Call us optimists, but we prefer to focus on the positive. The stock market is off to its best start in the first half of an election year since 1976. The economy continues to grow, albeit at a slightly slower pace. Corporate earnings remain robust, and analysts are optimistic about further growth in the second half of 2024. In this favorable environment, the benefits of strong equity market performance have once again gone to the biggest companies, as mega-cap stocks continue to dominate.
While caution is warranted due to persistent inflation, high consumer debt, and other economic challenges that could temper growth expectations, the overall outlook remains positive. Markets have accepted that the Federal Reserve may not cut interest rates soon, but this hasn’t bothered stocks. Investors continue to prefer large-cap companies with strong balance sheets. Considering that many mega-cap names are fully valued, we were pleased to see Alphabet, the parent of Google and one of our core holdings, announce its first dividend payment during the second quarter, returning a portion of profits to shareholders.
Although smaller companies have generally struggled this year, financial strength has been a better predictor of performance than size. While investor focus has favored large caps, small caps appear attractively valued based on several metrics and large cash holdings. We continue to wait patiently for small caps to recapture their historical role of relative outperformance. We believe that finding attractively valued opportunities during periods of underperformance creates the foundation for rewarding long-term results.
Given the strong performance of the U.S. markets over the last eighteen months, many diversified equity allocations are weighted more toward the U.S. Recently, however, we have found several attractively valued non-U.S. equity opportunities. For example, Japan, the world’s second-largest developed securities market, has benefited from the declining value of the yen, boosting Japanese exports and improving corporate profitability, which reached an all-time high in the first quarter. We recently invested in shares of Ono, a Japanese pharmaceutical company known for its partnerships, producing some of the world’s most successful drugs for cancer treatment.
We continue to advocate for maintaining a diversified portfolio of high-quality stocks. Such a strategy benefits investors if either market participation broadens or a correction occurs. In our opinion, the combination of high quality and best value represents an excellent investment strategy. Given attractive bond yields, a more conservative blend of stocks, bonds, and cash may be a more suitable allocation for those seeking greater peace of mind.
We sincerely thank you for your continued confidence and support of Cardinal Capital. Cardinal Capital is committed to delivering superior risk-adjusted returns over time through changing market environments.
