US stocks finished the first half of 2024 on a strong note, but investors are speculating whether political uncertainty, potential policy changes from the Federal Reserve, and the dominance of big tech companies in the stock market could make the rest of 2024 more difficult.
The S&P 500 has risen 15% in the first half of the year, as strong corporate earnings, a resilient U.S. economy and renewed interest in artificial intelligence have fueled strong gains in stocks like chipmaker Nvidia. The index’s steady rise has produced 31 new record highs in the first half of the year, the most in any first half since 2021.
The first half of 2024 “looks very much like a perfect period for stocks,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder. “The US economy has been stronger than many, including the Fed, predicted.”
According to a CFRA study of the market in election years since 1944, the growth momentum of US stocks is likely to continue: a positive first half of the year is followed by additional gains in the rest of the year.
But the road ahead for U.S. stocks could be rocky. Global political uncertainty could be an even stronger driver of asset prices as investors focus on the U.S. presidential election. A recent JPMorgan survey found that investors see political risks in the U.S. and abroad as the top potential destabilizer for the stock market.
Investors are also increasingly concerned about the shrinking growth of the market, which is concentrated in a few technology giants. Nvidia alone — whose shares are up 150% this year — accounts for about a third of the S&P 500’s total returns, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Another – very important – uncertainty is whether the US economy can maintain the balance between tapering inflation and sustained growth that has boosted investor confidence. ? A major deviation from the scenario, known as Goldilocks, could upset the Fed’s plans to cut interest rates later this year.
“The US election outcome is likely to impact many macroeconomic outcomes in 2025 and market volatility is likely to increase,” said Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management.
Politics has a stronger impact than monetary policy
While investors are largely focused on factors such as earnings and monetary policy this year, political factors are expected to have an even bigger impact as the confrontation between President Joe Biden, a Democrat, with his Republican opponent and former president Donald Trump in the coming months will become increasingly bitter.
Signs that one of the candidates is dominating could have a ripple effect on asset markets. For many, it comes down to differing tax policies: a Democratic win in the White House and Congress could mean the party will have more freedom to raise taxes, which is often seen as is a negative impact on stocks.
The rising VIX volatility index suggests that the stock market will continue to be volatile.
The weight of tech stocks
AI hype and surging corporate earnings helped boost US stocks in the first half of 2024, but gains were concentrated in tech stocks, including Nvidia, Microsoft and Amazon.
Many investors believe that big tech’s dominance in the stock market is well-deserved given these companies’ strong balance sheets and their leading positions in the industry. But the growing weight of these stocks could make the market unstable if demand for holding technology and growth stocks wanes and investors retreat en masse.
“It’s understandable why people are moving to these names, but it’s a game of musical chairs,” said Stephen Massocca, senior vice president at Wedbush Securities. “If the music stops, there’s a problem.”
Economy continues to be strong
Most investors are cheering signs of cooling U.S. inflation and slowing economic growth this year, as it strengthens the likelihood that the Fed will cut interest rates from multi-decade highs. century. However, a more pronounced economic recession could raise concerns that rising interest rates are putting a lot of pressure on the economy.
Fed officials have lowered their forecast for the number of times the Fed will cut interest rates this year to just one, from three previously forecast, due to solid US economic growth and persistent inflation.
The market reaction to past interest rate cut cycles largely depended on whether the cuts occurred during a period of relative economic strength or in response to a sharp slowdown in economic growth.
An Allianz study of interest rate cuts since the 1980s found that, although the S&P 500 rose an average of 5.6% in the 12 months after the rate-cutting cycle began, rate cuts coupled with a challenging economic environment has resulted in much worse returns. For example, the rate-cutting cycle that began around the collapse of the dotcom bubble in 2000 sent the index down 13.5% a year later.
