In the second quarter of 2024, the S&P 500 appreciated by 4.2%. For the same period, the Nasdaq rose by 8.3%. The industries leading the second quarter were semiconductor stocks, particularly in the artificial intelligence segment. Ultimately only three of the eleven economic sectors exceeded the overall S&P 500 for the quarter. As seen below in Table 1 the Information technology sector rose by 13.8% followed by the Communication Services sector 9.4% advancement and followed by Utilities, which increased by 4.4%.
The AI (Artificial Intelligence) theme broadened out to include utility stocks, particularly utility companies with nuclear fleets located in the same geographies of data centers.
Table 1 (As of 6/30/24)
S&P 500 Sector Performance
The market breadth continues to narrow further since the trend began in 2023. In the technology sector, for example, only the equities of semiconductor companies beat the market while software companies were generally flat. To underscore that point further, only 25% of the S&P 500 constituents beat the index return for the quarter while 60% of index stocks were in the red overall. Chart 1 illustrates this divergence as the S&P 500 equal weight index fell 3.1% in the second quarter.
Chart 1 2Q 2024 Performance
S&P 500 Index vs. Equal Weighted S&P 500
Source: FactSet Research
The S&P 500 returns for the first 6 months of 2024 achieved a 14.5% appreciation which represented the best first half of an election year in 50 years. Historically, when the market is up 10% or more during the first 6 months of the year, the remainder of the year is up 80% of the time and averages 8% in the second half. 1 Regarding the election, the market may be baking in a Trump victory, especially in the swing states polls. What could be more important is whether both the House and the Senate flips towards Republican rule.
The political implications for the stock market could come down to maintaining a 21% corporate tax rate versus a proposed increase towards a 28% rate. In addition, a change in capital gains taxes may also be held in check. The same also goes for a potential tax on stock buybacks. Regarding health care, some Affordable Care Act subsidies have expired, and this has resulted in prescription drug prices becoming an election issue. In the end, a political change could have positive implications for managed care and pharmaceutical companies.
The U.S. economy remains resilient, especially after recession calls going back over two years when bond yields inverted. S&P 500 earnings for 2024 are forecasted to rise 11.4%. When all results are finally in, the 2nd Quarter earnings window may ultimately lead to an increase 9.2%. While still early to tell the earnings results within three sectors (consumer staples, industrials, and materials) could post negative results. The remaining eight economic sectors could post 5% earnings growth once the second quarter is finalized.
Finding the Areas of Secular Growth
Over the last few years, legislators have passed four laws that provide fiscal stimulus in distinct areas of the economy. All said, despite disagreement on many issues, both Democrats and Republicans agreed on bipartisan spending related to onshoring manufacturing, investing in US infrastructure, and revitalizing clean energy to fuel the information economy. The CHIPS and Science Act seeks to revitalize the domestic production of semiconductors. The Inflation Reduction Act (IRA) is broad-based across several industries but has tax incentives and low-cost loans for nuclear power generation. The Infrastructure Investment and Jobs Act (IIJA) is directed towards ungraded infrastructure across roads, bridges, ports, rail, and water treatment. Finally, toward the end of the quarter, the Advance Act was passed and supports revitalizing nuclear power, especially in the state-of-the-art small modular reactor arena. Collectively, these measures have ten-year budgeted spending and are intended to enhance the global competitive posture of the US economy.
Along these lines, over the last several quarters, our research has identified individual companies that are currently experiencing strong demand for their products/services, which ultimately should propel future dividend growth rates for these select businesses. These companies are indirect beneficiaries of these themes and as a result, are trading at more attractive valuations.
In contrast to many dividend managers encumbered by restrictive rules regarding minimum dividend yields or length of payment histories, Brentview’s process looks across the entire dividend-paying landscape. Some of these companies have lower nominal yields, however, their dividend growth rates are attractive, and their fundamentals are very compelling.
Below is a summary of the four secular growth pillars: Artificial Intelligence, Infrastructure, GLP-1 class drugs, and Electrical Baseload Power generation.
Dividend Growth Scorecard
According to Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, in 2Q 2024, the cumulative dollar value of U.S. common stock dividends per share posted a 1.2% increase for the trailing twelve months 2.
As seen in Table 2, on a year-to-date basis, eleven GICS sectors have seen a dividend increase in 2024. For the year, nineteen of our thirty-seven holdings (51%) announced dividend increases of 9.4% on average. This average rate outpaced the rate of inflation. Also, it is important to note that one of our financial sector holdings announced dividend increases twice this year, by an average of 9.7%. All said, it was a busy quarter as eight holdings in our portfolio announced increased dividend payments. Our dividend growth rates remain on track and well ahead of the S&P 500’s 2024 forecast of 6% dividend growth.
Table 2
Brentview Dividend Growth (As of 6/30/24)
Source: Public company filings
How is Brentview positioning our portfolios?
At Brentview, we are adhering to previously mentioned secular growth themes that are also consistent with our dividend growth philosophy. From a portfolio perspective, we have a mandated requirement for all sectors, which we believe helps improve consistency over time. While no portfolio trades occurred this
quarter, we continue to monitor our holdings for their fundamentals. Ultimately the result of investing in consistent Dividend Growers shifts the focus from generating a total return off a volatile figure (earnings multiples) towards a more stable figure (cash flows). When combined with a broad investable universe of dividend-paying companies, we believe our selection of holdings can evolve as the economic landscape changes.
Our portfolio beta, a measure of risk, is also mandated to be lower than the S&P 500, our primary benchmark. However, individual companies repeatedly see their risk relative to the market change, which beta measures. Generally, this change in risk can be related to company-specific events or even its competitive posture versus the peer group. For this reason, we regularly track beta for both the companies and sectors. We are currently the most overweight consumer staples, which counterbalances our absolute weighting in information technology. Our largest underweight lies in the communication services sector, which rallied on the news of Alphabet and Meta Platforms initiating their first dividend.
Now that those two companies pay dividends, 84% of the S&P 500 index by weight pays a dividend. We highlighted these initiations for our clients in the April value-added Brentview Dividend Digest commentary titled “Changing Dividend Landscape”.
Sources
This commentary reflects the views of Brentview Investment Management and is subject to change as market and other conditions warrant. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, sector, or index. The commentary should not be seen as a solicitation or offer to buy or sell any securities. The advisor (Brentview Investment Management, LLC), and their employees and clients, may hold or trade the securities mentioned in this commentary. Diversification does not guarantee a profit or eliminate the risk of a loss. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
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