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Street SMARTS: Q2 Commentary 2024

By Thomas O. Herrick
Chief Market Strategist, Managing Director

Bad Breadth

Equities gained ground in the second quarter, albeit in a very concentrated manner. As of this writing, the S&P 500 Index is ahead by 4.34% for Q2. Given the massive outperformance of the semiconductor group in May and June, virtually all the quarterly gains were found in the large-cap growth space. The Russell 1000 Growth Index is up by over 8% versus the Russell 1000 Value Index, which is down about 2%. Small and mid-caps were down across the board. The long-term uptrend for equities remains intact but needs a broader base. Bond results were improved during Q2 — the Bloomberg US Aggregate clawing back to breakeven year-to-date with a .72% gain for the quarter. Bond volatility continues to compress, with the MOVE Index of bond volatility in a nice downtrend since last October. Lower bond volatility is supportive of equities.

Concentrated gains, but gains nonetheless

Bar graph shows three stocks account for nearly half of 2024 S&P 500 returns.

Source: Carlyle Analysis; Bloomberg, Federal Reserve, June 2024. There is no guarantee any trends will continue.

Market breadth refers to how many stocks are participating in a given move. As the S&P 500 Index reached an all-time high on June 11, just 34% of stocks closed above their 20-day moving average. That is the worst participation rate for a new high since data collection began in 1990. Virtually all the recent S&P gains can be attributed to momentum factor stocks, especially semiconductors. At the same time, various upside exhaustion signals are present for the NASDAQ 100, the index where momentum stocks are most evident. This is the clear and present challenge for equities.

Semiconductors have been dominant

Philadelphia Stock Exchange Semiconductor Index rises above S&P 500

Source: Fairlead Strategies

The momentum performance gap over the broad market is likely resolved either through a pullback or consolidation. The group significantly impacts major averages, given the heavy weight of these names. The history of spiked momentum factor outperformance sometimes results in a fast rollover that will take the major averages into a pullback as well. The other outcome, consolidation, looks more like treading water. The needle the market will attempt to thread is momentum, not cratering, while oversold breadth recovers somewhat.

Our highest conviction is that equities cannot move sustainably higher without improved breadth and participation. Potential catalysts for wider participation include improved inflation prints that turn into dovish Fed policy as well as earnings growth across a wider group of stocks. We see both having relatively high odds of outcome in the second half of 2024. Those two catalysts combined with a huge valuation gap point lower in capitalization (small and mid-caps) as a prime beneficiary. Given their recent lag, this same group is likely less vulnerable to any momentum factor-induced rollover.

Narrow leadership doesn’t portend looming losses

S&P 500® Performance Around Narrowing Market Breadth (1/31/85–5/31/24)

Source: Bloomberg

All market performance figures are sourced from Bloomberg.
The S&P 500 Index is comprised of 500 U. S. stocks and is an indicator of the performance of the overall U.S. stock market. An index is not available for direct investment; therefore, its performance does not reflect the expenses, fees and taxes generally paid with the active management of an actual portfolio.
The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the US equity universe and is constructed to provide a comprehensive barometer for the large-cap growth segment. The index is reconstituted annually to ensure that the represented companies continue to reflect growth characteristics.
The Russell 1000® Value Index measures the performance of the large-cap value segment of the US equity universe and is constructed to provide a comprehensive barometer for the large-cap value segment. The index is reconstituted annually to ensure that the represented companies continue to reflect value characteristics.
The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond) is a market capitalization weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most US traded investment grade bonds are represented. Municipal bonds and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, mortgage-backed bonds, corporate bonds, and a small number of foreign bonds traded in the US.
The MOVE Index, or Merrill Lynch Option Volatility Index is a gauge of interest rate volatility in the US Treasury Market. It is calculated from options prices, which reflect the collective expectations of market participants about future volatility. The Index measures the implied volatility of US Treasury options across various maturities.
Cary Street Partners is the trade name used by Cary Street Partners LLC, Member FINRA/SIPC; Cary Street Partners Investment Advisory LLC and Cary Street Partners Asset Management LLC, registered investment advisers. Registration does not imply a certain level of skill or training.
Any opinions expressed here are those of the authors, and such statements or opinions do not necessarily represent the opinions of Cary Street Partners. These are statements of judgment as of a certain date and are subject to future change without notice. Future predictions are subject to certain risks and uncertainties, which could cause actual results to differ from those currently anticipated or projected.
These materials are furnished for informational and illustrative purposes only, to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. Materials have been compiled from sources believed to be reliable; however, Cary Street Partners does not guarantee the accuracy or completeness of the information presented. Such information is not intended to be complete or to constitute all the information necessary to evaluate adequately the consequences of investing in any securities, financial instruments, or strategies described herein.
Cary Street Partners and its affiliates are broker-dealers and registered investment advisers and do not provide tax or legal advice; no one should act upon any tax or legal information contained herein without consulting a tax professional or an attorney.
We undertake no duty or obligation to publicly update or revise the information contained in these materials. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of securities, or information about the market, as indicative of future results.
Nothing contained herein should be considered a solicitation to purchase or sell any specific securities or investment related services. There is no assurance that any securities discussed herein have been included in an account’s portfolio, will remain in an account’s portfolio at the time you receive this report, or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and, in the aggregate, could represent only a small percentage of the portfolio’s holdings. It should not be assumed that any of the securities transactions or holdings discussed were, or will prove to be, profitable, or that the investment recommendations or decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein. A complete list of every holding’s contribution to performance during the period, and the methodology of the contribution to return, is available by contacting Cary Street Partners Marketing. CSP2024114

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