2024 mid-year review: tech stocks propel gains but there are signs of the market broadening out

At the start of the year, we expected stock markets to outperform bond markets, provided companies continued to maintain their pricing power and earnings growth, which would help drive share prices higher. However, we also expected bonds to deliver investors with a positive return, but they have seen more volatility as the timing of interest cuts was delayed. 

Given the narrow performance in the US stock market in 2023, we expected it to broaden out beyond the so called ‘Magnificent Seven’ (comprising Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla), although this was to promote diversification while we encouraged investors to remain exposed to the theme. 

In the first half of 2024 the Federal Reserve (Fed) was cautious about cutting interest rates, projecting only one cut for the entire year. In contrast, the European Central Bank (ECB) held its interest rate steady at 3.75% after a cut in June, as it monitored inflation, which fell from a peak of 10.6% in October 2022 to 2.5% in June this year.¹

In June, the World Bank upgraded its outlook for the global economy, saying it will expand by 2.6% this year. Emerging market economies have generally expanded faster, driven by robust demand and economic development. For instance, countries like India are projected to see strong growth rates, fuelled by positive demographic trends and a growing consumer class.

Company earnings have, in turn, been boosted by improving global growth. However, the advance of ‘Big Data’ has given companies an insight into consumer buying trends and access to more personal information, helping to supercharge their pricing. Here, we delve a bit deeper into individual regions and asset classes:

The S&P 500 and Nasdaq 100 indices have seen impressive double digit increases of over 15% and 18.5% respectively but, as mentioned earlier, this is largely thanks to robust demand for the Magnificent Seven.

According to Forbes, this group of companies is up by about 13% year to date on average, but this year we saw some divergence in performance. Nvidia led the pack, driven by strong demand for its artificial intelligence (AI) and graphics processing units.²

However, Apple and Tesla faced challenges, with Tesla’s share price experiencing a notable drop in the first six months of the year (although it has rebounded in July). While together these stocks contributed to a substantial portion of the S&P 500’s gains, some may lose the ‘magnificent’ moniker if their innovations are not game changing.

Overall investor sentiment has remained positive for the US, setting a strong foundation for the second half of the year. Economists surveyed by Bloomberg upgraded their forecast for the US economy to grow 2.3% after inflation, up from 1.2% at the start of the year. This improved forecast for US growth has been driven by loose fiscal policy, immigration and a buoyant jobs market.

It also meant the Fed hasn’t deemed it necessary to reduce interest rates in the first half of the year, however, a cut is expected in the autumn. Although interest rates have not come down, companies have been able to absorb or pass on the higher interest costs.

The US presidential election remains one of the biggest risks following the attempted assassination of Republican nominee Donald Trump and President Joe Biden’s decision not to stand for a second term in office.

The UK has been out of favour among investors for a while due to uncertainties caused by Brexit, recessionary fears and political instability. At the beginning of the year, the outlook for UK growth was weak, as it had experienced a mild recession at the end of 2023.

But, economically the UK has bounced back stronger than predicted, with GDP growth of 0.7% in first quarter of 2024 before slowing in April. However, inflation finally fell back to the Bank of England’s (BoE’s) target of 2% in May. Despite this, and due to July’s general election, the BoE has not yet embarked on cutting interest rates.

The mix of businesses listed on the London Stock Exchange has not appealed to investors in recent years as they are typically cyclical, more sensitive to economic growth and there are few technology stocks to choose from.

Cyclical stocks have participated in a broad rally in the UK with industrials performing well and oil and financials stocks experiencing a rebound at the end of April and beginning of May. The low valuation of the UK market finally attracted some investors with a wave of merger and acquisition activity accompanied by speculation that UK domestic stocks may have reached a turning point. This all helped the UK stock market to reach fresh all-time highs. For more on this read our article ‘Is the UK’s valuation discount a problem?’.

European stock markets initially participated in the rally of the first half of the year as semi-conductor stocks led the way. The region became more volatile as right-leaning parties won 22% of seats in the European Parliament versus 19% in 2019. Gains for France’s far-right Rassemblement National prompted French President Emmanuel Macron to call a shock national election, raising uncertainty which affected markets, particularly French stocks.

However, markets reacted with relative calm to the New Popular Front, a broad left-wing electoral alliance, winning the most seats and appeared to welcome the outcome. It remains to be seen what kind of an impact a political gridlock will have, with no one party able to claim an absolute majority.

Data shows that inflation in the Eurozone is moderating as the European Central Bank (ECB) cut interest rates in June, although it could remain sticky. There remains some doubt about Europe’s imminent recovery, however, this may start to evaporate in the second half of the year as a global recovery should support Europe’s manufacturing base.

In Asia, the Taiwan Semiconductor Manufacturing Company (TSMC), which accounts for over half of the region’s stock market, benefited from being at the heart of the AI spending boom and helped push the Taiwan Stock Exchange higher. 

For much of this year China’s stock market has weighed on the performance of Asian markets. The anticipated recovery as the country emerged from lockdown in 2023 failed to materialise. In January, there was a meltdown in the derivatives market. Chinese retail investors tend to buy derivatives, called ‘Snowballs’, which pay out regular, sizeable interest but rely on calm market conditions to do so. The weak market led to many of these ‘Snowballs’ breaching their limits leaving investors with significant losses and exacerbated the market weakness.  

Since the lunar new year began in February there have been signs of a recovery. Growth for China has been revised higher to 5% from 4.6% earlier in the year by the International Monetary Fund (IMF). Companies were trading on attractive valuations and confidence began to return amid hope that problems in the property sector were behind them. However, structural issues persist and foreign investors have yet to return with the rally fizzling out.  

The Indian stock market has performed well thanks to strong economic growth. In the 2024 financial year, which ended on the 1 April 2024, India’s economy grew 8.2%³, driven by business-friendly government reforms. There was a sell-off as the country’s general election saw Prime Minister Modi return to office, albeit as head of a collation government. However, it was short lived, and India remains appealing on account of its huge potential supported by favourable demographics. Although valuations are high, historically, the country has been an expensive market.  

The Nikkei 225 finally achieved a new all-time high this year, 34 years after it reached its last peak, driven mainly by corporate governance reforms, which have been a central issue in Japan for over a decade. These reforms, initiated by the government and the Tokyo Stock Exchange, have significantly boosted shareholder value. Companies that have embraced these changes have seen improvements in their share prices, signalling a shift towards greater transparency and accountability.

As a result of the reforms, Japan has seen the return of inflation after decades of low growth and deflation. This shift has led to higher prices and wages, with the Bank of Japan raising interest rates and ceasing its quantitative easing measures.

The weakening of the Japanese yen, however, remains a concern. The currency is down -31% against the US dollar since Prime Minister Fumio Kishida took office in 2021. While this has contributed to the stock market’s performance, benefiting export-oriented companies, there is now a danger of the weak JPY/strong earnings narrative being disrupted.

Gold is typically sought during times of political unrest. At the beginning of the year, we highlighted that this precious metal could be an investment opportunity as central banks continue to buy it. Gold is also likely to be a good diversifier in a year where election risk is high with most of the world's population going to the polls. 

Gold usually underperforms when interest rates rise but has deviated from this trend over the past couple of years. Despite a strong performance earlier in the year, gold saw a slight decline of 0.2% in June. However, investors can take solace in its impressive 12% gain year-to-date.⁴

Many investors have been hesitant to invest in bonds over the last 15 years due to persistently low yields. The bond market faced significant challenges in 2022 amid rising inflation as countries exited Covid lockdowns. It got worse for bond investors in the UK following Prime Minister Liz Truss’ ‘mini’ Budget, which triggered a substantial sell-off.

Investors were locking in higher yields in anticipation of interest rate cuts at the start of 2024, but as that expectation got pushed out to the second half of the year yields have risen again. This sent bond prices falling. However, as central banks began to cut interest rates (as noted, the ECB cut rates in June) prices started rising and yields came down again.

Overall, bonds have regained their appeal as a viable investment option, now offering attractive returns. The UK’s 10-year government bond yields 4.2% while the US’ Treasury bond offers 4.4%.⁵

This year is likely to be a more favourable environment for government bonds as inflation continues to decelerate, particularly if central banks initiate interest rate cuts in the second half of the year.

To refresh your knowledge on fixed income, read about the basics of bonds.

So far, 2024 has been a positive environment for equities, as the global economy, led by the US, has been stronger than expected and company earnings have continued to grow. 

Going into the second half of the year, we expect this to continue and we’re likely to see relatively solid economic growth. Potential interest rate cuts could further improve market confidence, mitigate risk, bolster corporate earnings, and provide a boost to bonds.

The US election in November remains a risk and could increase market volatility, so it’s important that investors continue focus on fundamental performance drivers for the second half of the year.

[1] Eurozone Harmonised Index of Consumer Prices (HICP)

[2] Why Amazon, Alphabet and Meta Platforms rallied between 27% and 43% in the first half of 2024; Yahoo Finance, 16 July 2024

[3] Economic Survey 2024 – industries grow by 9.5%, fueling economic growth to 8.2%; Business Insider India, July 2024

[4] Gold mid-year outlook 2024; World Gold Council, July 2024

[5] How bonds became a serious investment choice again; Financial Times, 12 July 2024