It has been said that if something cannot go on forever, it will stop.

At times this year, it has felt like someone forgot to share that sentiment with the small number of names pushing US equity indices to all-time highs.

Market concentration rose to multi-decade highs as names like Nvidia, Apple, and Microsoft continued to surge higher. The number of names outperforming the S&P 500 on a trailing basis fell to its lowest level in years. While the three largest names in the S&P 500 accounted for over 40% of total returns through the end of June.

Stated differently, the first half of 2024 continued in the same way as what we saw in 2023 – this was true not only in markets but also in the broader economy. Many market participants focused on two key topics: inflation and the economy. On the inflation side, the debate continued about the pace at which inflationary pressures could work back toward the Fed’s 2% target. After several data points generated cause for concern, the US resumed tracking lower.

Regarding the economy, the debate about whether or not we are heading toward a recession continued. While we have seen signs of a slowing economy, we have yet to see the signs of outright weakness that would seriously concern us about a more nefarious outcome. Nevertheless, we continue to see risks tilted to the downside.

Against this backdrop of relative uncertainty, it has felt like investors preferred the perceived certainty of strength associated with the megacap names and the AI story. The question, though, is what comes next?

After all, if something cannot go on forever, it will stop.

We don’t know when, we don’t know why, and we don’t know how, but it remains our belief that the severe concentration we’ve seen in markets will eventually unwind. To that end, we witnessed a violent rotation from large to small, growth to value, and within sectors following the June CPI data, which cooled more than expected. It’s unclear if this is a blip on the radar or the beginning of something more serious and persistent. What is clear, though, is that there is the potential for sizable shifts in markets that could lead to a dramatically different return profile than what we’ve seen.

With the potential for the overarching narratives that have been driving markets to change, so too could the resultant performance of equities. For instance, a few names have driven earnings growth, but that growth advantage they’ve enjoyed may start to fade. Volatility in the equity market has been subdued, but as we approach elections, we see reason to believe it could pick up. Slowing growth and ebbing inflation mean that the first rate cut of this cycle is likely coming – a clear reversal from what we’ve seen since the Fed began hiking rates in the fall of 2021.

Of course, we do not have a crystal ball, and we can’t predict with any degree of certainty where things go from here. What we do have, is a time-tested investment process that has developed over five decades of different market environments. We continue to find opportunities despite the challenging backdrop and remain confident in our ability to actively manage through what’s to come.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.