Equity Markets continue upward with S&P 500® Index reaching record highs

06/24/2024 — Key takeaways:

• Equity markets continued their impressive run, with the S&P 500® Index hitting 31 record highs this year.
• Institutional investors and Wall Street strategists are increasingly betting on a soft landing.
• The consumer is showing some signs of strain and price sensitivity ahead of next week’s inflation reading.

Drivers of market movement

Equity markets continued their upward move in the holiday-shortened week, with the S&P 500® Index closing at record highs twice this week and 31 times this year, crossing over 5,500 for the first time and returning 15% with a week to go in June. Risk metrics are remarkably calm, with credit spreads near cycle lows. Investor sentiment, financial conditions, momentum, and the put/call ratio reflect investors’ optimism. Volatility remains quite calm, with the VIX below 14 and the MOVE Index well below the highs from recent years. The primary pushback from bears includes the top-heavy nature of market breadth, with just 23% of the S&P 500 outperforming this year.

Institutional investors are at their most optimistic in nearly three years according to Bank of America’s Global Fund Manager Survey, with cash levels at the lowest level since June 2021. Fund managers are the most overweight stocks and underweight bonds since November 2022, as a soft landing is now consensus. Inflation continues to be the primary risk identified, though it has eased modestly as election uncertainty and geopolitics increase. The Magnificent 7 is the most crowded trade in the history of the survey, though allocations to technology fell to the lowest level in 30 months, with the overweight halved since the peak in February. This survey echoes recent movement from Wall Street Strategists, with Stifel and Evercore ISI the first to crack the 6,000 threshold for a year-end target. The average target, however, remains below the current level by 2%.

There are growing signs that the economy is slowing, highlighted by a weak reading on May retail sales of 0.1%, below the consensus of 0.3% and April’s 0.4%. The headline number was impacted by falling gas prices, as the control group sales, included in the GDP calculation, were in line with estimates of 0.4%. The report echoed recent commentary from consumer-focused companies, reflecting an increasingly cautious consumer and rising price sensitivity. Optimists, however, note that this is consistent with the soft-landing narrative. Other economic data reflecting the slowdown included steadily rising initial unemployment claims and slowing housing data. The Atlanta Fed’s GDPNow™ Model still forecasts strong growth of 3.0% with a week left in the second quarter, though the Citigroup Economic Surprise Index is at the weakest level in nearly two years at -28.

Government spending continues at a historic level, as the total public federal debt approaches $35 trillion, rising roughly $1 trillion every 100 days. The CBO boosted the outlook for the fiscal year deficit by $0.4 trillion to $1.9 trillion. The updates were driven by recent legislation, including aid for Ukraine, Israel, and countries in the Indo-Pacific region, and increasing discretionary spending by nearly $1 trillion over the next decade. The largest increase ($145 billion) was from the Biden administration’s student loan forgiveness program. The US Treasury is increasingly reliant on the issuance of short-term instruments despite the inverted yield curve, as regulatory changes drive demand. Bills with maturities of less than a year account for 22% of issuance.

This Fund Manager Survey described above echoes recent movement from Wall Street Strategists, with Stifel and Evercore ISI the first to crack the 6,000 threshold for a year-end target. Both of those targets were boosted from 4,750, which is a 26% jump (from a 13% decline to a 10% increase). Goldman Sachs increased their target to 5,600 from 5,200, driven by “stellar” earnings growth by the large-capitalization technology companies. The average target currently sits at 5,400, up 4% from last month, but it is still 2% below the current level. In each of the past five months, the average year-end estimate was below the level for the S&P 500 Index at the time, reflecting the consistent level of collective caution and pessimism. The average year-end estimate was 4,865 at the beginning of the year, 12% below the current level. Similarly in 2023, the average target at 12/31/2022 ended up being 16% below the actual.

Details on performance

The strong market rally continues with the S&P 500 Index closing at record highs this week, with investors increasingly pricing in a soft-landing scenario. The S&P 500 Index gained less than 1%, while the Dow Jones Industrial Average gained 1% and the NASDAQ Composite Index was down less than 1%. Growth indexes were neutral to value, and large caps were neutral to small caps as well. Leading sectors for the week included energy, consumer discretionary, and financials, while technology, real estate, and utilities lagged. Volatility remains low with the VIX closing at 13, while trading volume was elevated.

Domestic markets underperformed global markets, with the MSCI EAFE® Index and MSCI Emerging Market® Index both outperforming the S&P 500 Index. Asian markets were slightly mixed following mixed economic data, with Taiwan and China up 3% while India was down 1%. European markets were strong, rebounding after the dust of last week’s elections settled, with France up 2%, Germany up 1%, and the UK up 1% as well. Latin America was strong, with Mexico up 3%, and Brazil up 1%. The trade-weighted dollar index was up by less than 1% but remains up by 5% for the year.

Investor optimism persists, with the 10-year Treasury yield up 0.07% to 4.27%. The 2-year yield is up as well by 0.05% to 4.74%, with little movement of the spread between the two yields. Credit spreads remained tight and global rates were little changed. Commodity prices were higher with the S&P Goldman Sachs Commodity Index up 1% for the week and 9% for the year. Crude prices are up 4% as demand surges. Precious metals were mixed, silver was up 1% and gold was down by less than 1%, and agricultural commodities were little changed.

Strong markets are increasingly allocating to equities, adding $26 billion in the latest week. Domestic equity markets rose $20 billion, growing for the ninth week, with notable strength in emerging markets at $2 billion. Fixed income markets rose for the 26th week, gaining $6 billion, led by investment-grade up $5 billion, while high yield has seen outflows for the second week. Money market funds lost $16 billion in the latest week. Investor sentiment remains mixed despite the steadily rising markets. The CNN Fear & Greed Index remains well below neutral at 42 on a scale of 0-100, up modestly from 38 a week earlier. The AAII Sentiment Survey was more optimistic, with the percentage of bulls down slightly to 44% from 45% last week, but it remains roughly double the percentage of bears at 23%.

What to watch

Inflation data is again in focus next week, with the Fed’s preferred metric (PCE report) on Friday. Other notable data includes consumer confidence on Tuesday, new home sales on Wednesday, durable goods and revised first quarter GDP on Thursday, and personal income and spending, and consumer sentiment on Friday.