Markets steamed ever higher during the second quarter, featuring the S&P 500 US large-cap stock index up +4.4% (‘SPY’ Proxy ETF) for a third consecutive quarter of gains. Initially, there were concerns about rising interest rates due to an unexpected increase in the Consumer Price Index (CPI), which led to a rocky April. However, Jerome Powell, head of the Federal Reserve, reassured investors in May that rates wouldn’t rise. Good news kept coming, including a May CPI report indicating falling inflation, with Powell then hinting at potential rate cuts this Fall. This, coupled with strong earnings from Artificial Intelligence-linked technology companies like Nvidia, Advanced Micro Devices and Super Micro, pushed the S&P 500 to new record highs, up +15.2% year-to-date through the end of June.

However, the performance across various markets was mixed. The Nasdaq and S&P 500, both large-cap, tech-heavy indices, performed well, while others like the Dow Jones Industrial Average and the small-cap focused Russell 2000 posted negative returns. Indeed, small-cap value companies as a group remained negative on the year. AI enthusiasm has continued to drive these differences, while non-tech sectors, such as financials and industrials, reflected growing concerns about economic growth.

In the bond market, shorter-duration bonds outperformed those with longer durations, incorporating expectations of imminent Fed rate cuts. Lower-quality, but higher-yielding “junk” bonds rose modestly, reflecting continued investor optimism towards corporate profits with odds of a September rate cut currently hovering near 90% (CME Group). For the quarter, the Bloomberg US Aggregate Bond index finished flat, and was slightly negative on the year at -0.7% (‘AGG’).

As we head into the third quarter, the overall outlook remains positive thanks to lower inflation, potential rate cuts, steady if slowing economic growth, and relatively strong earnings. However, risks remain, including, further slowing, disappointment if rates aren’t cut, and surprise outcomes from the upcoming US elections. Importantly here, during national election cycles we often need to remind clients that our financial decision-making and our politics should likely remain separated for the best economic outcomes. Be assured we will continue to keep a close eye on the possibility of higher volatility into the elections. Meanwhile we wish you a wonderful summer.

Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice – please speak with your advisor about your particular situation.