The U.S. stock market’s growth this year continues to be dominated by a small number of technology stocks.
Ten stocks now represent 37% of the S&P 500 Index’s market capitalization. This is the greatest concentration in more than three decades. Eight of the ten outperformed the Index’s year-to-date return of 15.3% and have become expensive relative to their historic valuations. Since future returns are driven by today’s price compared to expected earnings, the more reasonable valuations of the remaining 490 stocks provide continued potential. For example, stocks with lower price to earnings ratios (“value stocks”) are currently close to the cheapest they have been relative to the more expensive “growth stocks” since 1999.
While the U.S. represents an unprecedented 64% share of the global equity market, it is not the top performing market this year.
Year to date, Taiwan (29.6%*) and India (17.1%*) outperformed the broad U.S. market (13.6% Russell 3000 Index). Since many markets outside the U.S. offer more attractive valuations and exposure to some of the world’s leading companies, we continue to maintain diversification across global equity markets.
Slow and steady economic growth in the U.S. is enabling low unemployment and a gradual drop in inflation.
The U.S. economy continues to expand, growing at 2.9% year over year. The inflation statistic preferred by the Federal Reserve, the “Core PCE deflator”, is currently at a 2.6% change year over year, close to the Fed’s target of 2%. The other inflation measure, the Consumer Price Index, is at 3.3%, well below its 9.1% peak two years ago.
The U.S. Federal Reserve is likely to lower interest rates later this year.
Assuming inflation continues to moderate, the Federal Reserve has indicated that they will start to lower short-term interest rates later this year and into 2025. At present, investors are earning yields around 5% on short-term maturities, above the 4.4% yield on the 10-Year U.S. Treasury note. Since longer maturities are riskier, they usually offer higher yields. If inflation stabilizes around 2%, today’s short-term yields of 5% will drop below those of longer maturities. Given the uncertainty of when this may happen, we balance exposure to both short and intermediate bond funds.
It is best not to guess when the current trends may reverse.
Some may believe that the momentum in large tech stocks or the 5% yield on cash deposits will continue indefinitely. If they do, investing would be as easy as simply buying what has recently gone up. Some may be convinced that stock markets will soon drop given the wars in Europe and the Mideast, escalating trade tensions with China and the political uncertainty in the U.S., the U.K., and France. Given the multiplicity of factors that influence financial markets, it is best to invest for the long term and benefit from the economic growth generated through innovations in medicine, energy and technology.
* in U.S. Dollar terms