Monthly CIO Update | September 2024

MARKET WRAP

Despite a deep pullback in equity markets to begin the month, the major indices rebounded sharply to post gains by the end of August (S&P500 +2.4%, DJI +1.8%, Nasdaq +0.7%). The S&P500 fell 6% in first three trading days of the month and the Magnificent 7 were down nearly 10% in the first week. However, the sell-off was short-lived as solid Q2 earnings results helped ease growth fears, and the confirmation of imminent Fed rate cuts bolstered equity markets. The S&P500 closed August just 0.3% away from a fresh all-time high, marking the swiftest market rebound since March 2020.

Market performance continued to broaden beyond BigTech with the equal-weighted S&P500 outpacing the index slightly and setting a record high. The month’s best-performing sectors leaned defensive, with Consumer Staples (+6.0%), Real Estate (+5.7%) and Healthcare (+5.1%) all outperforming.

Q2 earnings season closed with 79% of companies beating earnings estimates. However, sales beats were only 60% (lowest level in~5 years) suggesting that efficiency improvements rather than growth are driving the beats.

On the macro side, heightened volatility at the start of the month along with concerns around weakening economic data pushed investors to price in more aggressive rate cuts from central banks globally. In his speech at Jackson Hole, Fed Chairman Powell greenlit a September rate cut, stating that the “time has come” for a policy adjustment. This contributed to a positive month for fixed income, with Treasuries rallying towards their 4^th consecutive month of gains. Yields declined across the curve with the 2Y yield falling 38bps. By month-end the yield curve had almost fully uninverted with the 10Y-2Y spread widening to as high as 2bps.

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INVESTMENT OUTLOOK

MACRO: Recent moderation in the labor market underscored by softer than expected payroll growth and material downward revisions has exacerbated concerns about the strength of the US economy. However, we see fears around a US recession as exaggerated. While GDP growth is slowing and inflation has dipped below 3% for the first time since March 2021, consumption appears resilient, layoffs remain at pre-pandemic levels and real income growth is positive across cohorts. The Fed has maintained up to 525bps of easing capacity and is well positioned to combat further weakness in the labor market or a negative growth shock. The July FOMC meeting minutes along with Fed Chair Powell’s recent comments at Jackson Hole have confirmed a September rate cut and our base case forecast of a 25bps cut at the September meeting remains unchanged.

EQUITIES: Q2 corporate earnings have shown that revenues are normalizing at healthy levels (+2.4% y/y ex. energy) and the earnings outlook appears stable. Equity market valuations should be supported by falling yields and we expect to see further expansion in market breadth as rates comedown. Against this backdrop, defensives, long-lived assets and longer duration equities all appear attractive, with financials in particular poised to benefit from a steepening of the yield curve.

FIXED INCOME: A soft landing remains our base case scenario and continued economic growth could allow bond yields to remain at attractive levels. However, we see rotating out of cash into high quality fixed income as a compelling opportunity to lock in current elevated yields and enhance portfolio resilience against potential volatility and growth shocks.

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CHART OF THE MONTH

While the Fed’s rate hikes typically have a chilling effect on corporate spending, the current interest rate environment has had very little impact on Big Tech’s capital expenditures amidst the AI arms race. Magnificent 7 capex reached a record high in Q2, dampening the negative impact of tight monetary policy and providing a significant tailwind to the economic outlook.

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