Q2 2024 Market Outlook

MARKET OUTLOOK

As we reflect on the events of the second quarter, it is increasingly evident that we are witnessing a persistent tale of two markets in the U.S. It’s been the best of times for the largest U.S. stocks which have consistently delivered exceptional returns, fueling much of the stock market's ascent to all-time highs. These companies, characterized by strong fundamentals, sustainable growth prospects, and resilient business models, have exerted a disproportionate influence on global stock market performance. The U.S. stock market is now more concentrated than ever, with the top ten stocks representing 35% of the S&P 500. Even during the dot-com era, the combined weight of the top ten stocks peaked at only 25%, albeit the technology companies of today have stronger profitability and more sustainable business models. To look at it another way, the Magnificent 7 stocks are now worth more than the combined stock markets of Japan, Canada, and the U.K. Stripping out these seven stocks, the rest of the U.S. market has performed in-line with the rest of the world since the beginning of 2023. While some sectors and companies have shown resilience and growth, a significant portion has not kept pace with the highflyers.

Despite the buoyant equity market performance driven primarily by the promising AI outlook, the economic landscape is showing signs of cooling off. Leading economic indicators have begun to weaken modestly, signaling potential headwinds ahead. This is not to say that these indicators have not been wrong in the past, but the divergence between the stock market and economic fundamentals has widened, reflecting disparities in prosperity across different segments of society. Higher income households, which tend to be the owners of assets, continue to benefit disproportionately from the global market's rally and asset price appreciation, while lower-income households bear the brunt of cooling labor markets and high inflation. The labor market, which has been a beacon of strength, may be showing signs of slowdown as indicated by the uptick in unemployment rate, a slowdown in hiring, and increase job cuts. Historically, labor market weakness has been more pronounced among the low-income earners, but in today’s post-pandemic world, hourly wage workers have benefited from the labor shortage. However, with excess savings from the pandemic depleted, household debt is reaching record highs. Along with that, rising credit delinquency and default rates impact the most vulnerable consumers. Predictably, consumers may be reining in nonessential spending and watching their wallets, driving some of the world’s largest retailers to cut prices to stimulate demand. All of this makes our advocacy and public policy work on living wages and economic equity even more pressing.

As stewards of your capital, we remain steadfast in our commitment to prudently navigating these uncertain times. While the Magnificent 7 may capture headlines and investor attention, we manage diversified portfolios that include exposure to sectors and companies positioned to benefit from broader secular and economic trends. Looking forward, we anticipate some volatility as markets digest evolving economic data, uncertain election outcomes around the world, and intensifying geopolitical tension. Meanwhile, we will stay nimble to capitalize on dislocations that may arise in the market and pursue high-quality investments that will prosper over the long term.

Impact Update

We released our fourth impact report, detailing our advocacy efforts and outcomes over the past two years. This quarter, we emphasize the value of stakeholder engagement to gauge real-world impacts. Although challenged legally by the U.S. Chamber of Commerce, the Federal Trade Commission’s (FTC) ban on non-compete agreements was welcomed widely as a significant barrier removed toward wage growth and job mobility. Additionally, Zevin pushed for a living wage policy at Kroger, underscoring persistent wage inequality issues. As we reflect on the outcomes of our shareholder proposals this season — acknowledging both progress and setbacks — we remain staunch advocates for inclusive AI development and robust carbon offset strategies, navigating complex environmental landscapes with resolve. Please read our Q2 2024 Impact Update to learn more.

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