Falling Treasury Yields and AI Enthusiasm  Power the S&P 500 To New Highs in Q2

Quarterly Insights – July 2024 
The S&P 500 experienced its first real dose of volatility early in the second quarter, but  expectations for interest rate cuts by the Federal Reserve, solid economic growth and  continued strong financial performance from AI-related tech companies ultimately  pushed the S&P 500 to new all-time highs and the index finished the quarter with  strong gains.  

While the S&P 500 hit new highs in the second quarter, the month of April was  decidedly negative for markets as fears of no rate cuts in 2024 (or even a rate hike)  pressured stocks. The catalyst for these concerns was the March Consumer Price  Index (CPI), which rose 3.5% year over year, higher than estimates. That hotter-than expected reading reversed several months of declines in CPI and ignited fears that  inflation could be “sticky” and, if so, delay expected Fed rate cuts. Those higher rate  concerns were then compounded by comments by New York Fed President John  Williams, who stated rate hikes (which investors assumed were over) were possible if  inflation showed signs of re-accelerating. The practical impact of the hot CPI report  and William’s commentary was to push rate cut expectations out from June to  September and that caused the 10-year Treasury yield to rise sharply, from 4.20% at  the start of the quarter to a high of 4.72%. Those higher yields pressured the S&P 500 in April, which fell 4.08% and completed its worst month since September. 

On the first day of May, however, the Fed largely dispelled concerns about potential  rate hikes and ignited a rebound that ultimately carried the S&P 500 to new highs. At 

the May 1 FOMC decision, Fed Chair Powell essentially shut the proverbial door on the  possibility of rate hikes, stating that if the Fed was concerned about inflation, it would  likely just keep interest rates at current levels for a longer period instead of raising  them. That comment provided immediate relief for investors and both stocks and  bonds rallied early in May as rate hike fears subsided. Then, later in the month, the  April CPI report (released in mid-May) rose 3.4% year over year, slightly lower than  the 3.5% in March and that resumption of disinflation (the decline in inflation) further  increased expectations for rate cuts in 2024. Additionally, employment data  moderated in May, with the April jobs report coming in below expectations (but still  at healthy levels). The practical result of the resumption of disinflation, the supportive  Fed commentary and moderating labor market data was to increase September  rate cut expectations, push the 10-year Treasury yield back down below 4.50% and  spark a 4.96% rally in the S&P 500 in May.  

The upward momentum continued in June thanks to more positive news on inflation,  additional reassuring commentary from the Fed and strong AI-linked tech earnings.  First, the May CPI (released in mid-June) declined to 3.3% year over year, the lowest  level since February. Core CPI, which excludes food and energy prices, dropped to  the lowest level since April 2021, further confirming ongoing disinflation. Then, at the  June FOMC meeting, Fed Chair Powell reassured markets two rate cuts are entirely  possible in 2024, reinforcing market expectations for a September rate cut. Economic  data, meanwhile, showed continued moderation of activity and that slowing growth  and falling inflation helped to push the 10-year Treasury yield close to 4.20%, a multi month low. Finally, investor excitement for AI remained extreme in June, as strong AI driven earnings from Oracle (ORCL) and Broadcom (AVGO) along with news Apple  (AAPL) was integrating AI technology into future iPhones pushed tech stocks higher

and that, combined with falling Treasury yields and rising rate cut expectations, sent  the S&P 500 to new all-time highs above 5,500.  

In sum, markets impressively rebounded from April declines and the S&P 500 hit a  new high thanks to increased rate cut expectations, falling Treasury yields and  continued robust earnings growth from AI-linked tech companies.  

Second Quarter Performance Review 

The second quarter produced a more mixed performance across various markets than the strong return in the S&P 500 might imply, as AI-driven tech-stock  enthusiasm again powered the Nasdaq and S&P 500 higher while other major  indices lagged. The Nasdaq was, by far, the best performing major index in the  second quarter while the S&P 500, where tech is the largest sector weighting, also  logged a solidly positive gain. Less tech focused indices didn’t fare as well, however,  as the Dow Jones Industrial Average and small-cap focused Russell 2000 posted  negative quarterly returns. 

By market capitalization, large caps outperformed small caps in Q2, as they did in  the first quarter of 2024. Initially, higher Treasury yields in April weighed on small  caps, while late in the second quarter economic growth concerns pressured the  Russell 2000.  

From an investment style standpoint, growth massively outperformed value in the  second quarter, as tech-heavy growth funds once again benefited from continued AI  enthusiasm. Value funds, which have larger weightings towards financials and  industrials, posted a slightly negative quarterly return as the performance of non tech sectors more reflected growing concerns about economic growth.

On a sector level, performance was decidedly mixed as only four of the 11 S&P 500  sectors finished the second quarter with positive returns. The best performing sectors  in the second quarter were the AI-linked technology and communications services  sectors. They posted strong returns, aided by better-than-expected earnings results  from NVDA, ORCL, AVGO, TSM, MSFT, AMZN and others as AI enthusiasm continued to  push the broad tech sector and S&P 500 higher. Utilities also logged a modestly  positive quarterly return, as the high yields and resilient business models were attractive to investors given rising concerns about future economic growth, while declining Treasury yields made higher dividend sectors such as utilities more  attractive to income investors.  

Turning to the sector laggards, the energy, materials and industrials sectors closed  the quarter with modestly negative returns. Their declines reflected growing anxiety  about future economic growth as those sectors, along with small-cap stocks, are  more sensitive to changes in U.S. and global growth.  

US Equity Indexes	Q2 Return	YTD
S&P 500	4.28%	15.29%
DJ Industrial Average	-1.27%	4.79%
NASDAQ 100	8.05%	17.47%
S&P MidCap 400	-3.45%	6.17%
Russell 2000	-3.28%	1.73%

Source: YCharts 

Internationally, emerging markets outperformed the S&P 500 in Q2 thanks to  optimism towards a rebound in Chinese economic growth and as falling global bond  yields late in the quarter boosted the attractiveness of emerging market  investments. Foreign developed markets, meanwhile, lagged both emerging markets  and the S&P 500 and posted a fractionally negative quarterly return. Concerns about 

the timing and number of Bank of England and European Central Bank rate cuts,  along with French and German political concerns later in the quarter, acted as  headwinds for foreign developed equities. 

International Equity Indexes	Q2 Return	YTD
MSCI EAFE TR USD (Foreign Developed)	-0.06%	5.75%
MSCI EM TR USD (Emerging Markets)	5.40%	7.68%
MSCI ACWI Ex USA TR USD (Foreign Dev &  EM)	1.32%	6.04%

Source: YCharts 

Commodities saw slight gains in the second quarter thanks to aforementioned optimism on Chinese economic growth and as geopolitical concerns rose  throughout the quarter. Gold rallied solidly on the uptick in geopolitical risks, following  the tit-for-tat strikes between Israel and Iran, along with the growing chances of a  direct Israel/Hezbollah conflict. Oil, meanwhile, logged a small loss on signs of  slipping OPEC+ production discipline and concerns about future global growth and  demand.  

Commodity Indexes	Q2 Return	YTD
S&P GSCI (Broad-Based Commodities)	0.65%	11.08%
S&P GSCI Crude Oil	-2.07%	13.68%
GLD Gold Price	4.47%	12.60%

Source: YCharts/Koyfin.com 

Switching to fixed income markets, the leading benchmark for bonds (Bloomberg  Barclays US Aggregate Bond Index) realized a slightly positive return for the second

quarter, as rising expectations for a September Fed rate cut and moderating U.S.  economic growth boosted bonds broadly.  

Looking deeper into the fixed income markets, shorter-duration bonds outperformed those with longer durations in the second quarter, as bond investors priced in  sooner-than-later Fed rate cuts. Longer-dated bonds, meanwhile, were little  changed on the quarter despite the return of disinflation and moderating U.S.  economic growth. 

Turning to the corporate bond market, lower-quality, but higher-yielding “junk”  bonds rose modestly in the second quarter while higher-rated, investment-grade  debt logged only a slight decline in Q2. That performance gap reflected continued investor optimism towards corporate profits despite some disappointing economic  reports, which led to bond investors taking more risk in exchange for a higher return.  

US Bond Indexes	Q2 Return	YTD
BBgBarc US Agg Bond	0.07%	-0.71%
BBgBarc US T-Bill 1-3 Mon	1.34%	2.68%
ICE US T-Bond 7-10 Year	-0.05%	-1.40%
BBgBarc US MBS (Mortgage-backed)	0.07%	-0.98%
BBgBarc Municipal	-0.02%	-0.40%
BBgBarc US Corporate Invest Grade	-0.09%	-0.49%
BBgBarc US Corporate High Yield	1.09%	2.58%

Source: YCharts 

Third Quarter Market Outlook 

Stocks begin the third quarter of 2024 riding a wave of optimism and positive news as inflation is declining in earnest, the Fed may deliver the first rate cut in over four 

years this September, economic growth remains generally solid and substantial  earnings growth from AI-linked tech companies has shown no signs of slowing down.  

Those positives and optimism are reflected in the fact that the S&P 500 has made  more than 30 new highs so far in 2024 and is trading at levels that, historically  speaking, are richly valued. That said, if inflation continues to decline, economic  growth stays solid and the Fed delivers on a September cut, absent any other major  surprises, it’s reasonable to expect this strong 2024 rally to continue in Q3.  

However, while the outlook for stocks is undoubtedly positive right now, market  history has shown us that nothing is guaranteed. As such, we must be constantly  aware of events that can change the market dynamic, as we do not want to get  blindsided by sudden volatility. 

To that point, the market does face risks as we start the third quarter. Slowing  economic growth, disappointment if the Fed doesn’t cut rates in September,  underwhelming Q2 earnings results (out in July), a rebound in inflation and  geopolitical surprises (including the looming U.S. elections) are all potential  negatives. And, given high levels of investor optimism and current market valuations, any of those events could cause a pullback in markets similar to what was  experienced in April (or worse).  

While any of those risks (either by themselves or in combination with one another)  could result in a drop in stocks or bond prices, the risk of slowing economic growth is  perhaps the most substantial threat to this incredible 2024 rally. To that point, for the  first time in years, economic data is pointing to a clear loss of economic momentum.  So far, the market has welcomed that moderation in growth because it has  increased the chances of a September rate cut. However, if growth begins to slow  more than expected and concerns about an economic contraction increase, that 

would be a new, material negative for markets. Because of that risk, we will be  monitoring economic data very closely in the coming months.  

Bottom line, the outlook for stocks remains positive but that should not be confused  with a risk-free environment. There are real risks to this historic rally and we will  continue to monitor them closely in the coming quarter.  

To that point, at Trubee Wealth Advisors, we are committed to helping you effectively navigate this investment environment. Successful investing is a marathon, not a  sprint, and even intense volatility is unlikely to alter a diversified approach set up to  meet your long-term investment goals. 

Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as  we’ve worked with you to establish a unique, personal allocation target based on  your financial position, risk tolerance, and investment timeline. 

We remain focused on both opportunities and risks in the markets, and we thank you  for your ongoing confidence and trust. Please rest assured that our entire team will  remain dedicated to helping you successfully navigate this market environment. 

Please do not hesitate to contact us with any questions, comments, or to schedule a  portfolio review.