Daily market snapshot

• Stock indexes finished mixed as technology remains the guide – After the major averages finished mixed on Monday, stocks produced a similar encore on Tuesday, but this time with tech gains helping the S&P 500 and Nasdaq to a positive close, while the Dow gave back 300 points, thanks to declines in Home Depot and Walmart shares. Cyclical and defensive areas outperformed on Monday, but today's leadership came from a rebound in technology and communication services stocks, a rather common theme in 2024. NVIDIA, which briefly became the largest market-cap company in the world last week, had fallen more than 15% from that peak before posting a solid gain Tuesday. Nevertheless, enthusiasm around AI has been a powerful driver of market gains over the last several months, with the Nasdaq up 18% and the S&P 500 rising more than 14% year-to-date. Looking across markets, commodities were weaker, with gold declining and oil prices down more than 1% to close just above $80 per barrel. Bonds are essentially flat on the day, keeping the 10-year Treasury yield below 4.25%. The 10-year rate started June near 4.6%, but softer inflation and jobs data have put some downward pressure on yields in recent weeks. *
• Sector check shows shifting leadership – The case for sector diversification remains strong, as leaders and laggards have rotated amid the progressing outlook for economic growth and Fed policy moves. Year-to-date, the best performers are technology (+26%), communication services (+25%), utilities, financials and energy (each up roughly 11%). This reflects the significant momentum behind the AI trend while also demonstrating a broadening of leadership into both cyclical and defensive sectors, consistent with our view coming into the year that gains would widen beyond just mega-cap tech (the "Magnificent 7"). Performance over the last month reflects a shift in the macroeconomic landscape, as data have shown some emerging softness, notably in consumer activity. Over the last month, a pullback in tech has narrowed its lead, with real estate, consumer discretionary, communication services and health care also making up the best sector performers. Cyclicals, like financials and industrials, have lagged a bit in June as markets adjust to the prospects of slower economic growth. Nevertheless, equity markets continue to perform well of late, as the signs of moderating consumer demand also bring the prospects of slowing inflation and support for an upcoming Fed rate cut.  **
• Housing prices remain firm – The latest reading on the S&P/Case-Shiller home price index showed that housing prices rose by 7.2% year-over-year, with the month-over-month change increasing to 0.4% from a 0.3% pace in the prior month. There are two sides to this story: 1. Home prices are still rising at a pace that is challenging to the falling inflation outlook. Shelter prices have been persistent in an otherwise favorable trend in inflation, and this data suggest this condition is not changing rapidly. We suspect the lack of housing supply is a key contributor here, with existing homeowners reluctant to give up their low-rate mortgage that would come with listing their home.  2. On the other hand, this was the lowest rate of home-price appreciation seen in four months and the first decline in the annual rate (it was 7.4% in the prior month) in a year, telling us that high mortgage rates and tight monetary policy may be beginning to bite. We don't expect a sharp decline in home-price appreciation, but we do think shelter price pressures (homes and rents) will moderate as we progress through 2024, providing some more flexibility to the Fed to pursue rate cuts later in the year.

Craig Fehr, CFA
Investment Strategy

^{*FactSet ** FactSet, S&P 500 GICs level 1 sector total returns.}

• Markets finish mixed as tech lags – Equity-market trends diverged today, with the Dow gaining 0.7% but the Nasdaq retreating 1%. Last week NVIDIA had its first down week since April and dropped 6% today, as investors rotated out of technology after a strong run in the past two months. However, the stock, which sits at the epicenter of AI development and excitement, remains up 9% in June and 142% so far this year*. The energy, utilities and consumer staples sectors all rose more than 1%*. International markets were also mixed, with European equities broadly higher, led by autos, and Asian stocks lower ahead of inflation data in Australia and Japan later this week. The U.S. dollar retreated from three-month highs against other major currencies, and Treasury bond yields were little changed*.
• Inflation and politics in focus this week - The economic calendar is light this week, with the Fed's preferred measure of inflation, the core PCE inflation (personal consumption expenditures price index), on Friday being the highlight. Based on the already released consumer and producer prices, the expectation is that inflation will continue to ease, allowing the Fed to deliver the first rate cut of this cycle after the summer. Core PCE could slow to a 0.1% gain in May, its slowest pace this year, driving the annual rate of inflation down to 2.6%. If achieved, that would be the slowest year-over-year pace since March 2021*. Markets are currently pricing in a 64% chance of a September rate cut followed by another one in December*. We think this is a realistic path, but only assuming that the next three inflation readings that precede the September FOMC meeting continue to show moderation, with prices likely needing to increase at a 0.2% or lower monthly pace. Regardless of whether the Fed cuts one or two times this year, the bigger picture is that the Fed will likely be embarking on a multiyear rate-cutting cycle to normalize policy. Investors will also be paying attention to politics this week. The first U.S. presidential debate between Joe Biden and Donald Trump is on Thursday, and the first voting round of the French parliamentary election is on Sunday.  
• June set to extend gains amid narrow leadership - With a few days to go, June is on track to cap another positive month, adding to this year's strength in equities. However, the gains in the second quarter have been lopsided, with AI-related stocks and mega-cap tech driving most of the upside. The top-10 stocks by market capitalization in the S&P 500 now account for 37% of the index, making the index the most concentrated it has been over the past 30 years*. To us the increasing concentration highlights two things. First, that innovation is alive and well, as AI development has the potential to increase productivity across different sectors of the economy. The strong earnings growth of the companies that are enabling the development of AI supports the outperformance of mega-cap tech. But a second and equally important point is that diversification matters, as it can help manage portfolio risk if one investment style falls out of favor. The rally in tech may be due for a breather, and we continue to see catchup potential in other parts of the market. As positive earnings momentum broadens to other sectors in the back half of the year and the Fed delivers its first rate cut, market leadership may broaden as well.

Angelo Kourkafas, CFA
Investment Strategist

^*FactSet

• Stocks close lower - Major equity indexes closed lower on Friday but held onto gains for the week. Large-cap stocks trailed small- and mid-cap stocks for the day*. Sector performance was mixed, with consumer discretionary and communication services leading to the upside, and with technology and energy lower*. In global markets, Asia was mostly down after Japan core inflation of 2.5% was cooler than expectations of 2.6%, and Europe was also lower. Bond yields were little changed, with the 10-year Treasury yield at about 4.25%. The U.S. dollar advanced versus major currencies as U.S. interest rates remain higher than in most developed countries. In the commodity space, WTI oil and gold traded lower.
• Flash PMI edges higher – Markit's preliminary Purchasing Managers' Index (Flash PMI) for June was released this morning, with the composite rising to 54.6 in June, exceeding expectations for 53.4 and last month's reading of 54.5*. The services index led the composite index higher, coming in at 55.1, also above the estimate of 53.5 and prior reading of 54.8. Manufacturing was 51.7, compared with expectations for 51.0* and May's figure of 51.3. PMI is a diffusion index, meaning that readings above 50 indicate expansion, while those below 50 reflect contraction. Output has expanded for 17 consecutive months, in our view reflecting a resilient economy that continues to grow at a healthy pace, providing support for strong equity market performance.
• Leading Economic Indicators Decline – The Conference Board LEI declined 0.5% in May, below projections for -0.3% but above the prior month's 0.6% drop. The change was driven by a decline in new orders, weak consumer sentiment about future business conditions and lower building permits**. While this reading is an early indication that the economy may slow in the months ahead, the Conference Board commented that it does not signal a recession. Taken in combination with other recently-released data, we believe it reflects a strong economy that is slowly cooling toward a more sustainable pace.

Brian Therien, CFA
Investment Strategy

^{*FactSet ** The Conference Board}

• Stocks closed mixed: Stock markets closed with mixed performance on Thursday, as the Dow Jones moved higher while S&P 500 and the technology-heavy Nasdaq both fell. Nonetheless, for the full year, the Nasdaq is up about 18%, while the S&P 500 is up almost 15%. The Dow Jones, however, is up just about 4% year-to-date*. Keep in mind that this index is more heavily weighted towards sectors like financials, healthcare, and industrials, while the S&P 500 and Nasdaq have higher weights in the technology and growth sectors which have been leading markets higher. Meanwhile, Treasury yields also ticked higher on Thursday, although they have fallen rapidly in recent weeks, particularly after inflation data for May was softer than expected. The 10-year Treasury yield was up about 0.03% to 4.26% but remains well below the April highs of 4.7%*. The move lower in bond yields in recent weeks has supported better performance in both stock and bond markets.
• Mega-cap technology continues to drive market performance: After a strong year of gains in 2023, the mega-cap technology stocks have continued to see momentum in the first half of 2024. In fact, just two sectors, technology and communication services, both of which house many of the large-cap artificial intelligence (AI) stocks, are outperforming the broader S&P 500. These two sectors are up over 23% each this year thus far, versus the S&P 500 up about 15%*. The mega-cap technology companies have not only have delivered on earnings, but have fortress cash positions, allowing them to re-invest in their businesses and return value to shareholders. However, we continue to believe that market leadership should broaden beyond mega-cap technology for a few reasons. First, we see earnings growth broadening in the back half of the year. While the contribution to earnings growth in Q1 came largely from technology sectors, by Q4 earnings growth will be driven equally by sectors outside of technology, which should support these sectors as well. Second, we believe that as we get closer to Fed rate cuts, cyclical areas of the market may play catch-up as yields moderate. And finally, while the enablers of AI like semiconductors have gained most thus far, over time we believe the efficiencies from AI will be felt across sectors, which should support broader stock leadership as well.
• All eyes turn to PCE inflation next week: Markets will be turning their focus to more inflation data next week, as the personal consumption expenditure (PCE) inflation data for May is released next Friday. This tends to be the Fed's preferred inflation metric, and it is the one the FOMC references in its quarterly forecasts as well. The expectation is for headline PCE inflation to fall from 2.7% year-over-year to 2.6%, while core PCE inflation (excluding food and energy) is expected to move lower from 2.8% to 2.6%*. Of note, in its June meeting last week, the Fed forecast core PCE inflation to be 2.8% in 2024*. If inflation falls below this forecast next week, and stays there for a consistent period, then the Fed may have scope to cut interest rates this year, perhaps more than the one time they outlined in their updated views last week. In our view, one or two rate cuts are likely in the back half of 2024, driven by a bumpy path lower in inflation, as well as some cooling in the U.S. labor market.

Mona Mahajan
Investment Strategy

^*FactSet