Quick Hits
1. June Rally Caps Solid Quarter for Stocks
Stocks rose for the second consecutive month.
2. Bonds Up for the Month and Quarter
Falling interest rates in June supported bond returns during the month and quarter.
3. Inflation Slows
Inflation improved in May, with major inflation metrics showing slower price growth
during the month.
4. Solid Economic Growth
Economic reports released in June showed signs of continued healthy growth.
5. Market Risks to Monitor
Markets face a variety of risks in the second half of the year.
6. Positive Outlook for the Second Half
Markets and the economy are set for continued growth.
June Rally Caps Solid Quarter for Stocks
Markets continued to rise, with all three major U.S. indices growing in June. The S&P 500 gained 3.59 percent in June and 4.28 percent for the quarter. The Dow Jones Industrial Average increased 1.23 percent in June, but weakness in April caused the index to fall 1.27 percent during the second quarter. The technology-heavy Nasdaq Composite led the way with a 6.03 percent gain in June and an 8.47 percent increase in the second quarter. Solid fundamentals and an improving economic backdrop helped support equity market returns in June.
According to Bloomberg Intelligence, as of June 28, with all companies having reported earnings, the average earnings growth rate for the S&P 500 in the first quarter was 7.9 percent. This is well above analyst estimates at the start of earnings season for a more modest 3.8 percent increase. The better-than-expected results were widespread; 10 of 11 sectors showed better earnings growth than anticipated. Looking ahead, analysts expect to see continued solid earnings growth through the rest of the year. Over the long run, fundamentals drive market performance, so the positive first half of the year was encouraging for investors.
Technical factors were also supportive during the month and quarter. All three major U.S. indices spent the entire quarter well above their respective 200-day moving averages. This is an important technical indicator because prolonged breaks above or below the 200-day moving average can indicate shifting investor sentiment for an index. Continued technical support and solid fundamentals helped drive the market rally in June.
Results were more mixed internationally as political concerns weighed on developed foreign stocks. The MSCI EAFE Index fell 1.61 percent in June, leading to a 0.42 percent decline for the second quarter. Emerging markets, on the other hand, were up 4.01 percent during the month and 5.12 percent for the quarter. Technical results were supportive for international stocks; both indices spent the entire quarter above their respective 200-day moving averages.
Bonds Up for the Month and Quarter
Fixed income markets also had a solid month, capping off a positive quarter. Investment-grade bond returns were supported by falling long-term interest rates. The 10-year US Treasury yield fell from 4.51 percent at the end of May to 4.36 percent by the end of June. The Bloomberg Aggregate Bond Index was up 0.95 percent for the month and 0.07 percent during the quarter.
High-yield bonds were also up for the month and quarter. The Bloomberg US Corporate High Yield Index gained 0.94 percent in June and 1.09 percent for the quarter. High-yield credit spreads ended the month virtually unchanged, signaling continued investor appetite for higher-yielding bonds despite relatively tight spreads on a historical basis.
Inflation Slows
The drop in interest rates in June was due in part to signs of continued progress in the fight against inflation. Year-over-year consumer price growth rose to a 2024 high of 3.5 percent in March; however, we’ve seen steady improvements since then, with headline consumer price growth slowing to 3.4 percent in April and 3.3 percent in May. Although this is still above the Federal Reserve’s (Fed’s) 2 percent inflation target, the continued improvement was good news.
Other inflation metrics also showed signs of improvement during the month, including the Fed’s preferred inflation metric, the personal consumption expenditures (PCE) price index. Headline and core PCE growth fell to their lowest levels in more than two years in May. As you can see in Figure 1, core PCE growth has improved throughout the year, which may set the stage for interest rate cuts in the second half as the Fed closely monitors this indicator.
We ended the quarter with futures markets pricing in one or two interest rate cuts by the end of the year, with November and December appearing to be the most likely months for a potential rate cut.
Figure 1: Core PCE Price Index Year-over-Year Growth Rate, June 2019–Present
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