We hope you’re enjoying your summer and having a nice Fourth of July weekend! The first half of 2024 has wrapped up and the S&P 500 has continued to outperform expectations. However, not all corners of the market fared the same…
Style & Size Matter
The S&P 500 returned 15.29%1 in the first half of 2024. As you may know, the S&P 500 is weighted by market cap so the largest companies (many of which have been positively impacted by the generative artificial intelligence boom) have the largest impact. If the same companies were weighted equally, the return was only 4.96%.2 Drilling down into the stock market by company size and style tells a more nuanced story that is often overshadowed in the headlines by the impressive rise of Nvidia and others in the Magnificent Seven.
| Company Size | Value | Growth |
|---|---|---|
| Large | 5.71% | 23.42% |
| Mid | 0.45% | 11.51% |
| Small | -4.70% | 2.94% |
S&P returns in the first half of 2024 by company size and style3
Innovation and Disruption
Nvidia has dominated the AI chip market this quarter with a 78% gross margin compared to competitors Intel (41%) and Advanced Micro Devices (47%).4
Generative AI is just one example of innovation that can disrupt the status quo. Some of the appeal of companies that disrupt is that the timing of their breakthroughs tend to be uncorrelated with the market. Case in point: the surge in popularity from ChatGPT and other AI services overshadows what general economic conditions like inflation and interest rates might be doing. One challenge behind such companies is trying to project just how popular they will become and how long they can stave off competition. As we saw with the electric vehicle craze, competitors will eventually encroach upon the companies that were first to the market and lead to a price war which suppresses profit margins. When and how that will play out remains to be seen for Nvidia, but it certainly presents a risk that may not be adequately reflected by investors’ behavior.
Easing expectations for interest rate cuts
Expectations for interest rate cuts have continued to be pushed farther out into the future, leading to first half returns of -0.71%5 for the bond market. The Fed’s approach is to wait patiently for the data and not get ahead of themselves. Inflation still seems to be trending downward albeit slowly. There haven’t been many surprises thus far this year that would change the trajectory of inflation or cause the Fed to react. Perhaps being stuck in neutral is better than the alternative.
Results like these remind us of the importance of diversification. Certainly, large growth stocks have been leading the market’s surge and have momentum on their side. However, history warns us that bubbles can form where investor exuberance pushes prices and expectations so high that even great companies can become mediocre investments in the future. Meanwhile, despite their relative underperformance, value stocks may be so out of favor that they become stellar investments in the future. After all, value stocks cost less for each dollar of a company’s earnings, potentially making them a better value (hence the name). It’s difficult to know exactly when the pendulum will swing from growth to value which is where diversification comes into play to smooth out performance and minimize the risk of large losses. Rest assured we are monitoring these trends with your long-term goals in focus.
Sources & Disclosures
1. Data taken from Kwanti.com based on the S&P 500 Total Return Index
2. Data taken from Kwanti.com based on Invesco S&P 500 Equal Weight ETF (RSP)
3. Data taken from Kwanti.com based on Vanguard S&P 500 Value ETF (VOOV), Vanguard S&P 500 Growth ETF (VOOG), Vanguard S&P Mid-Cap 400 Value ETF (IVOV), Vanguard S&P Mid-Cap 400 Growth ETF (IVOG), Vanguard S&P Small-Cap 600 Value ETF (VIOV), and Vanguard S&P Small-Cap 600 Growth ETF (VIOG)
5. Data taken from Kwanti.com based on the Barclays US Aggregate Bond Index
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