Stocks Finish First Half on a High Note
Investment Takeaways
Stocks rose again in June as technology strength and artificial intelligence (AI) enthusiasm continued to power the major averages higher. The S&P 500's 3.6% gain marked the seventh positive month in the past eight and brought the first half return to a very strong 15.3% — with more than 30 new record highs along the way. The debate around when the Federal Reserve (Fed) would cut interest rates continued, with markets leaning toward September as June ended amid continued easing inflation pressures and some evidence of slower consumer spending. As July began, markets were focused on the Middle East conflict, the November election, the upcoming earnings season, and Treasury yields.
Within fixed income markets, falling Treasury yields helped most bond sectors end the first half on a high note, despite still showing modest losses for the year for the Bloomberg Aggregate Bond Index. High quality sectors, such as Agency mortgage-backed securities and U.S. Treasuries, outperformed. Market pricing for expected Fed rate cuts continues to be volatile, but we think current pricing is currently more in line with actual Fed intentions. As such, we think we're likely past peak interest rates in the U.S.
The LPL Research STAAC sees the risk/reward trade-off as slightly more attractive for fixed income than equities as higher bond yields increase the bond markets relative attractiveness. While the economic and profit growth backdrop generally remains favorable for equities, fixed income may have a bit more upside over the next six months based on elevated stock valuations and expected market volatility.
▪ Economic growth in the U.S. should outperform other developed markets. Despite a slow start and some headwinds to consumer spending, we expect solid business capital spending to support domestic growth overall, albeit at below consensus levels.
▪ The STAAC maintains its recommended neutral equities allocation amid a favorable economic and profit backdrop. Interest rates may need to fall for valuations to hold, so potential second half gains are more likely to be driven by earnings growth.
▪ The Committee remains comfortable with a balanced approach to market cap. High-quality small cap stocks are attractively valued, but the earnings power among large cap companies, overall, has been very impressive.
▪ The Committee maintains a slight preference towards large cap growth. AI-fueled earnings growth, potentially lower interest rates as the economy slows, and our technical analysis work favor the growth style.
▪ The STAAC’s regional preference remains U.S. over developed international and emerging markets (EM) due largely to superior earnings and economic growth in the U.S.
▪ The STAAC continues to hold a strong overweight tilt in preferred securities as valuations remain attractive. However, the risk/reward for core bond sectors (U.S. Treasury, agency mortgage-backed securities (MBS), investment-grade corporates) is more attractive than plus sectors. In our view, adding duration isn't attractive at current levels and the STAAC remains neutral relative to our benchmarks.
