Hello, everyone, and welcome to the June Market Compass. It's hard to believe we've reached the mid-year point for 2024 and we hope everyone is enjoying the warmer weather, longer days, and perhaps some well-earned downtime in the weeks ahead. Now, mid-year is also a good time to reflect on where we've been thus far and what we're watching going forward.
So what I thought I'd do today is first go through a market scorecard to check in on what markets have been doing and any key trends we're seeing. And then I'll highlight three factors we're watching in the second half of 2024 that we believe will be the key drivers of the markets and the economy. These include inflation and central bank policy, corporate earnings growth, and the US presidential election.
So first and foremost, how did markets do in the first half of 2024? Overall, it was a strong start to the year, especially in US stock markets. If we look at this chart on annual returns for the S&P 500 and the US Aggregate Bond Index, we can see that after a strong year in 2023, with the S&P 500 up over 24%, stocks continue to perform well in 2024. In fact, the S&P is up over 13% as of mid-June.
However, the bond market has lagged and is down slightly for the year. This is in part because interest rates have remained elevated as the Federal Reserve has not started cutting rates. This has put downward pressure on bond prices.
Looking across a broader set of indexes and asset classes, we can also see a couple of interesting trends. The momentum in the markets continues to be driven by areas like artificial intelligence and technology sectors, with that Magnificent Seven cohort and the tech-heavy NASDAQ leading the way higher. This has also supported S&P 500 returns, which have about a 50% weight to technology and growth sectors.
Now, as we move right on this chart, we can see that returns in areas like international equities, mid-cap stocks, and that equal weight S&P 500 are more modest in the 4% to 6% range. And then the areas that are lagging so far this year are the more interest rate-sensitive parts of the market, including small-cap stocks and bonds.
So as we head into the second half of the year, one theme we continue to monitor is the path of inflation and the path of the Fed. Now, while inflation had surprised to the upside during the first few months of 2024, more recently, we're actually seeing inflation come in cooler than expected and that disinflation trend gradually is resuming.
In our view, while we may not get a straight line lower, there are catalysts that may move inflation rates closer to the Fed's 2% target. These include shelter and rent components of core CPI, which may move lower as they play catch-up to real-time data, and a potential softening in wage gains, which should lead to easing services inflation. Now, of course, better inflation data would give the Fed more confidence in embarking on a rate-cutting cycle.
At the Fed's June meeting, the updated dot plot pointed to just one rate cut in 2024, although it still indicated a multi-year rate-cutting path ahead. So in our view, if we do get two or three better inflation prints or the labor market and wage growth softens more than expected, we could see up to two rate cuts this year.
Now, more broadly, we believe the Fed is poised to gradually bring rates down to a more neutral level in the next one to three years ahead. If they can do this without a significant deceleration in the economy, then both stocks and bond markets should be well supported.
Another key element we're watching in the second half of 2024 is earnings growth. We know stock markets are underpinned by earnings growth, perhaps more so than any other factor. Now, the good news is that S&P 500 earnings growth is expected to move higher after mixed results last year. Earnings growth for 2024 is forecast to come in at nearly 11% versus just about 1% in 2023.
Now, while last year's stock market returns were driven in large part by valuation expansion, particularly in that tech and growth part of the market, this year, markets may be supported by earnings growth as well. Also of note, in the first half of 2024, earnings growth for the S&P 500 companies was largely driven by that tech AI and growth sector. However, as we head to the third and fourth quarters of 2024, we would expect a broader set of sectors to contribute to earnings growth. This may lead to a broadening of market leadership as well.
Finally, perhaps one of the more anticipated events of the second half of 2024 is the US presidential election, which will occur on Tuesday, November 5 of this year. Now, while it's still early and we continue to hear more specifics on policy agendas in the months ahead, we can take some lessons from history and US elections.
For example, since 1928, in a four-year election cycle, year three tends to be the best year for markets and perhaps what we saw last year. And notably, year four, the year we're in now, tends to be second best, perhaps as some uncertainty is lifted.
Now, in addition, while we do tend to see volatility in the six to eight weeks leading up to election day, in the weeks that follow, market returns tend to rise regardless of the party that's in office. Also, in this election, we would expect US Congress to remain fairly divided, which likely means checks and balances remain in place regardless of who is in the presidential seat.
Now, this may mean it will be difficult to pass any new major legislation or regulation, but markets tend to prefer this environment of political gridlock, as it means a more transparent operating environment for companies to run their businesses. More broadly, we know that over the long run, markets tend to follow fundamentals-- those include inflation, the Fed and earnings growth-- more so than politics and elections.
So overall, after a solid start in the first half of 2024, with markets up over 13% thus far, we're looking towards an eventful second half of the year. Now, we would expect to see inflation continue to gradually cool and the Fed to begin an interest rate-cutting cycle, earnings growth to hold up and expand, and the presidential election to potentially spark some volatility, although we would consider using any bouts of volatility as an opportunity to diversify, rebalance and add quality investments at better prices.
We believe the fundamentals support a continuation of the current bull market face in perhaps the years ahead. So with that, I thank you and I look forward to a fantastic second half of 2024. See you right here next month on the Market Compass.