Mid-Year Momentum

Quick Take

• U.S. large-cap stocks returned 15% in the first six months of 2024, as optimism continues around artificial intelligence. Bonds were rather muted, as economic data was mixed. 

• A few companies have led the U.S. and global stock market’s rally, but this isn’t abnormal. Historically, only a few names have driven all stock market wealth creation.  

• Investing in a wide range of global stocks scaled by market capitalization and spread across economic and geographical sectors provides more manageable outcomes over time. 

Global stocks returned 11% in the first half of 2024, led by the S&P 500’s 15% return and artificial intelligence (AI) euphoria. U.S. bonds returned -0.6% for the first half as rates were volatile due to mixed economic data.  

The stock market continues to crown artificial intelligence’s biggest beneficiaries. The S&P 500 marched to 31 record highs in the first half of 2024. Information technology and communication service stocks have returned 28% and 26%, respectively, this year and are the index’s best-returning economic sectors. 

International developed and emerging stocks have lagged behind their U.S. peers but are still positive for the year. Taiwan and Indian stocks have had strong returns, outpacing the S&P 500. Taiwan Semiconductor, which makes up over a third of Taiwan’s stock market, has benefited from AI adoption and growth, and financial and utility stocks have primarily driven India’s stock market. 

Of the S&P 500’s 15% return this year, over 50% can be attributed to just a handful of the  “magnificent seven” companies: NVIDIA, Microsoft, Amazon, and Meta. The darling of the AI rally, NVIDIA, has continued its linear ascent upward, returning 150% this year, and accounts for 30% of the index’s return alone.

But it’s not just U.S. tech behemoths benefitting from the AI rally. Utility stocks have returned 9% as demand soars for power to fuel artificial intelligence. Constellation Energy, an operator of U.S. nuclear plants, is up 140% to date, and Vistra Corp., an integrated electricity and power generation company, has returned 72%.  

U.S. mega-cap AI and tech companies now make up much of the U.S. stock market and exert significant influence over global stock markets. But only a few companies tend to drive stock market performance at any time. In the white paper titled “Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks,” a group of academics found that 2.4% of firms accounted for all of the global stock market wealth creation from 1990 to December 2020. A few companies are extraordinary performers, while most are lackluster. 

These tech behemoths have had stellar returns because they have demonstrated an ability to grow, become incredibly profitable, and return money to investors. These companies exert significant influence over economic activity and investor sentiment, too. So far, NVIDIA has grown revenues and earnings at triple digits to back up the incredible price appreciation. On the contrary, the dot-com bubble saw a larger pool of companies with weaker fundamentals drive returns irrationally higher. 

America’s continued outperformance versus international markets has much to do with its exposure to technology stocks. In fact, economic sector exposure tends to be the main factor influencing a country’s performance. For example, industrial stocks largely influence France’s stock market, and energy stocks influence the United Kingdom’s. Sector performance is cyclical though, and economic sectors don’t outperform forever. A portfolio of U.S. and international stocks provides adequate diversification across all eleven economic sectors. 

What It All Means 

Historically speaking, an excellent first half of the year is often followed by a good second half. This year is an election year, and the guessing game continues around the Federal Reserve’s monetary strategy, but timing these events can be an unproductive exercise. At times, the market’s interpretation to elections, etc. can be counterintuitive and difficult to rationalize.  

The fact that a few extraordinary performers drive market returns reinforces the importance of a well-diversified stock portfolio – one that includes a broad allocation to U.S. and international stocks. We believe this to be true now more than ever. Betting too much on the wrong stocks, sectors, or countries can have severe consequences for long-term performance. 

We believe that investing in a wide range of global stocks scaled by their market capitalization and spread across economic and geographical sectors is an important core part of a stock portfolio. This approach increases the likelihood of having exposure to companies that may deliver strong performance and generate superior returns. 

Investing only in U.S. stocks likely means being overweight technology stocks. Including international stocks in a portfolio ensures a proper level of diversification across economic sectors. Harnessing the power of the global stock market in a diversified fashion can lead to more manageable outcomes over time. 

Contact us at 865-584-1850 or info@proffittgoodson.com

DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy, or investment product, and should not be construed as investment, legal, or tax advice. Proffitt & Goodson, Inc. makes no warranties with regard to the information or results obtained by third parties and its use and disclaims any liability arising out of, or reliance on the information. The information is subject to change and, although based on information that Proffitt & Goodson, Inc. considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers (Interactive Data Corporation, Morningstar, etc.). The Market Categories illustrated in this Financial Market Summary are indexes of specific equity, fixed income, or other categories. An index reflects the underlying securities in a particular selection of securities picked due to a particular type of investment. These indexes account for the reinvestment of dividends and other income but do not account for any transaction, custody, tax, or management fees encountered in real life. To that extent, these index numbers are artificial and cannot be duplicated in real life due to the necessity of paying those transaction, custody, tax, and management fees. Industry and specific sector returns (technology, utilities, etc.) do not account for the reinvestment of dividends or other income. Future events will cause these historical rates of return to be different in the future with the potential for loss as well as profit. Specific indexes may change their definition of particular security types included over time. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of Proffitt & Goodson, Inc. Past performance does not guarantee future results