2024- Second Quarter Review

Over the last two quarters we have highlighted the dominance of the largest companies in the S&P 500 (the magnificent seven) as well as the striking difference between how the S&P 500 has performed when measured by market cap vs the equal weight index.

This past quarter was no exception as A Tale of Two Markets continued to play out. As you have no doubt read in the news, the stock market climbed with the S&P 500 setting 31 record highs so far this year. This broad market index was up 3.9% during this past quarter and is up 14.5% year-to-date.

On the other hand, here are some other metrics for Q2: The Dow Jones Industrial Average was negative, losing 1.7%. The Russell 2000 Index which is made up of the smallest 2000 companies in the Russell Index was also negative, losing 3.6%. Also negative were the S&P Midcap 400 and Smallcap 600. In fact, six of the eleven S&P sectors, or over half, were negative for the quarter.

The story continues to be the strength of the largest tech companies which dominate the S&P 500 Index and specifically enthusiasm for Artificial Intelligence and all the companies that investors believe will benefit from the adoption of these advances.

Beneath these bullish AI headlines, however, concerns persist around themes we have been talking about since last year – geopolitical risks, inflation, higher-for-longer interest rates and signs of weakness among consumers as well as in the commercial real estate market.

During the quarter, large companies tied to the consumer – Walgreens, Nike, Levi Strauss and General Mills to name a few – reported weak demand for their products suggesting that consumer demand which has been robust since Covid, is slowing down. This matters because consumption is by far the largest component of GDP, accounting for almost 70%.

A positive development at the end of the quarter was that the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures index (PCE), came in at 2.6% which was a modest decline from the previous reading and showed a continued cooling. At its peak in 2022 the PCE was at 7.1%.

Given this mixed bag of data, the market seems expensive, priced at an historically high 21x forward earnings. But just like the divergences amongst the indexes and sectors, pricing ‘the market’ as a whole, may be misleading. When you strip out the ten largest stocks, the other 490 companies are priced at 17.6x forward earnings. That is certainly not cheap, but is a more reasonable valuation than 21x.

As you know, at Penobscot we focus on diverse portfolios and avoid excessive concentration in any one name so we will continue to monitor both the growth trends as well as the headwinds, focusing on well-managed companies with an emphasis on demonstrated earnings and dividend growth.

We hope you find time for some relaxation over the summer and as always, please reach out with any questions or comments.

Sources: FactSet, WSJ, NYT