Quarterly Perspectives

July 1, 2024

The S&P 500 Index rose in the second quarter driven by strong corporate profits, the promise of artificial intelligence and slowing inflation. Sizable gains in a small number of very large stocks lifted market capitalization weighted indices, though the average U.S. and international stock registered losses for the period. Interest rates finished the quarter little changed resulting in muted returns for fixed income investments. Global economic growth remained positive but evidence is mounting that tight monetary policy is slowing activity and geopolitical uncertainty presents additional risks to the outlook.

Economic Backdrop

Economic activity in the U.S. continued to be resilient in the second quarter. The employment backdrop has been a key area of strength but in recent months has displayed mixed signals. Payroll growth is healthy in certain industries but other leading indicators, such as lower full-time employment and job openings, suggest labor markets are softening. The unemployment rate remained low at 4.1%, but up from 3.5% a year ago. Consumer spending moderated in recent months as the cumulative impact of inflation weighed on confidence. The excess savings that were accumulated during the pandemic, as measured by the Federal Reserve Bank of San Francisco, have now been depleted. Lower income consumers have been disproportionately squeezed by higher prices, while households with investment and real estate assets have benefited from price appreciation, which has fueled an increase in consumer net worth by some 7% in the past year. The service economy was strong and manufacturing showed recent strength in certain sectors, such as technology hardware, utility infrastructure and national defense. Inflation continued to trend lower in the quarter with the most recent Consumer Price Index recording a 3.3% change year-over-year. Excluding shelter, which lags other components and comprises more than one-third of the index, CPI is up only 2.1%. Overseas, major export-oriented economies such as Japan and Europe are struggling with subdued demand for global trade. China has faced a troublesome economic slowdown and recent stimulus measures have yet to help consumers or its beleaguered real estate markets. Regional wars and upcoming elections in Europe and the U.S. add uncertainty to the outlook. On balance, the global economy is growing at a moderate pace but faces economic and geopolitical challenges.

Special Section: Electrifying Innovation

The power industry is undergoing significant change that will have meaningful implications across multiple sectors in the global economy. Electricity demand, which has grown at an average rate of less than 0.5% annually over the last twenty years, is expected to see its growth rate surge by as much as 4-times over the coming decades. The inflection in demand coincided with the emergence of generative artificial intelligence, a power hungry application. Companies such as Amazon, Microsoft and Alphabet have meaningfully increased their data center capital expenditure plans to satisfy the exponential growth in computing. The Boston Consulting Group estimates that data centers will triple their share of U.S. electricity consumption, from 2.5% to 7.5%, by 2030. Renewed demand is also coming from industrial settings, where electricity is increasingly supplanting oil, gas and coal in manufacturing processes. Use cases include the adoption of electric heat pumps for climate control, electrolyzers for hydrogen production and battery storage in place of industrial gas-powered generators. A renaissance in domestic manufacturing, sparked by the need to address supply chain disruptions that arose during the pandemic, is driving incremental power consumption from areas such as semiconductors, chemicals and medical equipment. Longer-term, the proliferation of electric and hybrid vehicles will also increase load on the power grid. While EV penetration slowed in 2024, electric car sales are still expected to grow nearly 20% annually over the coming years.

Meeting this resurgent electricity demand will require significant infrastructure investment and the adoption of new technologies. Utilities are making plans to expand generation, transmission and distribution capacity. The challenges will include financing capital expenditures, sourcing qualified labor to modernize grid infrastructure, accessing critical raw materials and transitioning to renewable power without disruption. Customers, including large technology companies, are insisting that a significant portion of their power needs be derived from clean energy in an attempt to meet their emission reduction targets. Government incentives are also accelerating clean energy adoption. In 2022, the U. S. government passed the Inflation Reduction Act that directs $394 billion in federal funding to encourage solar, wind, hydro and biofuel development. To fully decarbonize power generation by 2030, Bloomberg estimates the electric industry would need to double the level of investment from $300 billion to $600 billion. The economics of solar and wind are now competitive with legacy fuel sources and costs will decrease further with increasing consumption. Overall, the effort to meet rising electricity demand will hasten the transition to clean energy, boost living standards and present investment opportunities across the supply chain.

Fixed Income

Bond investments were little changed in the second quarter with yields on ten-year U.S. Treasury notes finishing the period at 4.4%, up from 4.2% at the end of March. Inflation concerns pushed the ten-year yield to 4.7% in April, before subsequent data drove bond yields lower through May and June. If inflation continues to trend lower, as long-term inflation expectations suggest, current yields on intermediate-term bonds will prove particularly attractive. The Federal Reserve’s expectation for rate cuts have been postponed due to resilient economic readings, but further moderation in inflation or deterioration in the labor market is likely to prompt a cut before year end. In the municipal bond market, a supply of new issues during the quarter offered an attractive window to accumulate bonds at favorable tax-equivalent yields. Conversely, corporate bonds are richly valued with yields that offer minimal premium over risk-free securities. In client bond portfolios, we are gradually extending the maturity range to capture attractive yields in anticipation of lower rates.


Equity markets around the world recorded a wide range of returns in the second quarter of 2024. The fifty largest stocks in the U.S. market led with returns of nearly 9%, compared to just 4% for the S&P 500 and negative returns for the Dow Jones Industrials Average and many small-cap and international indices. The excitement in artificial intelligence drove outsized gains in a handful of stocks. Corporate earnings have advanced at a healthy rate of about 8% this year, underpinned by top-line growth and a notable improvement in productivity, which bolsters profits by enabling companies to do more with less. Stocks have been supported by expectations that any slowdown in the economy will be quickly met with Federal Reserve rate cuts. The S&P 500 Index is presently valued at 21-times forward price-to-earnings, the high end of its historical range, but the data is skewed by a small number of large market capitalization companies trading at particularly high multiples. The average S&P 500 stock does not appear excessively valued at 16-times forward price-to-earnings, below its 10-year average.

Highly valued segments of the market that have appreciated sharply may be vulnerable to correction if global economic growth slows, as seems likely. In client portfolios we have recently trimmed some equity holdings that registered sizable gains and are redeploying proceeds into areas of the market we judge to be more attractively priced. We continue to emphasize high quality businesses with above average profit growth, reliable cash flows, proven management teams and competitive advantages. New purchases and existing positions are focused on companies with these characteristics, capable of generating durable earnings through a full economic cycle.