Small caps surged in July as mega tech stocks pulled back.
July 2024 Monthly Market Commentary
- The S&P 500 Index returned 1.2% in July, underperforming the Russell 2000 Index’s 10.3% return. Ten of the eleven S&P 500 sectors traded higher, led by Real Estate, Utilities, and Financials. Technology was the only sector to trade lower, reversing a portion of its rise in the first half of 2024.
- Corporate investment-grade bonds increased by 2.6% as Treasury yields declined. Corporate high-yield bonds gained 2.3% as credit spreads tightened.
- International stock performance was mixed. The MSCI EAFE developed market stock index increased 2.6%, while the MSCI Emerging Market Index lagged and only increased 0.8%.
Stocks & Bonds Continue to Move Higher
The S&P 500 ended July slightly higher, its third consecutive monthly gain. Throughout the month the index briefly surpassed 5,600 (for the first time) to reach a new all-time high, before it traded lower in late July and gave back some of the gains. The tech-heavy Nasdaq 100, which led markets higher in 1H 2024, fell 1.7% as Nvidia, Microsoft, Google, and Facebook-parent Meta traded down after their strong 2024 start. In contrast, the Russell 2000 Index of small-cap stocks posted its strongest monthly return since December 2023.
And in the bond market Treasury yields fell and the U.S. Bond Aggregate Index, which tracks a wide array of investment-grade bonds, traded higher for a third consecutive month, the longest win streak since 2021. Most important, despite the muted headline returns, the stock market experienced a seismic shift as expectations increased for a September interest rate cut.
Small-Cap Stocks Accelerate
Large-cap stocks dominated in the first half of 2024, with the S&P 500 outperforming the Russell 2000 index of small-caps by over 13%. This outperformance was largely driven by two main factors:
- Large-cap stock indices’ exposure to the artificial intelligence (AI) industry.
- Investor concerns about the impact of high interest rates on smaller companies.
This combination of interest rate concerns and AI dominance led to crowded positioning as most investors (and news commentators) focused on a narrow group of large-cap stocks (i.e. Magnificent 7).
This investment narrative started to change in July after the CPI inflation report showed continued progress. The better-than-expected inflation report raised expectations for a September interest rate cut, leading to a significant rotation within equity markets. Investors moved from large-cap stocks into small caps, with the Russell 2000 outperforming the S&P 500 by over 9%. This year’s high-flying mega-caps bore the brunt of the large-cap sell-off as investor optimism started to soften as questions around when the billions of dollars in AI investments will pay off.
As investors rotated, the year-to-date return gap between the Nasdaq 100 and Russell 2000 shrank from nearly 16% at the end of June to now just over 3%. Historically rotations within equities of this magnitude are uncommon, especially in such a short timeframe. In our view, these movements will likely compound volatility around the upcoming US Presidential election. As such, near-term we expect markets to become more volatile as investors weigh the prospects for corporate earnings and interest rate cuts.
ENDNOTES
Disclosures
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