S. presidential election. The first major debate between the two candidates took place toward the end of the month and while it was generally underwhelming, it is also not uncommon to see weaker performance by a presidential candidate early in the race.

Though the two candidates disagree on a fair share of issues, President Joe Biden and former President Donald Trump are aligned on seeking further restrictions on the Chinese semiconductor industry.

S&P 500 Index Average Performance in U.S. Presidential Election Years Since 1928

Markets Score, Elections Roar

Source: Bloomberg as of June 2024. Average since 1928, Price Returns.

Other points of contention include immigration, which could reverse the increase of available workers afforded to employers if there are stricter border controls under a Trump presidency. Another possible risk under Trump is around his proposal to impose broader tariffs, including a 10% levy across the board on all products imported into the U.S. from overseas, and a 60%+ tariff on Chinese imports. This type of aggressive trade policy could impact global exports for some of the world’s largest economies, and would likely be an inflationary impulse in the United States. With a Biden reelection, the risks lie in the sunsetting of tax cuts under the 2017 Tax Cuts and Jobs Act (TCJA), which would impact not only income taxes, but estate and gift tax exemptions. Biden may also effect more stringent regulatory oversight, including the tech-focused antitrust crackdown.

The usual trend observed during election years is volatility to start, a rally in the summer as candidates are formally announced, volatility as uncertainty spikes heading into election day, and then a rally post-election to end the year. August is typically the month with strongest returns during election years at +3.1%, while May tends to be the month with weakest returns at -1.1%. Meanwhile, this year’s May was the S&P 500’s Index best since 2009 at +5%. So far, this year has been anything but average for the index. However, we believe that there is increasing election-related tail risk over the short to medium term.

Major elections that have taken place so far this year show us the risk of potential political tremors. Elections inherently bring uncertainty to the path of leadership with results impacting the path of policy, laws and international relations, all of which can affect the markets and broader economy. Surprise results in India—Modi won a third term, but his party lost its parliamentary majority—and Mexico, as well as snap elections being held in the U.K. and France, are reminders of the uncertainty involved during changes in leadership. Shortly following their respective election results, India’s Sensex Index experienced daily swings of 3 – 5%, the Mexican peso plummeted, and France’s CAC 40 Index fell by 6% in a single week—all examples of volatility materializing.

Another historical trend to note within U.S. markets is the diversion between whether elections are close or not. When elections are not close, the economic backdrop and the business cycle appear to determine market performance, with the average pattern being a steady drift upward over the course of the year. When the election is perceived to be in the balance, however, average performance has followed a similar pattern of upward drift until September, at which point there is an uptick in volatility.

As it stands, the U.S. election seems to be close to a 50/50 proposition, as polling in swing states is still very tight. While it is still early, if it continues to be a tight race, investors should be prepared for potential volatility as we get closer to election day. Markets generally tend to be positive during election years, so any potential periods of volatility may be prudent opportunities to deploy excess cash where applicable, while maintaining a focus on quality assets and long-term allocation targets.

Portfolio Implications

Equities moved broadly higher with narrow leadership in mega-cap tech, but domestic small caps, developed non-U.S., and value stocks were negative. We maintain an at-target overall view across equities, with an overweight to small caps, a sector that had priced in a hard-landing scenario, as we anticipate further broadening of equity-market performance. Within equities, we still favor lower-beta, higher-quality names, with an at-target view on value versus growth. In this more challenging environment, we also favor employing active management to select companies with high earnings visibility.

Fixed Income was positive for the month, led by longer-dated maturities and municipals. We continue to favor credit markets, maintaining an overweight view on investment grade securities, reflecting a general bias towards quality. We maintain an underweight view on cash, preferring to lock in yields in anticipation of a decline in cash rates. We maintain an at-target view on high yield debt, given the recent tightening of spreads (yield advantage over Treasuries), which has reduced the risk-adjusted return potential of the asset class.

In a challenged fundraising, exit, and financing environment, we believe significant opportunities exist within Private Markets for firms and strategies that can act as liquidity and solutions providers to help close the capital supply/demand gap and support value-added transactions. This backdrop, along with Neuberger Berman’s deep relationships and unique position within the private equity ecosystem, has translated into record levels of deal flow across our platform. We continue to see potentially compelling opportunities across secondaries, co-investments, private credit and capital solutions. We are cautious on core private real estate, but this is offset by what we see as abundant market-dislocation opportunities in the value-add and opportunistic sectors, and particularly in real estate secondaries.

Index Returns as of June 2024

Equities & FX
Major U.S. Indices
S&P 500 Index 3.6% 4.3% 15.3%
Nasdaq Composite 6.0% 8.5% 18.6%
Dow Jones 1.2% -1.3% 4.8%
U.S. Size Indices
Large Cap 3.3% 3.6% 14.2%
Mid Cap -0.7% -3.3% 5.0%
Small Cap -0.9% -3.3% 1.7%
All Cap 3.1% 3.2% 13.6%
U.S. Style Indices
Large Cap Growth 6.7% 8.3% 20.7%
Large Cap Value -0.9% -2.2% 6.6%
Small Cap Growth -0.2% -2.9% 4.4%
Small Cap Value -1.7% -3.6% -0.8%
Global Equity Indices
ACWI 2.2% 2.9% 11.3%
ACWI ex US -0.1% 1.0% 5.7%
DM Non-U.S. Equities -1.6% -0.2% 5.7%
EM Equities 4.0% 5.1% 7.7%
50/50 Portfolio 2.6% 2.1% 7.4%
U.S. Dollar 1.1% 1.3% 4.5%
Fixed Income & Commodities
Major U.S. Indices
Cash 0.4% 1.3% 2.6%
U.S. Aggregate 0.9% 0.1% -0.7%
Munis 1.5% 0.0% -0.4%
U.S. Munis
Short Duration (2.4 Yrs) 0.8% 0.3% 0.2%
Intermediate Duration (4.6 Yrs) 1.3% -0.9% -1.4%
Long Duration (8 Yrs) 1.9% 0.2% -0.2%
U.S. Corporates
Investment Grade 0.6% -0.1% -0.5%
High Yield 1.0% 1.2% 2.5%
Short Duration (1.9 Yrs) 0.6% 0.9% 1.4%
Long Duration (12.8 Yrs) 1.2% -1.7% -4.1%
Global Fixed Income Indices
Global Aggregate 0.1% -1.1% -3.2%
EMD Corporates 0.9% 1.4% 3.7%
EMD Sovereigns - USD 0.6% 0.3% 2.3%
Commodities -1.5% 2.9% 5.1%
Commodities ex Energy -3.8% 2.9% 4.0%
U.S. Treasury Yields
U.S. 10-Year Yield -0.1% 0.2% 0.5%
U.S. 2-Year Yield -0.1% 0.1% 0.5%

Source: Bloomberg, total returns as of June 30, 2024. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S.

Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg ExEnergy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.

1Source: Beveridge Curve, which captures an inverse relationship between unemployment and vacancies.


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