What’s ahead in US: Key market themes to watch in 2H 2024

Overview

Wall Street looks set to round up the first half of the year with its third straight quarter of gains, with the VIX struggling to see much pick-up reflecting a broad risk-on environment. Despite some near-term wobble, the S&P 500 is still up close to 15% year-to-date, while the Nasdaq 100 index is up 18%.

Perhaps not much of a surprise is that stellar outperformance continues to revolve around the technology and communication services sector, as the artificial intelligence (AI) hype runs on. Both sectors pulled ahead from the rest to deliver a 25% return year-to-date. More broadly, ten out of 11 S&P 500 sectors were in the green, with real estate being the only losing sector.

As we head into the second half of the year, here are three key themes on the radar.

Federal Reserve (Fed) outlook – Debate for policy easing rocks on

We kicked off 2024 with broad expectations looking for as many as six rate cuts from the US Fed this year, only for such views to be proved overly dovish in light of slow US inflation progress and resilient economic conditions. Now as market participants recalibrated their views to price for only two cuts by the end of this year, the risks are that the “last mile” inflation fight remain arduous and failed to offer the conviction for any upcoming policy easing.

One may note that US inflation have been consolidating around current levels since the start of the year, while commodities prices such asoil, natural gas have also been on the rise lately, which adds to inflation risks. The Fed may still likely deliver a rate cut this year to retain some credibility, but if policymakers were to guide for a cut-and-hold scenario, markets could still view the easing process as less dovish.

What to watch: US dollar

The Commodity Futures Trading Commission (CFTC) data shows that the aggregate USD positioning against reported G10 currencies has been in net-buying territory since March this year. For now, a series of higher lows seem to keep an upward trend intact for the US dollar, as buyers successfully defended its daily Ichimoku Cloud support in early-June. Key resistance ahead will be at the 107.00 level, which will determine if the dollar can break out of its broader ranging pattern since 2023. On the downside, the upward trendline will serve as immediate support to hold.

US corporate earnings – Recovery to pick up pace

There tends to be a strong positive correlation between S&P 500 companies’ earnings and S&P 500 performance. Thus, for the US equities rally to sustain, a key catalyst may lie on the continued growth in corporate earnings.

The relief is that according to FactSet, 2Q 2024 earnings growth rate for the S&P 500 is estimated to be at 8.8% year-on-year, which may mark the highest growth rate since Q1 2022. The further pick-up in momentum may aid to drown out chatters of earnings recession, but one to note that the heavy-lifting may continue to revolve around growth sectors, with communication services and technology sectors pulling head from the rest.

What to watch: Nasdaq 100

The extreme overbought technical conditions do call for some breather in the near term, but on the broader scale, the index continues to trade within a rising channel pattern since October last year. Recent weakness could come due to the interaction with its upper channel trendline resistance but trading in line with the trend may still leave any buying-on-dips on watch. Any further retracement will leave eyes on the 19,500 level, while a greater support confluence may be at the 18,500 level, where the lower channel trendline stands alongside its daily Ichimoku Cloud support.

US presidential election – Added layer of uncertainty towards year-end

The latest preliminary polls suggest that the US 2024 presidential election may be a close call, as either side failed to garner a significant lead over the other just yet. Markets tend to dislike uncertainty so the general trend may be a more cautious lead-up nearing the election, but once the political uncertainty clears, sentiments may tend to improve into year-end.

Chatters are that the stock market tends to perform better under Democratic presidents without a majority in Congress based on past data, but the state of the economy plays a critical role as well. For now, the US economic backdrop has clearly been more mixed than before. Inflation remains above-target, while unemployment rate has edged to the 4% level for the first time since January 2022, with policymakers potentially facing the dilemma of balancing between price stability and supporting growth.