First quarter 2024 market commentary

Chief Investment Officer Thierry Hasse

The first three months of 2024 are behind us and spring has officially arrived. As I do at the beginning of each quarter, I’m pleased to share my thoughts and observations on the economy and financial markets.

The year started strong for U.S. equities, which showed surprisingly low volatility despite macroeconomic headwinds. Looking forward, we remain cautiously optimistic about the rest of the year.

Stocks Continue to Surge

The first quarter was an excellent one for equity markets worldwide and for U.S. stocks in particular. The broad-market S&P 500 Index (SPX) recorded its fifth consecutive monthly increase and ended the quarter up 10.2%. This remarkable performance occurred despite significantly elevated interest rates, which saw the U.S. Aggregate Bond Index (AGG) decline by 1.86% over the same period (Source: S&P Global).

Indeed, bond prices fell across the yield curve, as optimism surrounding the possibility of interest rate cuts by the Federal Reserve (Fed) dampened since the end of 2023. The market is now expecting three rate cuts of 0.25% each, with the first one likely to come out of the upcoming FOMC meeting in June.

This readjustment of monetary policy expectations has enabled equities – especially technology-focused companies – to continue their upward trajectory, reaching numerous new highs. This remarkable bull market continues to be fueled by enthusiasm for the potential benefits of artificial intelligence (AI) applications, but, more importantly, it’s driven by the “lifeblood” of the stock market: corporate earnings.

Despite predictions of an imminent stock market crash by a few, it is clear that corporations, particularly large U.S. multinationals, are recording record cash profits. To illustrate, S&P 500 earnings-per-share (EPS) for 2023 was around $220, and it’s forecasted to grow to $247 in 2024 and $275 in 2025 (Source: Yardeni Research). EPS is a metric used to measure the profitability of a holding, and since the S&P 500 is a basket of the most prominent U.S. companies, it can be a good gauge of corporate America’s growth potential. While these projections are subject to multiple revisions, they reflect the tremendous earning power of US businesses and underscore why they are the cornerstone of our investment strategy at Elevage Partners.

Among the individual equity names in our portfolios, Apple earned $97 billion for fiscal year 2023 while Microsoft earned $72 billion and Exxon Mobil earned $36 billion (Source: 10k Annual Reports). The list goes on but the message is clear: the performance of the U.S. stock market is built on strong cash flow fundamentals. We will maintain diversified exposure to U.S. equities as long as the conditions for strong earnings growth remain in place, aligning each portfolio’s specific exposure with your broader financial plan and personal risk tolerance.

The U.S. economy grew by 2.6% in 2024. The risk of an economic recession has diminished and the unemployment rate is forecast to hover close to a 50-year low of around 4% for the foreseeable future (Source: Federal Reserve Monetary Policy Report). Inflation is slowly but unevenly progressing toward the Fed’s 2% target.

Identifying Potential Macroeconomic Risks

Given the current positive – even euphoric – economic environment, what could cause investment conditions to turn? Macro geopolitical risks immediately spring to mind.

The war in Ukraine is entering its third year with no end in sight, and the conflict between Israel and Hamas threatens to escalate into a wider conflict in the Middle East. However, a historical perspective can provide some comfort for investors. Looking back at how the market has reacted to 25 of the most significant geopolitical crises since World War II, the S&P 500 Index declined by an average of 4%, bottomed out in 14 days, and recovered in 33 days (Source: Barron’s).

While these conflicts tragically result in immense human suffering, the financial markets, historically, tend to move past these crises and revert to focusing on profits and cash flows.

Less sensationalist but potentially more consequential for the future health of the US financial system is the Long-Term Budget Outlook. The Congressional Budget Office publishes an annual report projecting the US economy and federal budget over the next 30 years. The latest release from March 20, 2024, serves as a sobering reminder that the federal budget deficit is quickly outpacing gross domestic product (GDP). The debt held by the public, as a percentage of GDP, is expected to reach its highest level ever in 2029, surpassing the previous high-water mark set in the wake of World War II (Source: CBO).

This mounting debt could slow economic growth and pose a risk of a sharp and sudden increase in interest rates. Ernest Hemingway famously described bankruptcy as happening “gradually and then suddenly.” While we are not suggesting that bankruptcy is imminent, we will prudently maintain a short (1- to 3-year) duration in Elevage Partners’ fixed-income portfolio to mitigate the potential impact of future rate increases should any occur.

We’re Investing for Your WHY

As we look forward to the rest of the year, we are optimistic that the investing landscape will remain positive while providing plenty of opportunities for risk-managed growth.

At Elevage Partners, your long-term goals – and your WHY – are always front and center for our investment committee. We will continue monitoring economic conditions and make adjustments to your portfolios when necessary. As always, please do not hesitate to reach out if you have any questions about the markets or your investments.

Thierry Hasse
Chief Investment Officer
Elevage Partners