Market predictions for the rest of 2024

Key takeaways:

1. Interest rate cut expectations drove stocks and bonds up over the summer, though not without some volatility.
2. Bonds are back as portfolio diversifiers: when stock volatility picked up, bonds provided ballast.
3. Alternatives have continued to deliver competitive returns while also diversifying stock and bond exposure.

Markets are shifting rapidly as we move toward a Fed easing cycle and evaluate economic data to assess just how much economic growth may be slowing. And with U.S. elections coming up, we can expect additional market volatility as investors parse through uncertainty around who might win various offices and how the outcomes might impact policy.

On the heels of a wild summer for financial markets, we believe now is a good time to revisit portfolios and make sure you’re comfortable with your allocations going forward. We have three market predictions for the rest of the year and ideas for how you can prepare your portfolios. But first, let’s recap what we learned from the market this summer.

Summer market performance recap (the markets did not go on vacation)

Interest rates moved down

Evidence of slowing inflation and rising unemployment kicked off a repricing in Fed rate cut expectations and bond market yields that continued through the summer.

Expectations for Fed rate cuts went from a “maybe they’ll cut this year” outlook at the end of May, with markets pricing in a 64% likelihood of one cut or less by year end, to a “it’s just a matter of how many rate cuts” discussion today, with markets now pricing in a 27% likelihood of three cuts this year and a 73% likelihood of four or more.¹

Interest rates fell over the summer
Treasury yields

As falling rates suggest potentially lower funding costs for growing businesses, the market’s optimism for imminent rate cuts sent small cap stocks rallying 10.5% in the month of July, as per Bloomberg, before reversing gains on concerns around what slowing growth might mean for smaller cap stocks.

Technology stocks stayed in the spotlight

Technology stocks kept investors on edge this summer. Sentiment around artificial intelligence (AI) swung between concerns about whether companies would be able to monetize their huge investments in the rapidly evolving technology and enthusiasm over AI-driven growth prospects. The ‘Magnificent 7’* cohort posted five consecutive weeks of negative returns before reversing and closing August 16^th with its best weekly performance (+6.3%) of the year. As of August 29^th, the Magnificent 7 have returned 34% year to date.^2 
*The Magnificent 7 includes Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

It’s no coincidence that indexes with the highest allocations to the tech sector have posted strong gains in tandem.

Tech stocks are driving strong returns in U.S. large cap indexes
Performance year-to-date and technology sector exposure by index

We remain constructive on the tech sector, and believe that today’s valuations are justified by growth potential. With higher than recent averages – tech stocks are currently trading at a 20% premium relative to their five-year historical average – today’s 29.7x forward price-to-equity ratio is well below the 103.5x of November 2001.³

If you are concerned about tech stock valuations, or if you believe earnings growth could be broadening out beyond tech stocks, you could seek to diversify tech exposure by trimming U.S. growth or U.S. broad-based large cap exposure and adding to small caps, international or value stocks.⁴ Those who are also concerned about slowing growth may prefer large cap value, with a lean towards higher quality stocks. Earnings growth has just turned positive on the S&P 500 ex-technology universe, but small caps are still struggling amid the combination of slowing growth and restrictive real rates.

S&P 500 ex-tech earnings turned positive, while small caps remain challenged
Year-over-year earnings growth, by quarter (%)

Bonds may provide diversification amid a volatile stock market

While stocks broadly climbed higher this summer, a sharp-but-quick dip gave bonds a chance to prove themselves. When the S&P 500 fell by a whopping 7% between July 16^th and August 5^th, the Bloomberg U.S. Aggregate Bond Index rose by 2%, and long duration Treasuries, as measured by the ICE U.S. Treasury 20+ Years Bond Index, rose by 5.5%.

Bonds delivered strong performance in stressed markets
Total returns, July 16-August 5, 2024

With inflation appearing to be on its way down and the Fed having expressed a willingness to lower policy rates, stock/bond correlations are not likely to rise if history holds true, suggesting that bonds could continue to be effective diversifiers of stock risk this fall.

Liquid alternatives had our backs

While bonds effectively diversified stock market risk this summer, liquid alternative funds showed up for investors too. Elevated bond market volatility, particularly in long-duration bonds, led us to prefer a more diversified basket of diversifiers to manage risk in a multi-asset portfolio. Particular alternative strategies that held up well this summer include the BlackRock Global Equity Market Neutral Fund (BDMIX), which posted a 2.96% return from May 31 to August 21, and the BlackRock Systematic Multi-Strategy Fund (BIMBX), which gained 4.63% for the same period.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance.

Wondering whether you need liquid alternatives in your portfolio when bonds appear to be coming back? I do like bonds for diversifying against severe risk-off moves, which will be important if recession fears really pick up again. However, I believe alternatives are set up to deliver more competitive returns while still providing risk diversification if the Fed’s soft landing comes to fruition. After all, ‘cash plus alpha’⁵ returns could continue to be attractive in a world where cash rates – while falling – are still expected to provide a reasonably good cushion, and bond markets may have already priced in current rate cut expectations.

Alternatives have delivered returns independent of stock and bond performance
Average monthly performance since last Fed hike, 7/31/23-7/31/24

Three market predictions for the rest of 2024

1. Market expectations of Fed policy shift (again), favoring an active approach to fixed income.

This isn’t the first time interest rate expectations have repriced rapidly, and it may not be the last time, either. Historically, our fixed income investors have long favored the belly of the curve as the “goldilocks” positioning that takes today’s inverted yield curve into account. But with a large number of cuts already priced in and the potential for future big swings, an active approach to curve positioning could pay dividends.

An allocation to the BlackRock Strategic Income Opportunities Fund (BSIIX) may offer a flexible approach to curve positioning and security selection.

2. Imminent Fed cuts cause investors to revisit income portfolios

Everyone has gotten used to earning a 5.5% yield with very little risk, and will now need to rejigger income portfolios as the Fed starts cutting rates to maintain that low risk, high yield experience. This will take some creativity, given falling Treasury yields and tight credit spreads. Intermediate bonds may allow you to lock in quality yield, while a risk-managed approach to higher yielding ‘plus’ bonds could help increase income. It may also be a good time to explore the potential of generating higher income from stocks, by looking for dividend-paying stocks, using options-based strategies, or both.

If this is part of your overall objective, these products seek to offer higher income: iShares Flexible Income Active ETF (BINC), iShares Advantage Large Cap Income ETF (BALI) and BlackRock High Equity Income Fund (BMCIX).

3. Taxes come into focus as investors rebalance portfolios that are broadly up

Investors rebalancing their portfolios may need to contend with large capital gains, particularly in growth stocks: the S&P 500 Growth is up 61% since January 1, 2023, and 24% year to date through August 29th. And there’s not a lot of negative asset class returns to offset those gains. Even bonds have recovered from their slightly negative start to the year to be in firmly positive territory.

This is a good time to get creative with your tax management strategies. Consider Aperio direct indexing SMAs that can do the work of tax loss harvesting for you, and SpiderRock option overlay strategies that could potentially allow you to adjust your risk exposure using option strategies. And don’t forget that you can rebalance allocations by giving stock to charity, too. 

Getting your portfolios ready for the fall

BlackRock can help you construct well-diversified portfolios designed for today’s markets. Contact your BlackRock representative for more information or explore our online investment tools and resources.

Explore the Advisor Outlook – BlackRock’s monthly market outlook for financial advisors – for more details on our latest market and portfolio insights.

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