Q1 2024 Update - AI Enthusiasm, Fed Rate Cuts and Strong Growth Power Stocks to New Highs

Welcome to Spring! As we wrap up the first quarter of 2024, we're thrilled to announce that The Davis Executive Wealth Management Group has surpassed $500 million in managed assets. This milestone is a testament to the hard work of our team and the trust and confidence of our valued clients in our team. On behalf of Michaelyn, Mike, Ed and myself, Thank you.

The 2023 rally continued in the first quarter of 2024 as a positive combination of stable economic growth, falling inflation, impending Fed rate cuts and ever-growing enthusiasm towards artificial intelligence (AI) propelled stocks higher, as the S&P 500 rose above 5,000 for the first time and hit new all-time highs.?

Despite some initial volatility, particularly around concerns regarding inflation and Fed rate adjustments, stocks climbed steadily throughout the quarter. Key highlights include:

• Fourth-quarter corporate earnings exceeded expectations, helping stocks recover from early declines.
• The Federal Reserve signaled an end to rate hikes and hinted at forthcoming rate cuts, boosting investor confidence.
• Strong earnings reports from companies like Nvidia fueled excitement around AI, propelling large-cap tech stocks and driving the S&P 500 to new record highs.

First Quarter Performance Review

The first quarter of 2024 reflected a much more evenly distributed rally compared to the fourth quarter of 2023, where tech and tech-aligned sectors handily outperformed the rest of the markets. Over the past three months markets saw broad gains distributed more equitably amongst various sectors and industries.??

However, while the rally in stocks did broaden out in the first quarter, that did not benefit small caps as they a notable laggard. Small caps registered a positive return for the first quarter but lagged large caps as concerns about stubbornly high interest rates weighed heavily, as they are more sensitive to higher funding costs and slowing growth.

From an investment style standpoint, growth once again outperformed value in the first quarter but the margin was much closer than last year, as both investment styles logged strong quarterly returns. Continued heightened AI enthusiasm was the main reason for the modest outperformance of growth as large-cap tech stocks again saw strong rallies in Q1.

Here are some impressive statistics on the backdrop of the strong market we have seen:

• The S&P 500 has now logged five straight monthly gains, with 2024’s 1st quarter performance having exceeded 10%.?This represents the 11th best 1st Quarter since 1950.?
• Since 1950, the top 24 instances of the best 1st quarter returns have never led to a down year. Of the top 15 Q1 returns, only in 1987, did the year prove negative from April into year-end.?However, the year still ended with a positive return.

·???????? The median return after a positive string of four straight winter months of November-February has been 15% from March into year-end.?This string has occurred 16 times in the last 90 years and has an uninterrupted track record of gains from March into year-end (FS Insights, 4/1/24).

Second Quarter Market Outlook

We begin the second quarter in the midst of a positive macroeconomic environment as growth appears stable, inflation is still falling, the Fed is likely going to deliver the first rate cut in four years and AI enthusiasm keeps earnings estimates high. But while this is undoubtedly a favorable set up, the strong rally of the last six months has left the S&P 500 at previously historically unsustainable valuations while investor and analyst sentiment is very bullish and, potentially, complacent. So, while the outlook is currently positive, it’s essential we continue to monitor the macroeconomic horizon for risks because at current stretched valuations and with sentiment very bullish, the market is vulnerable to a negative surprise.???

We remain the most constructive of the small/mid cap sectors of the market which under-preformed in Q1 2024 and have been in a brutal Bear Market since 2021 when the Russell 2000 last hit it’s all time. Today it sits 14% off it’s all time high per Yahoo Finance. The catalyst for the Russell 2000 going forward:

• The Russell 2000 is set to grow revenues & Earnings Per Share (EPS) faster than the S&P 500 in 2025
• The faster sales & EPS growth may surprise many analysists who will be forced to play catchup and raise estimates as the year progresses. This will be led by: Fed lowering rates, ISM (Manufacturing Index bottoming), global inflation easing & CEO caution ending.
• Valuations are at 25-year lows – Russell 2000 vs. S&P 500 with the median P/E (Price to earnings) for 2025 of 10x vs. 16.9x.
• Shouldn’t?Small-caps trade at a valuation premium, arguably, given the higher top-line (revs) and EPS growth??So, does a 41% P/E discount make sense? Or a 44% P/B discount. This is not “cheap for a reason.”‘?And when CEO confidence recovers, we also see the low valuations as setting the stage for synergistic M&A and consolidation.
• In 1999, this was also the same exact launch point for 12-years of outperformance.?From 1999 to 2011, small-caps outperformed by 650 bp(basis points) annually and a cumulative 113% (11,300bp).?

Thank you to Tom Lee and the team at FS Insights for those statistics.

Bottom line, this historic rally is currently supported by positive fundamentals. But we cannot let the currently positive set up blind us to risks and that’s why, while we are pleased with the market performance, we are also focused on managing both reward and risk in portfolios, because despite the strong performance this market remains vulnerable to negative news.?

At The Davis Executive Wealth Management Group, we are committed to helping you effectively navigate the markets regardless of whether it’s a Bull or a Bear. Successful investing is a marathon, not a sprint and we will remain focused on the diversified approach set up to meet your long-term investment goals.

Sincerely,

Tim

Listen to my interview on Sirus XM’s Business Briefing: https://youtu.be/URCkH5TQpa4?si=TzpkZdtKEvQnWDio

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Timothy Davis, CFP?

Executive Managing Director – Wealth Manager

Partner

Davis Executive Wealth Management Group

Steward Partners Global Advisory

One International Place,?Suite 3210

Boston, MA 02110

(Direct) 617-377-4418

(Office) 617-377-4422

(Toll Free) 888-371-0086

(Fax) 857-233-2966

[email protected]

https://www.davis.stewardpartners.com/

https://www.dhirubhai.net/company/timothy-davis-executive-wealth-management

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*2019 - 2023 Forbes Best-In-State Wealth Advisor

https://www.forbes.com/profile/timothy-davis

All recognition award information can be found on Steward Partners’ website at

https://www.stewardpartners.com/Recognition.7.htm

https://www.forbes.com/best-in-state-wealth-advisors

The author(s) and are neither employees of nor affiliated with Steward Partners Investment Solutions, LLC.? We are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by Steward Partners of any information contained in the presentation.? The opinions expressed by the authors/presenters are solely their own and do not necessarily reflect those of Steward Partners.? The information and data in the presentation may be deemed reliable; however, their accuracy and completeness is not guaranteed by Steward Partners and providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned.? In addition, the information and data used are subject to change without notice.? Past performance is not a guarantee of future results.? One basis point is equal to 1/100th of 1% or 0.01%.? In decimal form, one basis point appears as 0.0001 (0.01/100). Basis points(BPS) are used to show the change in the value or rate of a financial instrument, such as 1% change equals a change of 100 basis points and .01% change equals one basis point.

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