The Stock Market Isn’t All About AI Anymore
The fervor surrounding artificial intelligence (AI) has started to wane in the stock market, especially as we transition into the latter part of 2024. Unlike the first half of the year, where investors were driven by an insatiable passion for AI technologies, the third quarter has ushered in a different market dynamic. While high inflation continued to overshadow the prospect of interest rate cuts by the Federal Reserve, investors have begun evaluating a broader range of stocks beyond just big tech companies.
Changing Market Sentiment
During the first half of 2024, the market seemed almost wholly dependent on the advances made in AI. However, the third quarter marked a shift as inflation started to show signs of easing. This change in sentiment provided the Federal Reserve with the opportunity to lower interest rates, causing a ripple effect throughout various sectors of the market. As economic indicators pointed toward a stabilizing economy, many investors exhibited renewed confidence that the Fed had achieved a balance—stimulating growth without triggering a recession.
“It really does appear as though the Fed is pulling off a soft landing,” noted Ellen Hazen, chief market strategist and portfolio manager at F.L. Putnam Investment Management. According to Hazen, the broadening of market activity beyond the narrow confines of the tech sector is likely to persist, a sentiment backed by recent changes in stock performances across various industries.
Sectors on the Rise
This quarter, traditionally underperforming sectors like utilities, industrials, and financials have outperformed many big tech stocks. Value stocks have overshadowed growth stocks, and small-cap stocks have shown remarkable progress, signaling a more diverse and robust market rally. Companies like Trane Technologies have gained attention as promising investments fueled by expected economic resilience.
Big Tech’s Uneven Performance
The so-called “Magnificent Seven” big tech stocks displayed a mixed performance. For instance, Nvidia, a prominent player in the AI sector, has seen a pullback following its rapid gains earlier in 2024. Other tech giants like Alphabet and Microsoft reported underwhelming results accompanied by increased spending on AI initiatives. This has led some investors to question the long-term profitability of such extensive investments in AI technology. Jim Polk, head of equity investments at Homestead Advisors, remarked that while the AI narrative remains compelling, it began to feel overextended.
Market Performance Metrics
Despite some significant declines in select tech stocks—like a 10% drop for Alphabet and a 2.7% decrease for Amazon—the broader market has benefited from increases in other sectors. The S&P 500 rose by 5.1% in the third quarter, marking an impressive total gain of 20% for 2024, heading toward its best quarterly performance since 1997.
Bond Market Reactions
The bond market has likewise experienced positive trends, primarily influenced by the Fed’s interest rate cuts. The yield on the benchmark 10-year U.S. Treasury note has dropped from 4.342% at the end of June to 3.751%, signaling an increase in bond prices and positive investor sentiment. As Treasury yields decline, sectors typically perceived as bond proxies—such as utilities and real estate—benefit. Utilities, for example, are poised to finish the quarter as the top S&P 500 performer with an impressive 18% gain.
Inverted Yield Curve vs. Economic Growth
A fascinating development in the government bond market occurred earlier this month, with the inversion of the yield curve finally correcting itself. Traders had been observing an inverted yield curve since July 2022, a phenomenon often viewed as a precursor to a recession. However, recent improvements in longer-term Treasury yields have left many investors more optimistic, as evidenced by Bank of America’s global fund-manager survey, where more than half of respondents expressed doubt about the likelihood of a U.S. recession within the next 18 months.
Inflation data has shown positive trends, cooling down for five consecutive months, with recent reports indicating new three-year lows. Employment figures have also bounced back, improving consumer sentiment and indicating ongoing spending patterns among households.
Challenges Ahead
Nonetheless, the economic picture is far from flawless. A rising unemployment rate reveals cracks in the economy, particularly affecting lower-income consumers. For instance, Dollar General recently adjusted its sales outlook following the economic strain on its customer base. Additionally, restaurants are introducing promotional deals to entice patrons who are becoming increasingly price-sensitive.
“You haven’t seen equities really price in enough of that deterioration in growth yet,” remarked Josh Emanuel, chief investment officer at Wilshire, with some analysts indicating that the Fed’s decision to cut rates more aggressively might suggest underlying economic challenges.
Conclusion
The narrative surrounding the stock market has undeniably shifted. While AI and tech stocks ignited the market’s early-year rally, the third quarter has underscored the importance of diverse investments and economic stability. As traditional sectors recover and expand, the focus on tech will need to adapt, signaling a potentially more sustainable growth path for the market as a whole.