The Vintage Year for US Stock Markets That Few Expected

In an unexpected turn of events, 2024 has emerged as a vintage year for US stock markets, defying initial expectations of a challenging economic landscape. Despite a bumpy third quarter, the US stock market finished the period up 6%, driven by a significant rotation out of big-cap growth and AI stocks and into value and smaller company names. This shift, coupled with a dovish stance from the Federal Reserve, has fueled a surprising surge in US stock market performance.

The rotation away from large-cap growth and AI stocks was primarily driven by renewed recession fears and other factors, leading to a brutal selloff in August. However, the market rebounded, finishing the quarter on a strong note. The Fed's 50 basis point rate cut in September further boosted the market, signaling a shift towards an easing cycle. This dovish stance, coupled with falling rates, attracted investors to riskier assets like US stocks.

The tech sector's strong performance, despite high valuations, has been a significant driver of U.S. large cap indexes. Tech stocks, led by the 'Magnificent 7' cohort (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla), returned 34% year-to-date as of August 29, 2024. Their high valuations, driven by growth potential, propelled U.S. large cap indexes despite concerns about premium prices.

Bonds have proven to be an effective portfolio diversifier during periods of stock market volatility in 2024. When stocks experienced a sharp dip, with the S&P 500 falling by 7% between July 16th and August 5th, bonds provided a stabilizing force. The Bloomberg U.S. Aggregate Bond Index rose by 2%, and long duration Treasuries, as measured by the ICE U.S. Treasury 20+ Years Bond Index, rose by 5.5%. This demonstrates that bonds can help mitigate portfolio risk during market fluctuations.

The rotation towards value and smaller company names was supported by our valuation analysis, which indicated that large-cap growth stocks were fully valued or overvalued, while value and smaller company names offered more attractive opportunities. As a result, investors benefited from allocating to more reasonably priced sectors and companies.

In conclusion, 2024 has emerged as a surprising vintage year for US stock markets, driven by a rotation out of big-cap growth and AI stocks and into value and smaller company names. This shift, coupled with a dovish stance from the Federal Reserve, has fueled a surprising surge in US stock market performance. Tech stocks' strong performance, despite high valuations, has been a significant driver of U.S. large cap indexes, while bonds have proven to be an effective portfolio diversifier during periods of stock market volatility.