For global equity investors, 2024 presented stark contrasts. Key economic themes such as inflation and artificial intelligence endured while the trend of populism led to further political disruptions. Global equity markets continued a steady rise, notching a second consecutive year of double-digit gains, amid a tumultuous sea of political upheaval in democracies around the world. U.S. equities, particularly megacap technology stocks, outperformed other developed market equities as the U.S. continued to outpace others in economic growth since the COVID-19 pandemic, driven by a strong labor market and resilient overall consumption.

Meanwhile, over 70 nations held elections, a banner year for democracy even while the threat of encroaching autocracy loomed ominously in several corners of the globe. A key theme of 2024’s global electoral extravaganza was a rejection of incumbent leaders and parties as voting publics, aggravated by the high cost of living, sought change and new—often unorthodox—approaches to realizing broader prosperity. Yet, while voters rebuked incumbent political leadership in many democracies worldwide, investors continued to stick with leading industries and companies in global equity markets. The emerging commercialization of artificial intelligence continued to drive equity valuations and returns as industries levered to this phenomenon benefited from investor enthusiasm, such as software applications.

Maybe it really is different this time. A typical business cycle usually consists of an overheating economy followed by higher policy rates imposed by central banks. This eventually leads to a slowing economy, and in 6 out of the last 7 monetary tightening episodes in the U.S since 1970, the economy has fallen into recession. Higher lending rates slow consumption, leading to layoffs, which further slows consumption and more layoffs, and so on. However, this cycle has been different so far. When the Fed began raising interest rates in 2022 to fight inflation, the personal consumption response was much more muted than usual, thanks to previous emergency pandemic stimulus. The U.S. economy has slowed somewhat in response to tighter monetary policy, but employers have been mostly reluctant to implement significant layoffs with the fresh and painful memory of the 2020-2021 pandemic reopening when consumer demand rebounded sharply but employers had a hard time finding workers to satisfy demand. So-called “labor hoarding” has become a significant attribute of the current economic cycle, which has contributed to the relative strength in the labor market, consumption, and the economy in general.

As we reflect on the events of the second quarter, it is increasingly evident that we are witnessing a persistent tale of two markets in the U.S. It’s been the best of times for the largest U.S. stocks which have consistently delivered exceptional returns, fueling much of the stock market's ascent to all-time highs. These companies, characterized by strong fundamentals, sustainable growth prospects, and resilient business models, have exerted a disproportionate influence on global stock market performance. The U.S. stock market is now more concentrated than ever, with the top ten stocks representing 35% of the S&P 500. Even during the dot-com era, the combined weight of the top ten stocks peaked at only 25%, albeit the technology companies of today have stronger profitability and more sustainable business models. To look at it another way, the Magnificent 7 stocks are now worth more than the combined stock markets of Japan, Canada, and the U.K. Stripping out these seven stocks, the rest of the U.S. market has performed in-line with the rest of the world since the beginning of 2023. While some sectors and companies have shown resilience and growth, a significant portion has not kept pace with the highflyers.