After recent S&P500 highs, is a consolidation phase ahead?
15 JUL, 2024
After the recent highs of the S&P500, Federated Hermes specialists warn of the risk of facing a consolidation phase due to the seasonal weakening in August and September. Overall sentiment remains bullish, however, the quarterly reporting season and profit taking will determine the future of the index.
Seasonality tends to weaken in August & September
Linda Duessel, Senior Equity Strategist at Federated Hermes
The S&P 500 rose to yet another new all-time high last week, cheering Jerome Powell’s words that disinflation looks to be back on track. Over the last 20 years, July has been the strongest month for both the Nasdaq (up 3.5%) and the S&P 500 (up 2.3%), with the first half of the month being particularly strong. With the relative strength indicator suggesting overbought levels, we could be facing a consolidation before too long, as seasonality does tend to weaken in August and September. Breadth remains quite weak, with just 24% of S&P 500 stocks outperforming the index in the first half of this year. And it’s curious to see a cyclical sector like Materials underperform even as the broader market posts new highs. Still, nearly 80% of stocks are within 20% of their 52-week highs, so it’s not just Technology that’s faring well. And price is not the only form of return to equity ownership; dividends have been rising nicely, with S&P 500 average dividends up 6.5% in Q2 year on year. Flows have been strong, with equity ETFs seeing $265 billion of inflows in the first half of this year, second only to 2021’s $356 billion. As for global markets, they have participated in equity gains as well, with the MSCI ACWI hitting a new all-time high in June.
Looking ahead? For now, the industry forecast is to enjoy the fastest earnings growth in the entire S&P 500 is video games. The Gen Zs at our friend’s annual July 4th bash will be thrilled when College Football 25 is out later this month and Grand Theft Auto VI is released next year! As for the rest of us, there were no fireworks on the ground. We kept our political filters in check, respecting the mixed opinions of the group.
Heading into possible summer storms
Stephen Auth, Chief Investment Officer for Equities at Federated Hermes
Generally speaking, I don't like taking profits in secular bull markets. That’s certainly been the right call for the last 18 months, and our patience has been handsomely rewarded. However, the recent market action, especially as we head into possible summer storms and the earnings season, suggests a little humility is now in order. So earlier this week, we cut our equity overweight from 500 basis points to 300 in our moderate-risk-balanced allocation models. Those cuts came out of large-cap growth and international equities, up 47% and 23%, respectively, since the adds we made there last year.
This move diminishes, but does not reverse, our overall bullish stance. We’re maintaining our 6,000 target on the S&P 500 for late 2025. Although that target is now only 7% away, we are keeping all our remaining equity over weights in large-cap value, small-cap growth and emerging markets. We expect these areas will outperform the S&P from here, as they benefit from the “broadening out” theme we’ve been discussing in our recent market memos.
We put the proceeds from our large-cap growth and international trims into money markets. Yields there remain high, and the liquidity will give us the opportunity to reload should a significant correction unfold.
