Monthly Market Update - July 2024


Highlights:

  • The S&P 500 rose 3.6% in June, with a year-to-date return of 15.3%, driven by mega-cap stocks.

  • Over 30% of the S&P 500 is concentrated in "the Magnificent Seven" stocks, influencing index performance.

  • Weakening economic indicators such as manufacturing data and consumer confidence underscore the disconnect between stock market performance and economic realities.

Looking at just the headline indices, June was another stellar month for stock investors. The S&P 500 Index was up 3.6% for the month, bringing the year-to-date return to 15.3%. But underneath this banner was a different story. The equal-weighted S&P was down for the month, as were the major mid-cap and small-cap indices. So, too, for the value indices. For the month, only three sectors, Technology, Consumer Discretionary, and Communication Services, beat the overall index. Six of the 11 S&P sectors were negative. More than 100% of the month's gains were concentrated in that coterie of mega-caps christened "the Magnificent Seven."

Today, a buyer of the S&P 500 is placing more than 30% of that investment in these seven stocks, so index investing alone provides inherent momentum behind their pricing. But the rise of these stocks, closely linked to the AI boom, is fundamentally an earnings story. This has been the case for some time. For instance, in the first quarter of this year, the blended earnings rate of the companies in the S&P 500 was 0.5%; without the Mag7, this dropped to -6.0%.* The equal-weighted S&P 500 has a forward price-to-earnings (P/E) of 16x; the Mag7's is 30x.

This bifurcation of earnings and stock returns suggests that the overall economy may not be as hot as the stock market, an intuition that has plenty of real evidence. Manufacturing continues to be soft, with the Purchasing Managers’ Index (PMI) dipping again in May, well below the 50 threshold, indicating contraction. Consumer confidence slipped in June, although not as much as feared in the face of persistent higher prices. The consumer is as bifurcated as the market, with affluent households buoyed by the rising stock market and cushioned by the relatively small percentage of income spent on goods. Meanwhile, wage gains at the lower end of the income spectrum have not been sufficient to cover the increased cost of goods and services, and these households are increasingly stressed. Small business sentiment confirms the division, with half of owners in the latest survey projecting conditions to worsen for the remainder of the year. Meanwhile, GDP is still expanding, albeit at a slowing rate, and the employment environment remains healthy, with the standard unemployment measure hovering near historic lows.

Persistent inflation and solid employment have conspired to keep hoped-for Federal Reserve cuts on hold. The rate of inflation dropped in June, but it did so at a pace that was uninspiring. While the consensus still points towards a quarter-point Fed cut in September, this minor shift seems unlikely to spark much change. High mortgage rates continue to throttle the housing market, and the yield curve seems stuck in its inversion.

Given the gap between stock market index returns and the underlying realities, we are discomforted with the animal spirits calling for a continued piling on to current market winners. We continue to seek ways to participate in the rally while moderating the risk we believe is inherent in extremely narrow markets.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

All investing involves risks including the possible loss of principal. There can be no assurance the asset allocation portfolios will achieve their investment objectives. The portfolios may invest in equities which are subject to market volatility. In addition to the general risk of investing, the portfolio is subject to additional risks including investing in bond and debt securities, which includes credit risk, prepayment risk and interest rate risk. When interest rates rise, bond prices generally fall. Securities rated below investment grade are more sensitive to economic, political and adverse development changes. International equities involve risks of economic and political instability, market liquidity, currency volatility and differences in accounting standards.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

The S&P 500® Index is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance.

Price-to-Earnings (P/E) Ratio: measures how expensive a stock is. It is calculated by the weighted average of a stock’s current price divided by the company’s earnings per share of stock in a portfolio.

The ISM Services PMI® is a composite index based on the diffusion indexes for four of the indicators with equal weights: Business Activity (seasonally adjusted), New Orders (seasonally adjusted), Employment (seasonally adjusted) and Supplier Deliveries. An index reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. Supplier Deliveries is an exception. A Supplier Deliveries Index above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

Yield Curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main types of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve) and flat. Yield curve strategies involve positioning a portfolio to capitalize on expected changes.

Upon request, Madison may furnish to the client or institution a list of all security recommendations made within the past year.

Diversification does not assure a profit or protect against loss in a declining market.