With the halfway point of 2024 fast approaching, the U.S. economy has entered its fifth year of economic expansion, buoyed by both a gradual moderation in inflation and resilient consumer spending. Widespread recession fears that have been in place since 2023 have not come to fruition, held at bay by a strong job market that has featured high worker participation rates and rising wages. In the U.S. alone, 2.8 million jobs have been filled in the past twelve months. Economic growth around the world has also been sustained, although financial markets will be keenly attuned to the upcoming political elections in 2024. Notable political contests in Germany, France, the United States, and Mexico (largest trading partner of the U.S.) will likely set the future direction of trade policy, market reforms, as well as other national priorities.
Global stock markets have enjoyed gains for the year, with Corporate America leading the way with 5% yearover- year earnings growth in the recently completed first quarter. These encouraging business results have been widespread across the S&P 500 member companies, with all eleven sectors of the index expected to post profit growth for the calendar year. According to bullish commentary from U.S. executives, companies are expected to further support their share prices by way of $1 trillion dollars of cumulative share buybacks in 2024. In addition, according to Bloomberg, the five major AI “hyperscalers” (Microsoft, Meta, Amazon, Oracle, and Alphabet) are planning to invest an additional $200 billion in cloud computing and related logistics, providing an additional tailwind for the U.S. economy.
Of course, optimism directed towards the equity market, coupled with the recent rise in share prices, has pushed stock valuations to elevated levels. At current prices, the S&P 500 is trading at 20x next year’s earnings which is considered expensive by historic measures. To sustain this market premium, companies will need to meet the lofty expectations set by investors and deliver at least 10% earnings growth during the upcoming secondquarter earnings period.
While global financial markets have advanced during the year, economic reports in various countries have been mixed. For example, the Chinese economy is expected to meet or exceed its growth target of 5% for the year, despite a prolonged real estate crisis that is testing the confidence of local citizens and investors. In addition, the Chinese manufacturing engine has also shown some vulnerabilities, hindered by both declining automobile sales and less demand for exports. Similarly, the U.S. economy has enjoyed impressive real GDP growth of 1.3% in the first three months of the year, with expectations of 2.5% growth in the second quarter. But concerningly, the U.S. consumer who is powering our economy has used up 90% of their available credit by amassing a record $1.12 trillion of credit card debt.
Looking ahead, economic prospects for the second half of the year will be influenced by global central bank policy, including interest rate decisions communicated by the Federal Reserve Chairman Jay Powell. An important question for investors revolves around both the timing and the amount of upcoming interest rate cuts. Forecasts at the beginning of the year for six interest rate cuts turned out to be off the mark, as the Fed struggled to get inflation under control. Consequently, Chair Powell has left the policy interest rate at 5.33% in their efforts to stabilize prices, recognizing that tight monetary policy can also have the undesirable effects of slowing the economy and driving up unemployment.
