Artificial intelligence continues to inflate the stock market. Just ask ChatGPT.
The bullish run-up in stocks in June, the second quarter and so far in 2024 can be summed up in two words: AI boom.
But not all stocks are enjoying the tech-fueled rally. The stock market is narrowing with fewer winners. Megacap growth stocks like AI darling Nvidia are dominating the performance charts.
The S&P 500's 3.59% total return in June and 4.28% gain in the second quarter propelled the large-cap index to a 15.29% first half gain. But if you back out Nvidia's 150% gain through the end of June, the S&P 500's six-month return shrinks to 10.72%, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. And if you subtract the performance of the Magnificent Seven, the market benchmark's year-to-date return slips to 6.28%.
AI Stocks Surge In The Stock Market
The Dow Jones Industrial Average, which gained 1.12% in June but fell 1.74% in the second quarter, was a laggard. Small-cap stocks also struggled with the Russell 2000 index falling 1.08% last month and 3.62% last quarter. The small-cap index rose just 1.02% so far this year, compared to the Nasdaq's 18.13% gain in 2024 after a 6% gain in June.
"It's half-time and it's party time, at least if you are in large-cap, a market-cap weighted index or the Magnificent Seven," Silverblatt said.
A review of mutual fund and ETF performance highlights the market's split personality. In June, for example, the average U.S. diversified equity fund gained 1.02%, according to Lipper Refinitiv data. But that respectable one-month return pales in comparison to the 5.9% advance for science and technology funds, the 5.89% gain for large-cap growth funds, and the 3.55% rise for S&P 500 index funds, according to data from Lipper Refinitiv.
Large Caps Drive Stock Market Higher
While growth funds and large-cap funds led the way, value and small- and midcap funds didn't attend the party. Large-cap value funds, for example, gained only 0.27% in June. And they rose 9.01% through June, compared to a 19.6% year-to-date gain for large-cap growth funds.
Similarly, the average small-cap growth fund and small-cap value fund both finished in the red in June. They sported second-quarter declines of 2.76% and 3.78%, respectively.
A review of top-performing ETFs also highlights the concentrated gains in tech and growth. Invesco S&P 500 Momentum, the top diversified stock ETF performer this year with a 33.86% gain, was up 7.5% in June. Nuveen Growth Opportunities' 8.5% gain last month was No. 1.
Sector performance was all about tech, too. MicroSectors FANG + ETN, which owns five core big tech stocks Meta Platforms, Apple, Amazon.com, Netflix and Alphabet plus five actively traded tech growth stocks, shot up 10.01% in June, extending its 2024 gain to 30.18%. Roundhill Magnificent Seven rallied 9.01% in June, while Van Eck Semiconductor gained 8.41%, stretching its sector-leading year-to-date performance to 49.08%.
"The bigger (stocks) continue to get stronger," said Sandy Sanders, portfolio manager for John Hancock Fundamental All Cap Core Fund, a 2024 IBD Best Mutual Funds Awards winner.
Size Matters For Stock Market
Sanders says the outperformance of megacap techs and fund holdings like Nvidia, Microsoft, Amazon and Apple has much to do with their formidable market positions. "Their sustainable competitive advantages continue to widen, and their cash flow flywheel remains strong," he said.
The growth runway for AI-chip maker Nvidia, a top holding of John Hancock Fundamental All Cap Core (JFCIX), and the other megatechs with an early foothold in AI, is a long one, says Sanders.
"When we zoom out and think about AI compute and where we are (in terms of) market penetration, we're relatively in the early innings," said Sanders. What's tricky with a stock like Nvidia, he adds, is that despite the huge run-up in the stock, the chipmaker's revenue and cash flow continue to come in much higher than expected.
Growth Vs. Value
And in a clear illustration of the wide divide between growth and value performance, Vanguard Growth gained 6.78% in June to extend its year-to-date return to 20.62%. In contrast, Vanguard Value edged up just 0.15% last month and its 8.65% gain in 2024 is 12 percentage points shy of its growth counterpart.
Bond investors fared OK in June as the iShares Core US Aggregate Bond, which invests in a diversified basket of investment grade bonds, gained 0.88% to trim its 2024 loss to 0.71%. Foreign stock ETFs also didn't provide much diversification to investors either. iShares Core MSCI EAFE, which tracks an index of large, mid- and small-cap developed market stocks, excluding the U.S. and Japan, dipped 2% in June, cutting its 2024 gain to 5.1%.
Finding Stock Market Value In Value
One stock market strategist sees value in value stocks
If there's been a laggard in the stock market, it's in the value space, according to Jill Carey Hall, a U.S. equity strategist at BofA Global Research. "Value is inexpensive," the BofA strategist said.
How cheap? Value stocks are the most inexpensive stocks in the S&P 500 on a price-to-earnings basis, BofA research shows. And small stocks are trading at their lowest valuations in at least 20 years based on their price-to-book ratios.
"We think there is more upside in parts of the market than just buying the S&P 500," Hall said.
More Winners To Come?
Hall also sees an eventual broadening of the market's list of winners. There are many areas of the market, she says, that are unpopular. One catalyst that can move more stocks higher is if the corporate profit growth picture broadens out beyond the megatech titans.
By the fourth quarter, earnings growth for the rest of the market sectors will pick up, narrowing the wide gap now seen with the tech sector, creating momentum for forgotten stocks, says Hall. "Earnings for the rest of the market are expected to pick up," said Hall.
In the first quarter, for example, profit growth for the S&P 500 was 8.2%, versus 27% for the information technology sector, according to LSEG I/B/E/S data. That wide gap is seen narrowing sharply by year-end, with estimated earning growth rate for the S&P 500 at 14.8%, just shy of the 16.4% growth projection for tech.
Playing The Stock Market Cycle
Aside from value, Hall sees opportunities in so-called cyclical stocks in the energy and financial sectors. She also thinks real estate and real estate investment trusts will become more attractive when the Federal Reserve begins cutting rates. Hall, though, remains cautious on small-cap stocks, which have been hurt by higher for longer interest rates.
Sanders of John Hancock Fundamental All Cap Core Fund is also bullish on financials, noting that they will benefit from a capital markets recovery once the Fed starts lowering rates. Banks and private equity firms like KKR top his list.
Watching The Fed
Due to Fed rate hikes, "capital markets really were basically shut off, with IPOs, secondaries, mergers and acquisitions" put on hold, said Sanders. "We believe the Fed is essentially done raising rates, and you've got basically a line around the block for companies to go public, to get access to capital, to raise secondary capital."
Morgan Stanley and Goldman Sachs, the number one and number two investment banks in the world, are well positioned to see an increase in their revenue and earnings as the capital market cycle starts to pick up its pace of growth, says Sanders. Private equity firm KKR would also be a beneficiary. "They would likely be able to sell some of their companies they've taken private to the public and monetize those investments," said Sanders.
Sanders is also bullish on homebuilder Lennar, which he says will benefit from the ongoing shortage of homes and a resurgence of buying once mortgage rates start to head lower. "There's a shortage of homes out there. There's really a lack of supply. And Lennar is in the business of creating supply," said Sanders.
And given affordability issues, Lennar, whose average sale price in the second quarter was $426,000, is in a great position to profit from buyers who can't afford more expensive homes.
What's The Outlook For Bonds?
In June, the yield on the 10-year Treasury ticked down 10 basis points to 4.402% but was still up nearly a quarter-percentage point for the quarter.
Cash still has a loyal following with yields around 5%. But Matt Brill, manager of Invesco Core Plus Bond Fund (ACPSX), says investors are making a mistake if they stick around in cash for too long and don't take advantage of plump yields offered by bonds and possible capital appreciation when the Fed starts to cut rates.
"I think people have gotten accustomed to these high yields on cash and the front (or short) end of the yield curve," said Brill. "But they probably don't realize that these high cash yields won't be there forever." The market will eventually front-run an eventual Fed cut or series of cuts, which will make cash less attractive and bonds more attractive, says Brill.
Stock Market Is Monitoring Inflation
Right now, with the worst of the inflation scare behind us, Brill is looking to add a little more duration, or interest rate sensitivity, to his fund. That would take advantage of any capital appreciation opportunities when the Fed begins to cut and rates fall. Bond prices move in the opposite direction of yields. Brill likes high-quality corporate bonds. He's underweight Treasuries because he is in the soft-landing camp and doesn't fear missing out on a flight-to-quality rally if the economy takes a sharp U-turn south.
He says while there may be volatility in bonds ahead, given the stickiness of inflation, he says current yields on bonds will act as a buffer on any short-term volatility.
