There are years that ask questions and years that answer

“There are years that ask questions and years that answer”

–Zora Neale Hurston

In our year end letter we shared our concern that 75% of the S&P 500 market appreciation in 2023 was driven by only seven stocks. We believed that further advances in the market would occur in 2024 only if a broader number of stocks participated. So far, we’ve been wrong. In fact, five stocks are responsible for 60% of the S&P 500’s 15% advance year to date. These companies are Nvidia, Meta, Amazon, Microsoft, and Apple. Thankfully, we own three of them. One stock, Nvidia, is responsible for 31% (5 percentage points) of the stock market’s return. Excluding only Nvidia and the stock market would be up 10%, and if one were to remove all five the market would be up only 6%.

We believe a broader number of stocks will drive performance in the second half of 2024. Overall earnings for companies that comprise the S&P 500 are forecast to increase 11% in 2024 and 15% in 2025. Companies owned in client accounts have reported earnings growth of 22% in the first quarter and are forecast to grow earnings by almost 25% in 2024, which should help client portfolios perform well over time. The valuation of the stock market on a price to earnings basis is 22x for 2024 and 19x for 2025, which is toward the higher end of historic valuation.

As we prepare for the second half of the year we will be monitoring several items. First, inflationary pressures, while stubborn, appear to be slowly abating. At the same time, there are signs that the consumer is moderating spending. The ISM Manufacturing index is also showing signs of cooling. Therefore, an important theme in the second half will be whether the Federal Reserve is successful in orchestrating a soft landing to bring down inflation. The Fed has yet to cut interest rates and the Fed Funds rate remains at 5.5%. Many analysts predicted four or more rate cuts in 2024, but forecasters now predict anywhere from zero to two cuts in 2024. Regarding the Presidential election in November, we have learned in our careers the best path is to be apolitical in trying to time the market. An investor that choses to own the stock market depending on which political party is in power underperforms the apolitical investor.

Thank you for entrusting us with the management of your money. We look forward to speaking with you soon.

Sincerely,

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