Market pulse: Second Quarter Review
In the second quarter the war with Iran continued, oil prices remained elevated, inflation rose, and interest rates jumped higher. With those strong headwinds stocks surely fell. Right? Not so fast. Stocks had their best quarter since 2020 with the S&P 500 gaining 15 percent and the Nasdaq jumping 21 percent. How can that be?
There is the saying “can’t see the forest for the trees.” For stocks, oil prices, interest rates, and inflation are the trees while the artificial-intelligence (AI) buildout is the forest. Headlines pointed toward a bad stock market but the incredible amount of AI spending remained unabated, pushing the economy and earnings higher. In other words, it was all about AI.
With AI, there are those that do the spending (i.e. hyperscalers) and those that receive the money and provide the goods (compute companies). Semiconductor and memory companies performed best. Interestingly, the largest semiconductor company, Nvidia, badly lagged other chip companies with its 7.3 percent year-to-date return. Nvidia competition has arrived.
That is how the market works. When one company does very well competition on quality and price soon arrive. IBM, General Electric, AT&T, Coca Cola, Cisco Systems, Microsoft, and ExxonMobil were all stocks that dominated … until they didn’t.
While AI was the dominant theme, the broader market also performed well. The Russell 2000, an index of small-company stocks, surged 21 percent in the first half of the year. That was its best in 35 years.
I’ve written many times that stock prices are about earnings and interest rates. Strong earnings have pushed stocks higher for several years. The net profit margin for S&P 500 companies is at its highest reading ever. Margins are high even when technology stocks are removed. That could be an early sign of AI efficiency. More efficient companies become more profitable. More profitable companies grow faster than slow ones and trade at higher P-E multiples. Bull markets have been built and sustained on less.
As for interest rates, new Fed chair Warsh made it seem that an increase in rates is more likely than a cut. Keep in mind that once rates change they continue in that direction for a while. Higher rates will soon give savers an opportunity to nail down higher yields. As long as the earnings outlook stays very positive with a growing economy the market will see better days even if interest rates rise. Corporate America will carry the day.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
