Quarterly Commentary

1Q 2024

The first three months of the new year proved to be an extension of 2023 – large technology stocks leading the way with some sizzle provided by companies tied to Artificial Intelligence (AI) and bouts of interest rate volatility keeping markets on edge. Economic data continued to surpass consensus expectations with some experts now suggesting that the US economy might sail past a hard or even a soft landing without a pause – a prospect on no one’s radar until recently.

Stronger growth dampened hopes for near-term interest rate cuts. Back in January, many believed that decelerating inflation and a slowing economy would encourage the Federal Reserve to cut interest rates at least six times in 2024, taking short rates from 5.25% to 3.75%. Home buyers and businesses facing debt maturities were hoping for a break after last year’s spike. While we were never assuming rates would drop that fast, even our more moderate expectation of three or four cuts may turn out to be too aggressive. It’s not like inflation is soaring as it was a year ago, yet some categories are proving to be sticky, notably the measure used to track shelter inflation in the official statistics. Real-time measures of market-rate rents suggest that inflation is cooler than the Consumer Price Index (CPI) states, but most believe the Fed will want to see this borne out in the official stats before taking action.

We think the current pattern is near a tipping point. There are several scenarios that might unfold between now and the end of the year; any one of them could drastically change the market narrative. We are doing our best to prepare for change and volatility, acknowledging that we can’t predict the exact timing.


Nvidia is the leader in designing the chips that power AI. Its growing order book helped push its share price up 82% since the start of the year, accounting for one-quarter of the S&P 500’s 10% first-quarter gain. It is now the third most valuable company in the world after Microsoft and Apple. 

AI is not a fad for companies making money on it now. Nvidia’s incredible earnings growth is very real. Other AI hardware/software pioneers are expected to log improving earnings in 2024 and beyond. However, we think the lessons of previous tech innovations will be repeated: the benefits (economic and otherwise) of AI will ultimately be diffused across many more businesses and customers than is currently anticipated. Comparisons to the dawn of the Internet are apt – it was years before the manner and magnitude of its true impact was realized and monetized. While AI’s introduction may take less time (most things do these days), we are still in the early days of understanding how AI will change the world and how it might help the bottom line at many businesses. A handful of stocks have skyrocketed along with Nvidia in the approximately twelve months since the AI craze took hold. Some will not sustain their advances as competitors emerge and investors shift focus to results, not just forecasts. Many businesses that now appear to have been left behind will perform better on a relative basis as they harness AI to their advantage.

Are investors chasing AI stocks into bubble territory? It seems as though a fear of missing out is creating some unsustainable froth, as it is really too soon to identify most of AI’s long-term winners and losers. There will be surprises – some unlikely winners and some unexpected losers.

  • Will NVIDIA be able to sustain its growth rate as other chip companies and their biggest customers (i.e. Google) all race to design their own competing products?
  • Will the main benefit of AI be improved productivity? If so, will this usher in a period of high economic growth with relatively benign inflation?
  • How will software companies monetize AI to justify their billions invested?


Putting the AI enthusiasm aside, stock returns elsewhere were modest. Some large stocks stumbled in the first quarter: Apple shares fell 11%, at least partially due to worries about its exposure to China. Tesla shares declined 29% as price cuts failed to boost sales and the migration to electric vehicles is feared to be decelerating.

Stocks with significant interest rate exposure (i.e. real estate) were notably weak, as were the shares of most companies involved in renewable energy. Small caps fell further behind large caps.

Looking forward

Despite the consensus belief that the economy will continue to surge over the remainder of the year, we’re keeping our eye on some indicators that suggest caution. For example, both credit card delinquencies and mortgage origination debt-to-income ratios are showing consumer strain that we believe is being overlooked or downplayed. This isn’t to say that we see catastrophe on the horizon, but the more time that passes before the Fed begins to cut rates, the wider we think these cracks will get.

Meanwhile, the medium-term US fiscal picture appears increasingly challenging, as rising interest payments are forecast to cause deficits to climb over the next decade. Combined with outlays on entitlement programs, mandatory spending will increasingly crowd out discretionary programs. This would be a notable shift from the massive fiscal stimulus of recent years.

To be clear, these are risks to a healthy status quo. However, combined with the unpredictable narratives that will emerge as the presidential election cycle heats up, we expect to see significant volatility at the index level and under the surface this year.