Hello, everyone, and welcome to the June Market Compass. Now, it's hard to believe we've almost reached the midpoint of 2024, and we certainly hope everyone is enjoying the warmer weather, longer days, and perhaps some well-earned downtime in the weeks ahead. Now, mid-year is also a good time to do a little reflection on where we've been thus far and what we're watching going forward.
So today, I'll go through a market scorecard to check in on what markets have been doing and any key trends we are seeing. Then I'll highlight three key factors we're watching in the second half of 2024 that we believe will be the drivers of markets and the economy. These are inflation and central bank policy, corporate earnings growth, and the US presidential elections.
So how have markets done so far in 2024? Now, overall, it was a strong start to the year, more so in the US than in Canada. If we look at this chart on annual returns for the S&P 500, the TSX and the Canadian Aggregate Bond Index, we can see that after a strong year in 2023, with the S&P 500 total return up over 26%, stocks continue to perform well in 2024.
In fact, the S&P 500 total return is up over 15% as of mid-June. However, the bond market has lagged and is only slightly positive for the year. This is in part because interest rates have remained high. And while the Bank of Canada cut interest rates earlier this month, the Federal Reserve in the US has not. And this has put downward pressure on bond prices in both countries.
Now looking across a broader set of indexes and asset classes, we notice a couple of interesting trends. The momentum in the market continues to be driven by areas like artificial intelligence and technology, with the Magnificent Seven cohort and the tech-heavy NASDAQ leading the way higher again this year. This has also supported S&P 500 returns, which have about a 50% weight to technology and growth sectors.
Now, as we move right on this chart, we can see lower returns in areas with less exposure to technology and growth, with more modest increases in the 4% to 6% range. And the areas that are lagging so far this year are the more interest rate sensitive parts of the market, including mid-caps and bonds.
Now, as we head into the second half of the year, one theme that we continue to monitor is the path of inflation and the Bank of Canada and the Federal Reserve. The Bank of Canada cut the key lending rate by 1/4% to 4.75% in June. This was the first reduction in four years and the first cut by a G7 central bank this cycle.
Now, this comes not only as Canada's inflation rate has moderated at a better pace than the US, but the economy's growth rate has also softened. Now, while the magnitude of the cut may seem marginal, it is significant as it marks the official turning point after more than two years of restrictive policy. We expect the Bank of Canada to embark on a gradual rate-cutting cycle alongside the Fed with potentially one or two more rate cuts in 2024.
While US inflation has remained higher than expected during the first few months of 2024, more recently, we're seeing inflation come in cooler than expected and the disinflation trend gradually resume. Now, in our view, while we may not get a straight line lower, there are catalysts that may move inflation rates closer to the Fed's 2% target. These include shelter and rent components of core CPI that may move lower as they play catch up to real-time data and a potential softening in wage gains that should lead to easing services inflation. Better inflation data would, of course, give the Fed more confidence in embarking on a rate-cutting cycle.
Now, at the June Fed meeting, the updated survey of Fed officials suggested a single rate cut in 2024, although still indicated a multi-year rate-cutting path ahead. Now, in our view, if we do get two or three more months of lower inflation or the labor market and wage growth softens more than expected, we could see up to two rate cuts this year. Now, more broadly, we believe the Fed is poised to gradually bring rates down to a more neutral level in the one to three years ahead. And if they can do that without a significant deceleration in the economy, then both stocks and bonds should be well supported.
Another key element we're watching in the second half of 2024 is earnings growth. We know that stock markets are underpinned by earnings growth, perhaps more so than any other factor. Now, the good news is that the TSX and S&P 500 earnings growth is expected to move higher after mixed results last year.
TSX earnings growth for 2024 is forecast to come in at a modest 5% versus 2023, where we saw a year of -9% growth. In the US, the S&P 500 is expected to have earnings growth of 13% versus -1% in 2023. Now, while last year's stock market returns were driven in large part by valuation expansion, particularly in tech and growth parts of the market, this year, markets may be more supported by earnings growth as well.
Now, also of note, in the first half of 2024, earnings growth for the S&P 500 companies was largely driven by AI, tech, and growth sectors of the market. However, as we head to the third and fourth quarter of 2024, we would expect to see a broader set of sectors contribute to earnings growth, which may also lead to a broadening of market leadership.
Finally, perhaps one of the more anticipated events of the second half of 2024 is the US presidential election, which will occur on Tuesday, November 5. Now, while it's still early days, and we'll continue to hear more specifics on US policy agendas in the months ahead, for now, we can review the impacts of previous elections on Canadian and US markets. For example, since 1977, in a four-year election cycle, year 3 tends to be the best year for US markets, and perhaps we saw that last year. Now, notably year 4, the year we're in now, tends to be third-best, perhaps as some uncertainty is lifted.
In addition, while we do tend to see volatility in the six to eight weeks leading up to US election day, in the weeks following the election, market returns tend to rise regardless of the party in office. Now over to Julie for our perspective on what this means for you.
Thank you, Mona. So far, the S&P 500 is up over 13% this year and continues to be led by the Magnificent Seven. The TSX is up over 3% with equities outperforming bonds in both countries. This speaks to the importance of diversification across asset classes, sectors, and regions.
Another headline was the Bank of Canada cutting interest rates ahead of any other G7 country. This means interest-bearing investments in Canada may decline, and the cost of debt will likely be reduced. What exactly that means to you depends on your goals and your relationship with risk, the type of debt you have, and the amount of debt you hold relative to your income.
And as we head into the second half of the year, expect some noise and potential volatility in the markets as we move through the US election. As we saw, the impact to both US and Canadian markets has historically been positive in the US election year. Elections are part of a regular business cycle. So speak to your Edward Jones financial advisor to determine if any of this has an impact on your individual financial strategy.
And with that, I thank you, and I look forward to a fantastic second half of 2024. See you next quarter on "The Market Compass."