What a Strong Economy Now Means for the Rest of 2024

Tom Lauricella, Morningstar’s global markets editor and Smart Investor newsletter editor, discusses how a strong economy has defied expectations, why it’s still worthwhile to invest in bonds, and what to watch for in the second half of 2024.

How is the Market Reacting to the Federal Reserve’s Interest Rate Forecast?

Will the Economy Get a Soft Landing?

Nvidia is Driving the Stock Market’s Bull Run

Nvidia Stock Outlook

Why We’re Seeing More Stock Splits in 2024

New Dividends From Mega-Cap Tech Companies

What Could Provide a Lift to the Bond Market?

Why Investors Should Still Own Bonds

Key Takeaways

Read about topics from this episode.

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A Cautious Fed Eyes Just One Rate Cut In 2024

These Stocks Are (Still) Powering the Bull Market

What Does Nvidia’s Stock Split Mean for Investors?

Job Gains Surged Again In May, Dashing Hopes of a Sustainable Slowdown

It’s Been a Terrible Time for Bonds. Here’s Why You Should Own Them

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Invest in SpaceX Alongside Elon Musk? Why This Closed-End Fund Is Not Worth the Ride

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Ivanna Hampton

Tom Lauricella

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Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton. Expectations are shifting across the markets and economy. Inflation’s gripped tightened before loosening again. The Federal Reserve predicted interest rate cuts would come, the stock market is waiting, and so are bond investors. Yet, the promise of artificial intelligence is stirring up optimism. Tom Lauricella is joining the podcast to discuss the biggest headlines from the first half of the year. He is Morningstar, Inc.’s Global Markets Editor and Smart Investor newsletter editor. Here is our conversation.

Welcome back to the podcast, Tom.

Tom Lauricella: Glad to be here.

Hampton: The Federal Reserve scaled back its interest rate forecast from three cuts to only one this year. Talk about how the markets are reacting to this pivot.

Lauricella: It’s been an interesting reaction out there in the markets. On the one hand, you do have the Fed saying that it expects to be cutting rates less. You would think that that would not be good for the equities market. You would think it would not be great for the bond market. But the markets seem to be taking it in stride almost as if they don’t really believe that’s what’s going to be happening with the Fed. Stocks have held in well. Bonds have bounced back from the worst levels of the year. So, at this point, it seems that the markets seem to be betting that inflation is going to turn out better than the Fed is expecting. And that perhaps they will be cutting rates more than they say they’re going to be cutting them.

Hampton: Inflation came in hot in Q1 and started to cool again. Meanwhile, job growth accelerated in May. How does this data affect the hopes of a so-called soft landing?

Lauricella: Yeah. So, this is part of the interesting dynamic that’s happening out there. On the inflation side, inflation numbers in the CPI have looked a little bit better the last two months after that very hot Q1 that had everybody worried. The consensus seems to be that inflation should improve over the course of the year. It’s really all a matter of just how much and whether it will be enough for the Fed. But most folks seem to be convinced that inflation is on the right trajectory.

The jobs front, that’s remained very strong, defying continual expectations every month. Economists are calling for more of a slowdown that actually happens. So, job growth remains strong. We’ve seen some interesting dynamics there where, for example, immigration has played a big role in supporting job growth in this country. And so, there are other factors that are feeding through and, of course, strong jobs means that consumers like to keep spending, which keeps the economy rolling. So, despite the fact that we had these very significant interest rate increases starting in 2022, the economy is doing well and there’s no sign of a recession. So, you have people saying that the soft landing or no landing really at this point is very much in the cards.

Hampton: AI leader NVIDIA is driving the stock market’s bull run. Can you talk about whether this is a positive or a negative?

Lauricella: Yeah, we seem to be talking about NVIDIA all the time. In one sense, for very good reason. I mean, it’s really a remarkable story that’s unfolded over the past year. Really, only the past 12, 13 months, and NVIDIA unveiled its earnings report last year that showed this massive unexpected growth in AI revenues. At this point, the AI business for NVIDIA just seems to be real. There’s a lot of hype around AI stocks, but NVIDIA is really – it’s got real products, it’s building a network for developers. And so, the stock is really powered a lot of the gains. There’s a lot of folks who are concerned that the market breadth is too narrow when it comes to this rally. Again, it’s another thing that seems to be defying a lot of predictions that that will end. But at this point, it seems that NVIDIA is on a solid trajectory. It’s like any stock, could easily have its bumps. But for now, it is supporting a decent amount of stock market’s gains.

Hampton: The chipmaker’s market value recently hit $3 trillion for the first time ever. It’s in the company of Microsoft and Apple. What does team hear from analysts about NVIDIA’s outlook?

Lauricella: Right. Yeah, NVIDIA hit that $3 trillion mark. And it’s really rocketed up to be one of these household name companies very quickly. It wasn’t very long ago that it was primarily known for just making chips for computer games. And here it is powering a lot of the AI revolution. Our analysts are very positive on the outlook for NVIDIA. Brian Colello thinks that it’s a real business with real solid fundamentals. In terms of valuation, it is considered to be fairly valued at this point. However, given the power of this company’s business, Brian thinks it’s a good stock for investors to own. And they expect continued strong growth out of the company going forward.

Hampton: I got one more question about NVIDIA. NVIDIA and several other companies have split their stock or announced plans to do so. Why do you think we’re seeing more of this in 2024?

Lauricella: Well, we did have these stocks go up to some pretty astronomical dollar amounts, NVIDIA a thousand, Broadcom up around the same sort of neighborhood. For investors, as we’ve written, stock splits, they don’t actually really matter for the long term. But what they do is make a stock seem more appealing because it becomes easier to afford a few shares. For your more typical individual investor, buying a couple of hundred dollars’ worth of NVIDIA is different than forking over a thousand dollars for one share. So, it’s really just a function of a tremendous rally that we’ve seen in some of these really big names. And we’ve seen this in other periods of time when tech stocks have rocketed higher, they come out with the stock splits. Doesn’t change the fundamentals of the company, doesn’t change the way Morningstar views the stock. It’s really just a function of math and optics, really. It’s really just all about optics.

Hampton: Well, another trend this year is mega cap tech companies announcing new dividends. Meta, Salesforce, and Alphabet surprised Wall Street. Should investors get excited?

Lauricella: Well, this is an interesting development that we’ve seen in the last few months. It’s not a new thing for tech stocks to be offering dividends. There are plenty that have for quite a long time, but we had the spurt of companies announcing them as you noted. The key thing for investors to remember about these stocks is that the actual dividend yield, which is the dividend amount that they pay out per share, is really low. So, we’re talking less than 1% on all the names that you mentioned, Salesforce, Alphabet, Meta. We’re talking 0.5%, 0.6%. These are very low dividends. However, what this does do is it changes the complexion of dividend growth strategies. So, these are strategies where you’re looking for stocks that are going to be paying out more money over time. Because these are growth stocks, because they’re generating a lot of cash, the dollar amounts of the dividends are likely to grow. So now you’re seeing a lot more tech stocks in dividend growth strategies, whereas before, it might have been heavily financials or utilities, energy companies, that kind of thing. So, it certainly makes those strategies potentially a little more volatile, a little more interesting. It’s definitely a trend that we’ll be watching going forward.

Hampton: Well, from stocks to bonds, the bond market has gone almost four years since reaching a new all-time high. Talk about the pressure bonds are dealing with and what could provide a lift to the bond market.

Lauricella: Yeah, it’s been quite a rough road for the bond market as interest rates rose and then stayed high. We had a little bit of relief at the end of last year, but that’s faded as the economy has turned out to be stronger than expected. And as we mentioned, the Fed is now looking to cut interest rates a lot less than people thought at the beginning of the year. At this point, the key thing for investors to think about is the level of interest rates in the bond market. Yields are probably not going to be going back to the low, low yields that we saw anytime soon in the foreseeable future. As long as growth stays strong, inflation stays somewhat elevated, you’re going to see yields stay relatively high. And that means, perhaps, you’re not going to be making as much money in terms of price appreciation in bonds. So, it’s a different dynamic out there.

Hampton: And why should folks still own bonds?

Lauricella: Well, there’s the flip side to it. So, yields are higher than they’ve been in a long, long time. So, you’re talking 5% on very safe bond investments with inflation even down to 2.5%. That’s a nice, real yield that people can invest in. So as our folks say, there’s still very good reason to own bonds. They diversify your portfolio. They can pay out some nice yield. And if anything, if inflation does stand to come down a little bit, then you can make a little bit of money in terms of total return from price appreciation. But at the very least, we’re looking at some nice yields that can generate some income for folks for the first time in literally decades.

Hampton: Wow. Well, let’s wrap up our conversation with a couple of key takeaways from investors for the second half of 2024. Tom, what is on your list?

Lauricella: Well, I think the main thing is that this has been a year that so far has defied a lot of expectations. And so, investors can think about what their expectations are, and we can see lessons for perhaps why it is really good to think long term. I think if you told most folks that the Fed would only be cutting interest rates once this year as opposed to the five or six times that people had thought at the beginning of the year, you might have expected stocks to be down a lot more than they are. But we’ve seen strong earnings growth. And as we mentioned, we’ve seen this AI technology boom. So, as we head through the second half of the year, of course, all eyes will be on the Fed and will they actually be able to cut interest rates. But then the real other key thing for the equities market is will corporate earnings remain strong? We had a bounce back this year. Will this AI technology story continue to play out? And of course, we have an election coming up. So, there’s potential volatility around that. But for long-term investors, the story is the same. Looking for those undervalued names, thinking long-term will make all the difference no matter what the short-term moves.

Hampton: Well, thank you, Tom, for coming on the podcast for this mid-year market checkup.

Lauricella: Thanks very much. Glad to be here.

Hampton: Subscribe to the Smart Investor newsletter to read Tom’s market commentary each week. Thank you for listening to Investing Insights. I’m also thanking Senior Video Producer Jake VanKersen and Associate Multimedia Editor Jessica Bebel. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.