2024 Midyear Market Update and Investment Trends

Navigating financial markets, leveraging opportunities, and managing investment risks in a volatile economic landscape require a wide-ranging understanding of various factors and trends. It’s crucial to stay informed and adaptable in this ever-changing environment.  

We recently hosted a fireside chat where our own Michael Morris and guest speaker Alex Chaloff, the chief investment officer of Bernstein Private Wealth Management discussed how the economy has fared in the first half of 2024 and some of the major investment trends we’re seeing. What follows is a recap of Mr. Chaloff’s replies. 

State of the S&P 500 

Despite being expensive, the S&P 500 is still an attractive investment. A handful of companies drive the market, but there's still value in the broader market, and earnings are helping offset concerns about a growth slowdown.  

Above-trend growth and positive earnings takeaways are supportive. Major index revision ratios have consistently risen over the past few weeks, and that trend could continue if inflation stays elevated in the coming months. Margins have been a key driver of better-than-expected earnings, and companies will continue to ramp up measures to manage expenses and keep costs under control. 

Inflation and interest rates 

Inflation has been a hot topic, though we believe we're through the worst. The rate of change has slowed, but we're not returning to the prices we saw in previous years; organizations can adjust their pricing, and consumers are okay with spending. Inflation isn't over, but the rate of change is slowing. 

Interest rates are another area of concern, but we believe we’re through the worst on that front as well. The Federal Reserve has been cautious about cutting rates, which is good. Markets can still be profitable, and the economy can grow with the current interest rates. 

Geopolitical influences 

Geopolitical risks are always a factor in the financial markets. The situation in Iran, Russia’s actions in Ukraine, and China’s stance on Taiwan all have potential implications for global markets. However, investing for a specific outcome is hard, so we try to remain as dispassionate as possible. 

Outside the U.S., European stocks are benefiting from the low earnings bar. Valuations in Europe and outside the U.S. are exceptionally attractive relative to the U.S. and its history. China has had a couple of positive surprises on the macro front and a nice market reaction.  

In the U.S., some prominent strategists have raised their targets on S&P. You know it’s a bull market when strategists raise their targets, but in many cases, it’s a catch-up for rallies late in the cycle. In other words, I get worried when estimates come up to match the market. 

Outlook for private markets and lending 

We’re still fans of the private markets and are aggressively looking to take advantage of large institutional LPs stepping away from new investments and selling off their illiquid stakes. The expected returns for all private areas are much higher today than over the long term. 

The headlines about the glut in private lending are real. Too much money has been raised in the space, and we’re seeing some transactions that leave us shaking our heads: poor covenants, lower than market coupon, more leverage, and worse, the deals are being done for the wrong reasons (in our opinion)—dividend recaps.  

We’re watching the space closely and are looking forward to buying some of these notes in the secondary market at a deeply discounted price that appropriately reflects the poor underwriting we're observing. 

Impact of AI 

AI is still a major theme in the stock market. Lately, the most notable offshoot has been a ~20% rise in utilities, even though estimates remain unchanged as they’re based on future years' earnings growth. Many stocks at similar multiples but with different fundamental prospects give reason to think that could be a good setup for active management, which has faced challenges recently with narrow leadership and drift in the rest of the market. 

The impact of AI and technology on the job market is complex. AI is enhancing productivity without significantly replacing jobs in the near-term. However, it's important to note that AI is still in its early stages and has a long way to go before it's perfect.  

Commercial real estate market 

The commercial real estate market is in flux. Due to underwater assets and the stress this puts on banks and investors, a day of reckoning is coming. However, there are strategies for managing these challenges, such as secondary deals and loan sales. 

The potential for a banking crisis due to commercial real estate loans is a concern. Banks have a lot of commercial real estate debt outstanding, which could lead to a crisis. However, there are ways to manage this, such as selling loans at a reduced rate. 

The future of the economy and society is a broad topic. Half of the nation lives paycheck to paycheck, which is a concern. However, wage growth for the middle class has been emphasized, and the job market is thriving. The U.S. has a retirement crisis, and individuals need better financial planning and more savings for the future. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.