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The 2022 bear market is fading from memory.

Why? It’s only the beginning of June and the S&P 500 has already hit 25 new all-time highs.

What's driving the market up? Two things:

a) Higher Earnings: S&P 500 TTM operating EPS hit another record high in Q1, up 8% from the same period last year.

b) Higher P/E Ratios: Enthusiasm over the AI ​​revolution has led to a massive expansion of P/E ratios over the past year, with the S&P 500’s P/E ratio increasing by 19% (from 20.5 to 24.3). This is the highest valuation we have seen since June 2021.

U.S. stocks are once again outperforming the rest of the world, a trend that has continued for more than a decade.

In the US market, we see...

• Large-cap stocks continue to outperform small-cap stocks (highest relative strength since June 2000).

• The concentration of holdings in the top three S&P 500 holdings (Microsoft, Nvidia, and Apple) continues to increase and now accounts for more than 20% of the index, the highest level on record (note: data goes back to 1980).

• Semiconductors outperformed, with the Semiconductor ETF to S&P 500 ratio reaching a new high, surpassing the all-time high in 2000.

Growth stocks are outperforming value stocks, with the growth-to-value ratio approaching its highest level since 2000.

Regional banks ($KRE ETF) continue to show weakness, with relative strength to the S&P 500 approaching all-time lows from May 2023 (post-SVB/First Republic bankruptcy).

Bonds/Federal Reserve

The U.S. bond market is very different from the stock market.

While the S&P 500 has hit 25 all-time highs this year, the Bloomberg Aggregate Bond Index is still 11% below its summer 2020 peak.

At 46 months so far, it is the longest bond bear market in history.The story behind the long drawdown is simple: interest rates have risen from their historic lows in 2020.

While many feared this would lead to a surge in corporate defaults, this has yet to materialize. In fact, we’ve recently seen investors betting on the opposite, with both high yield and investment grade credit spreads reaching their tightest levels since 2021.

We saw a sharp rise in inflation expectations from the 2020 low to the 2022 high, a trend that has subsided and investors are now expecting more normal inflation rates going forward (10-year breakeven rate of 2.33%).

Where these inflation expectations go (higher or lower) could have a big impact on the path of interest rates and Fed policy.

With the federal funds rate now 2.5% above their preferred measure of inflation (core personal consumption expenditures), and monetary policy at its tightest level since September 2007, many expect the Fed’s next move will be a rate cut.

But it remains to be seen when the first rate cut will occur and how aggressively the Fed will cut rates. Going into this year, the market expected the Fed to cut rates 6-7 times in 2024, with the first rate cut occurring in March. After persistently high inflation data (headline CPI is still 3.4%), we have seen a dramatic shift, with the market now expecting only 1-2 rate cuts from the Fed, with the first rate cut not occurring until September.

This means that the U.S. yield curve (10-year yield minus 3-month yield) will remain inverted for the time being, extending the longest inversion in history (589 days and counting).

Real Estate/Housing

Bonds aren't the only asset class that would be affected by rising interest rates.

Real estate investment trusts (REITs) are still more than 20% below their early 2022 peak.

This coincides with a decline in U.S. commercial real estate prices, which are down 21% from their 2022 peak levels.

Meanwhile, U.S. home prices have continued to rise despite a rise in 30-year mortgage rates from 2.65% to over 7%.

The Case-Shiller national index hit another all-time high in March, up 6.5% from last year. All 20 cities in the Case-Shiller 20-City Index saw home prices rise from a year ago.

Rising home prices and rising mortgage rates have led to the most unaffordable housing market in history.

This naturally led to a collapse in demand. So why are prices still rising? Supply has fallen even more, hitting a record low in 2022, as many potential sellers can’t afford to move. Only recently has inventory of existing homes begun to trend upward, but not enough to drive down prices.

The result: Homeownership, relative to renting, has never been more expensive.

Commodity

Commodities ($DBC ETF) were the worst performing major asset class over the past decade, down 5%, while gold ($GLD) rose 81% and the S&P 500 ($SPY) rose 229%. This relative underperformance hit bottom in 2020, when crude oil prices briefly fell. From there, commodities will soar as inflation rises until they peak in 2022.

Over the past three years, commodities have performed much better than over the past decade, rising 28% while the S&P 500 has risen 32%.

Here’s what’s happened to major commodity prices over the past year. Aside from cocoa’s parabolic rise, the most notable has been the surge in industrial metals prices (copper recently hit a record high) and the rise in silver (highest since 2012) and gold (highest since 2013).

Gasoline futures are currently 7% lower than they were a year ago, which means gas prices at the pump are also lower (the national average is $3.48 per gallon, compared to $3.54 a year ago).

currency

Predictions of a declining dollar have yet to come true.

On the contrary, the U.S. dollar remains one of the strongest currencies in the world, and its value against the euro and the yen has risen sharply over the past decade.

encryption

Aside from Nvidia, the biggest news in the market this year has been the return of cryptocurrency.

With the approval of 11 spot Bitcoin ETFs in January, we saw another parabolic rise in the space. By early March, Bitcoin was back to its all-time high, fully recovering from the November 2021-November 2022 bear market.

The U.S. Securities and Exchange Commission (SEC) also recently approved eight Ethereum spot ETFs, driving Ethereum prices up sharply.

Bitcoin and Ethereum are both up 69% year to date, far outperforming stocks, bonds, gold and commodities.

Stocks and Bonds

Stocks have consistently outperformed bonds over the past decade, and the ratio between the two major assets continues to hit new highs in 2024.

Over the past 3 years, the correlation between stocks and bonds (0.71) has been higher than any 3-year period in history.

Over the past seven years, the 7.5% annualized return of a 60/40 U.S. stock/bond portfolio has come almost entirely from the stock side, with the S&P 500 up 11.6% per year and bonds up just 0.8% per year.

economy

The U.S. economy continues to grow, albeit at a slower pace. The annualized rate of growth in the first quarter of this year was 1.3%, a significant drop from 3.4% in the fourth quarter of 2023.

Still, the economic expansion continues, now at 48 months old. Does this mean we’re overdue for a recession? Not necessarily. The past four U.S. economic expansions lasted at least 73 months, and the 2009-2020 expansion lasted 128 months (more than 10 years).

The economic growth is expected to continue for at least a quarter, with Wall Street and the Atlanta Fed both forecasting real GDP growth in the second quarter between 2-3%.

The biggest concern remains persistently high inflation, with CPI above 3% for 37 consecutive months. This is the longest such streak since the late 1980s/early 1990s.

The cumulative effect of those price increases appears to be starting to weigh on U.S. consumers, with retail sales falling 0.7% over the past year after adjusting for inflation.

The good news is that the labor market remains strong, with the unemployment rate at 3.9%. This is the longest stretch of unemployment below 4% since the late 1960s, which lasted 27 months.

That momentum could soon end, however, as the labor market shows signs of softening. The number of job openings has fallen by more than 4 million from its peak to its lowest level since February 2021.

The most important chart in my opinion is the one showing wage growth versus inflation. When wages don't keep pace with price increases, we're headed in the wrong direction because your purchasing power is being eroded. This has been happening throughout 2022, causing consumer confidence to hit historic lows. But over the past 12 months, we've seen the opposite, with wages rising faster than inflation. This is a good sign for American workers, and hopefully it continues.