Drilling down

U.S. stocks again set new highs

The S&P 500 Index rose 3.92% over the second quarter, but the market’s strength remained narrowly concentrated in large technology and technology-related companies, with growth stocks significantly outperforming more value-orientated stocks. Over the period, the index rose from 5,254.35 at the end of March to 5,460.48 at the end of June. The total return of the S&P 500 Index (including dividends) was 4.28%.  

The NASDAQ Composite Index^® rose 8.26% over the quarter, from 16,379.46 at the end of March, to 17,732.60 at the end of June, bringing its year-to-date gain to 18.13%.

Retail sales cool

After rising well above consensus expectations in March, the monthly change in retail sales declined in April and rose just 0.1% in May, below consensus expectations closer to 0.2%. While year-on-year changes have remained high, retail sales clearly cooled over the second quarter. Even food and beverage sales, which had been a stable source of strength in real sales, slipped in May, falling 0.4% relative to April’s figures. Furniture and building material sales also remained under pressure as these sectors await a recovery in the housing market.

Job growth remains healthy

While March’s employment data was exceptionally strong, raising concerns about growth being too hot early in the quarter, the data softened as the months progressed. Employment in June rose by 206,000, while the April and May employment figures were revised significantly lower, according to the Department of Labor’s July 5 report. The unemployment rate in June remained little changed at 4.1%. The rise in average hourly earnings slowed, though at a year-over-year level (3.9%) that is still higher than inflation.

Sector strength was technology led

Of the S&P 500 Index’s 11 sectors, five posted positive performance while the remaining six sectors declined over the quarter. The information technology and communication services sectors drove the Index’s performance, rising 13.81% and 9.37% respectively over the period. The materials sector was the weakest performing sector (down 4.50%), followed by industrials (down 2.90%) and energy (down 2.42%).

The chart below shows the results of the 11 sectors for the past month, second quarter and year to date.

Treasury yields rise modestly

The yield on 10-year U.S. Treasuries rose over the quarter, from 4.20% at the end of March to 4.37% at the end of June. Concerns about strong employment and higher inflation pushed yields up early in the period, but they drifted lower as economic and inflation data renewed investor confidence that the economy would both slow and achieve a soft landing. With expectations for interest rate cuts pushed back over the period, shorter-dated Treasury yields remained high. Longer-dated yields, including the benchmark 10-year note, stayed elevated on renewed caution over the path of the government’s fiscal policy.

The Bloomberg U.S. Aggregate Bond Index rose 0.07% over the quarter, bringing its year-to-date loss to -0.71%.

Corporate earnings projections keep rising

Corporate 12-month earnings projections for the S&P 500 Index continued their steady rise since the start of the year. Earnings per share (EPS) estimates rose 3.84% during the quarter, a sign of increasing optimism about the outlook for economic growth and for companies, particularly the larger technology and technology-related companies, to generate increasing revenue.

Forward P/E ratios rise modestly

The forward 12-month price-earnings ratio (P/E) of the S&P 500 Index rose over the second quarter, from 20.96 at the end of March to 21.01 at the end of June. A higher P/E ratio means stocks are more expensive relative to their EPS.

The forward 12-month earnings yield, which is the inverse of P/E, was essentially unchanged over the period. At 4.78%, the forward 12-month earnings yield remained above the 4.37% yield offered by 10-year U.S. Treasuries at the end of June, but the gap continues to narrow. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields.

Dollar gains vs. euro and yen

The U.S. dollar appreciated versus the euro and Japanese yen during the quarter, with the euro falling 0.76% relative to the dollar, and the dollar rising 6.29% relative to the yen. Expectations that interest rate cuts would be pushed back while the economy remained relatively robust helped support the dollar.

Oil prices recede

Oil prices fell over the quarter, with the price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, declining 1.96%, from $83.17 at the end of March to $81.54 at the end of June. Prices rose early in the period on the back of increased tensions in the Middle East, but retreated after OPEC+ (a consortium of oil producing nations including Saudi Arabia and Russia), announced plans to gradually add back production.

Gasoline prices at the pump remained stable over the quarter, falling by only $0.01, from $3.57 at the end of March to $3.56 at the end of June.

Gold rises again

Gold prices rose again in the second quarter (up 4.52%), bringing its year-to-date gain to 12.93%. Gold prices have been supported by expectations of falling interest rates, which diminishes the opportunity cost of holding gold, as well as foreign demand and the desire to hold assets that could be a hedge against political risk.

International equities decline

International equities, as measured by the MSCI EAFE Index, fell 1.48% over the second quarter, lowering its year-to-date gain to 3.51%. The Index had a stronger start to the quarter, but fell back in June when the European parliamentary election rattled eurozone markets after far-right parties made surprising gains, raising concerns about the region’s commitment to fiscal spending targets.