May 2024 Market Newsletter

May Market Newsletter

 

Since the last newsletter, we have seen a recovery in stocks, which are now holding near record highs in North America, while expectations of the Federal Reserve easing monetary policy are reducing and yields are trending higher. With the first quarter reporting season winding down, we have seen strong earnings on both sides of the border. With 95% of the S&P 500 companies reporting, 78% have topped earnings estimates, with technology and healthcare leading. In the US, earnings growth is tracking at 8% year-over-year. Financial markets, being a leading economic indicator projecting six to twelve months into the future, show an outlook that closely resembles the last 12 months: high rates, stubborn inflation, and strong corporate fundamentals.

 

Reflecting on the first half of 2024, the continuation of the AI trade has dominated the markets and driven them to all-time highs due to the outsized performance of the mega-cap tech names. As a result, we continue to see divergence between the equal weight and market weight S&P 500 as concentration risks increase. With inflation continuing to be sticky, markets remain reliant on monthly economic data to gauge central banks' monetary policy paths. Over the course of the first five months of the year, we have seen rate cut expectations align with our thoughts that there will be 1-2 cuts in 2024, likely backloaded to the end of the year.

 

We believe that in the current environment, there will continue to be bouts of choppiness and pullbacks. BMO Capital Markets research indicates it is highly unlikely that the 5.5% pullback we saw in April will be the worst for 2024, as historical data shows that the average drawdown for the second year of a bull market is 9.4%. We remind clients that it is normal and healthy to experience drawdowns in a bull market.

 

With solid corporate fundamentals and a benign economic outlook, we anticipate a favorable environment for equities but remain cautious as valuations are not cheap. In the current market environment, we continue to believe in the importance of stock picking and identifying high-quality companies. Therefore, we recommend a barbell portfolio between quality cyclicals and quality growth. Additionally, we continue to seek to lock in higher yields in the fixed income portion of portfolios by expanding duration when there are spikes in yields.

 

Overall, we continue to see upside in financial markets as we transition towards the second half of 2024. Corporate fundamentals remain strong, and the economy is holding up better than anticipated as the soft landing story continues to hold. While there is potential for upside surprises from inflation data, April’s CPI data showed an encouraging signal that the recent spike in inflation pressures appears to be moderating. We maintain our base case of two rate cuts by the Federal Reserve in September and December. Upcoming, the next Federal Reserve meeting will be on June 12th, and the next Bank of Canada meeting will be on June 5th.

 

Debbie, Chris, Mark, and Rosemary

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Market Performance

Source: BMO Economics

Source: BMO Economics