Market Recap 5/24/2024: Nasdaq Shines as Tech Rally Persists

The tech-heavy Nasdaq Composite was the standout performer on Wall Street last week, rallying 1.4% to close at 16,921 as investors continued to pile into artificial intelligence and cloud computing stocks. The Dow Jones Industrial Average and Russell 2000, meanwhile, struggled to find direction amid signs of a cooling economy, shedding 2.3% and 1.2%, respectively. The S&P 500 was little changed on the week, finishing flat at 5,305.

Key Takeaways

• Nasdaq surges 1.4% to 16,921, extends YTD gain to 12.7%
• Dow slips 2.3% to 39,070, but still up 3.7% YTD
• S&P 500 flat at 5,305, holds onto 11.2% YTD advance
• Russell 2000 falls 1.2%, lags broader market with 2.1% YTD gain
• Nvidia, AI-linked tech stocks lead Nasdaq higher
• Softer retail sales, job growth data hint at economic slowdown

Tech Titans Power Nasdaq to Fresh Highs

The Nasdaq’s rally was fueled by ongoing enthusiasm for companies at the forefront of the AI revolution, with Nvidia leading the charge. Shares of the chipmaker surged to new records after the company posted blowout earnings and issued bullish guidance, and announced a 10-for-1 stock split, cementing its status as a key beneficiary of the AI boom.

Other tech heavyweights also posted strong gains, with Microsoft, Apple, and Amazon all rising on optimism about their AI initiatives and cloud computing prospects. The outperformance of these mega-cap names underscored the market’s willingness to pay up for growth in an increasingly uncertain economic environment.

The S&P 500 was able to eke out a modest gain thanks to the strength in tech, which helped offset weakness in more economically sensitive sectors like energy and industrials. The muted performance of the broad market index reflected investors’ cautious stance amid mixed economic data and ongoing concerns about inflation and interest rates.

Economic Data Paints Mixed Picture

The market’s choppy performance came against a backdrop of conflicting economic signals. On the one hand, retail sales data for April came in weaker than expected, suggesting that consumer spending may be starting to cool after a strong start to the year. The softer reading added to concerns that the economy may be losing momentum as higher prices and borrowing costs start to bite.

At the same time, the labor market showed signs of resilience, with initial jobless claims falling more than anticipated and continuing claims remaining near historic lows. The data suggested that despite pockets of weakness, the overall job market remains healthy, which could help support consumer spending in the months ahead.

Inflation data was also in focus, with the core Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, rising 4.6% year-over-year in April. While still elevated, the reading was down slightly from March and in line with expectations, suggesting that price pressures may be starting to ease.

Hedge funds are facing a challenging fundraising environment as the pace of private equity exits slows to a crawl. With buyout-backed sales dropping to their lowest level in a decade at just $345 billion, the flow of capital from private equity to hedge funds has slowed to a trickle, leaving many managers struggling to raise new money.

The backlog of companies waiting to be sold has swelled to a record high of over 28,000, with a combined value of more than $3 trillion. The glut of unsold assets has made it difficult for private equity firms to cash out of their investments and return money to investors, who in turn have less capital to allocate to hedge funds.

The slowdown in private equity exits has coincided with a broader shift in investor sentiment away from hedge funds, which have struggled to generate consistent returns in recent years. Many institutional investors, including pension funds and endowments, have been pulling money out of the sector in favor of lower-cost index funds and other passive strategies.

The combination of reduced liquidity and increased investor skepticism has created a perfect storm for hedge funds, with many firms forced to cut fees, reduce headcount, or even shut down altogether. While some managers have been able to adapt to the new reality by launching more investor-friendly products or focusing on niche strategies, the overall outlook for the industry remains challenging.

Conservative Investors

With economic growth showing signs of cooling and inflation risks still lurking, conservative investors may want to focus on quality companies with strong balance sheets, consistent cash flows, and defensive characteristics. Consumer staples, healthcare, and utilities are among the sectors that have historically held up well during periods of economic uncertainty. Short-duration bonds and cash equivalents can also provide a measure of stability in a volatile market.

Growth Investors

Growth investors may want to focus on companies that are benefiting from long-term secular trends such as artificial intelligence, renewable energy, and digital transformation. While valuations in some of these areas have become stretched, there are still opportunities to find reasonably priced stocks with strong growth prospects. Cybersecurity, cloud computing, and e-commerce are among the industries that could continue to see robust demand even in a slower-growth environment.

Opportunistic Investors

For investors with a higher risk tolerance, the recent pullback in economically sensitive sectors like energy, industrials, and materials may present some attractive entry points. While these areas could remain volatile in the near term, they may be poised for a rebound if economic growth starts to pick up steam in the second half of the year. Small-cap value stocks and emerging markets equities are other areas that could offer upside potential for patient investors.

Our Take: Balancing Growth and Resilience Key in Uncertain Times

The market’s divergent performance last week underscores the challenge investors face in navigating an increasingly complex and uncertain economic landscape. While the tech sector’s ongoing strength is certainly encouraging, the weakness in more economically sensitive areas suggests that the road ahead may be bumpy.

In our view, the key to success in this environment is to focus on building a diversified portfolio that can balance growth potential with resilience in the face of potential headwinds. While the allure of high-flying tech stocks is understandable, investors would be wise to also consider more defensive areas of the market that can provide a measure of stability if economic conditions deteriorate.

At the same time, we believe that the long-term outlook for many of the industries driving the tech sector’s outperformance remains bright. The ongoing shift towards digital transformation and the accelerating adoption of AI and other emerging technologies are likely to create significant opportunities for investors in the years ahead.

To capitalize on these trends while also managing risk, we recommend a barbell approach that combines exposure to both growth and value stocks, as well as a mix of cyclical and defensive sectors. By spreading bets across a range of industries and investment styles, investors can participate in the market’s upside potential while also building a cushion against potential downturns.

Of course, no investment strategy is without risks, and investors should always be prepared for the possibility of short-term volatility and periodic market corrections. By staying disciplined, diversified, and focused on long-term goals, however, we believe that investors can navigate the challenges ahead and emerge stronger on the other side.

The holiday-shortened week ahead brings a lighter calendar of economic data and earnings reports, but there will still be plenty for investors to chew on. The Conference Board’s consumer confidence index and the University of Michigan’s consumer sentiment survey will provide fresh insights into the state of the American consumer, while the latest readings on durable goods orders and pending home sales will offer clues on the health of the manufacturing and housing sectors.

On the earnings front, a handful of notable companies, including Salesforce.com, Costco, and Dell Technologies, are slated to report results. While the bulk of earnings season is now over, these reports could still move the market if they deviate significantly from expectations.

Investors will also be keeping a close eye on developments in Washington, where lawmakers are racing to reach a deal on raising the debt ceiling before the June 1 deadline. While most observers expect a last-minute agreement, any signs of heightened brinkmanship could rattle markets in the days ahead.

Finally, geopolitical tensions remain a wild card, with the ongoing war in Ukraine and rising tensions between the U.S. and China over Taiwan continuing to simmer in the background. While these risks have largely been overshadowed by domestic concerns in recent weeks, they can flare up at any time and disrupt the market’s fragile state.

 

Views expressed here should not be considered personal investment advice.

Sources

Edward Jones

AP

Yahoo

Financial Times