June 24, 2024  |  3 MIN READ

Weekly Market Update

S&P 500 Reaches 5,500 Then Retreats

What happened last week?

Last week, the S&P 500 and Dow jumped by 0.61% and 1.45%, respectively, while the Nasdaq was flat. During the week the S&P 500 reached 5,500 for the first time intraday on Thursday but then stocks slipped into a “Triple Witching” Friday where derivatives on stocks, stock indices and futures contracts all expired at the same time.

Experiments in AI will yield both successes and failures. At an individual firm level, some of these gains and losses will be significant. With optimism, we would note that the aggregate gains in capital spending in the US economy have not shown any unusual excesses even as AI booms within.

Can a technological innovation be profound, “unstoppable,” and overpriced by investors? History is unequivocal: it can.

Yet that single observation is the mere starting point for a very difficult set of questions for investors with their long-term portfolio success in the balance.

Our guesswork on the future of AI and US tech is as follows: 1) AI technology is merely at an incipient stage which has yet to result in an aggregate stock market bubble; 2) Like the advent of the internet, an explosion of market gains may come and go in exaggerated fashion.

In our view, innovation that enables economic growth is the equity market’s strongest driver of long-run returns.

3 Things to Know

Mid-Year Market Turbulence

In the first quarter 2024, these largest US tech leaders grew EPS 51.7% year-over-year and seem poised for a 25% EPS gain for this year. Markets at present seem to view them as immune to any slowing.

They’ve risen in value since 4Q 2022, while other shares have gained much less. During this time, bond yields have dropped as investors have feared for the economic and global political outlook.

An inconvenient truth for investors is that innovation doesn’t follow easily predictable patterns sometimes seen elsewhere in the economy.

The sustainability of tech leaders’ returns has varied widely. Only hindsight can make it seem easy to judge how well a firm would profit from its invention and critically, which firm, among competitors, would ultimately succeed.

For example, 1990s tech highflyers Cisco Systems and Apple had very different returns. These were unforeseeable by investors until there was hindsight.

Apple and Microsoft — firms founded in the 1980s — are now two of the largest three firms in the world by market cap. Other leaders of the late 1990s such as IBM, Cisco, GE, Intel and AT&T are worth less today than their value 25 years ago.

The irony of this analysis is that every firm that rose to the top 10 enjoyed higher returns than the broad market to get to that level. But seeking future outperformance is different from simply assuming the past innovators will continue to outperform.

As already witnessed a mere year after the demonstration of Chat-GPT, the firms that have the potential to grow and sustain profits from AI development have the possibility to be the firms that become the world’s market cap leaders.

But who will they be and how long will individual firms sustain their leadership?

It’s fiction to believe this can be predicted with great confidence in advance. With this knowledge, we believe investors should seek to balance the reward against the idiosyncratic risk endemic in portfolio concentration.

Surprise! Elections Are Unpredictable

Just as it seemed as though the US election would win awards for surreal disharmony, France has grabbed headlines with shocking dual movements of left-wing and right-wing populism, sure to rock centrist sensibilities.

As discussed in the New York Times and other media (see our Europe: Electoral Implications report), President Macron has called to dissolve the lower house of parliament. France will now hold new elections after a surge in support for French nationalists in European Parliamentary votes this month.

His call to battle the right has helped unify the French left.

Either extreme could potentially build a coalition to govern after second round elections on July 7.

Typically, EU parliament votes are not market moving issues likely to impact the outlook for the economy. However, the surprise unification of left-wing parties, including communists, has rocked Europe’s markets. This is just as its economies are coming to grips after a very weak 2023.

Nonetheless, the costs of moving France away from centrist policies will be a market factor for the time being. Investors will have to live with French uncertainty until at least July 7 when second round votes conclude. It is possible that political concerns impacting European and global markets will increase if certain parties take action that threatens growth, profits, and sustainable government finance.

It is also possible, however, that just as in the case of Italy, a political shift in power — once unthinkable — fades into the background as a market concern.

The recent EU parliamentary vote surprises — with elections in Mexico and India before it — should remind investors that comfortable polling data should not be taken for granted. Every election of note this year has generated surprises.

The UK general election looms on July 4, and the US Presidential and Congressional election of November 5 follows. There are industry implications to consider, but also the larger observation that politics alone will not determine the economic and market outlook in economies with significantly free markets like the UK and US.

Citi Global Wealth Investments
Charlie Reinhard - Head of North America Investment Strategy
Lorraine Schmitt - North America Investment Strategy

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