🎙️ Winners and Losers

The second half of the year is underway. Somehow, it’s already the start of the third quarter after a very strong first six months in 2024.

Here’s a quick recap of the gains year-to-date:

• S&P 500: ~15%

• Nasdaq: ~18%

• Gold: ~13%

• Bitcoin: ~48%

And since it’s a new month, it’s worth noting that July is the best month of the year for the S&P 500, both since its inception and over the past 20 years.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Bill Ackman’s Pershing Square sets IPO price

• The AI trade: a deeper look

This, and more, in just 5 minutes to read.

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In The News

📊 Bill Ackman’s Pershing Square to Offer Shares at $50

Billionaire investor Bill Ackman's Pershing Square has announced plans to launch a new closed-end fund in the U.S., setting the initial public offering price at $50 per share. 

The fund is slated to become the largest closed-end fund in the country. Its ambitions aren’t small: It wants to raise $25 billion from retail investors.

• A closed-end fund raises capital for investment through a one-time sale of a limited number of shares, which may then be traded in the secondary market.
  

• The new vehicle will mirror Ackman's existing Europe-listed hedge fund but with reduced fees and quicker access to capital. It will focus on investing in 12 to 15 undervalued, large North American companies.

Fee game: Pershing Square USA will implement a flat 2% management fee, which will be waived for the first 12 months, and notably, there will be no incentive fee. This fee structure is designed to be more attractive than typical hedge fund fees, which could draw in a broader range of investors.

• The fund's shares will be listed on the New York Stock Exchange in 2025 or 2026 under the ticker symbol "PSUS.” While the number of shares offered remains undisclosed, interested investors must purchase at least 100 common shares ($5,000-plus) to participate in the offering.

Premium fund: Ackman's existing European vehicle has demonstrated quite good performance, returning 50.3% over the past year and outpacing most of its U.S. peers. But it’s trading at a 25% discount to its net asset value, a gap the new U.S. fund might aim to narrow.

• “With lower required costs than his typical hedge fund fees and social media popularity, the US-listed Pershing Square USA Ltd. could become the largest closed-end fund in the country and trade at a premium to its net asset value,” Bloomberg analysts wrote. 

Prominent financial institutions, including Citigroup Global Markets, UBS Securities, Bank of America Securities, and Jefferies, are underwriting the IPO. The move follows Pershing Square’s recent $1.05 billion fundraising by selling a 10% stake, valuing the firm at about $10 billion.

Why it matters:

With Ackman's social media popularity and the fund's attractive fee structure, analysts suggest Pershing Square USA could become quite popular with all kinds of investors. 

Bon voyage: Hedge funds have traditionally employed a fee structure known as "two and twenty," charging 2% of assets under management and 20% of profits above certain thresholds. The model, attributed to Alfred Winslow Jones, the "father of the hedge fund industry," was inspired by Phoenician sea captains who claimed a fifth of profits from successful voyages.

• Notably, Pershing Square USA will not charge performance fees, aligning with a broader industry trend of funds seeking to better match investor interests in a competitive landscape. Analysts view this as a confident move that may set a precedent for fee structure innovation in the industry.

Skills-less returns: The hedge fund industry has gradually moved away from the traditional "two and twenty" model. In 2022, average performance fees were 17.31%, and management fees were 1.39%. Fees are expected to continue to fall in the coming decade.

Recently, 29 institutional investors called for hedge funds to lower their performance fees, arguing that the current higher interest rate environment has allowed funds to collect significant fees on "skills-less returns."

Read more

More Headlines

📈 JPMorgan, Morgan Stanley boost buybacks and dividends

🌎 More than one-third of Americans plan to take on debt for summer travel

🚗 Uber drivers secure $32.50 an hour minimum wage in Massachusetts

✈️ TSA forecasts record-setting summer airline travel

💰 Venture capital’s money model is shifting

💸 The AI Trade: A Closer Look at Winners and Losers

Here are three thoughts on stocks and the AI trade as the second half begins:

1) All eyes remain on Nvidia

Nvidia widely outperformed the broader market in 2024, rising about 157% in the first half after five consecutive earnings beats. 

Top heavy: The average stock in the S&P 500 is up about 4.1% this year, while the index itself has risen 14.5%. 

For most of the stock market’s history, the best companies have carried the S&P 500 higher. That isn’t new. However, this 10.4 percentage point gap is the largest underperformance since at least 1990, per a Financial Times analysis. Six out of 11 sectors in the S&P 500 declined in the second quarter.

2) Bearish bets, still?

Believe it or not, there are still some (very) bearish Wall Street strategists out there. 

Some are calling for a recession, just as they did in late 2022, right before the market’s surge upward. 

• The S&P 500 index is up about 15% this year, reaching numerous record highs, primarily thanks to a small group of AI stocks.
  

• Along the way, many strategists and banks, including Goldman Sachs, Citigroup, and UBS, have upgraded their end-of-year forecasts, calling for more gains ahead. Evercore recently upgraded its end-of-year S&P forecast from 4,750 to 6,000, implying a further 10% gain into year-end. 

Courageous bears: Meanwhile, bearish strategists find it increasingly difficult to convince clients of their contrarian views. One strategist said he expects the S&P 500 to drop about 13% by year-end due to weaker growth, lingering inflation, and fading AI-related enthusiasm. 

• Other “bears” see indicators pointing to a recession in the next nine months, but clients often challenge this view.
  

• The S&P 500's price-to-earnings ratio of about 25 times is in the top decile of valuations since 1960, which bears view as a red flag.
  

• JPMorgan analysts predict a 25% drop in the S&P 500 by year-end, mostly citing the market's dependence on a few AI stocks.

Predicting the stock market is no easy task—Warren Buffett says there’s no point in trying—and maintaining consistently bearish views can lead to a loss of credibility when markets continue to rise. 

3) Not all AI stocks are on the rise

Big winners like Nvidia, Microsoft, and Amazon are hot, but many stocks that benefited from AI hype in 2023 have fallen in 2024. 

As high-profile companies like Nvidia continue to surge, investors seek concrete evidence of AI benefits rather than just optimistic rhetoric. For example, over half of Citi's "AI Winners Basket" stocks have fallen this year. 

• And over half of the stocks in AI-focused ETFs from BlackRock, Invesco, and First Trust declined in 2024.
  

• The takeaway: Investors now focus more on earnings and tangible results from AI investments.
  

• Nvidia's success is largely thanks to its ability to deliver incredibly strong financial results: Despite its massive market cap growth, its stock has actually become cheaper relative to sales.

Other stocks haven’t been so good. Large-cap tech companies like Salesforce, Snowflake, Intel, and Adobe have sharply declined after strong gains in 2023.

Some market commentators view this shift as a return to rationality in the market, while others, like Rob Arnott of Research Affiliates, see signs of a "classic bubble" in AI-related stocks.

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Quick Poll

On Friday, we asked: Thinking about your own personal giving, which charitable cause do you give most to?

— About one-third of readers give most to religious causes. Many donate to educational services, too. “Education as a catch-all for local comunitiy resources like museum, library, and public radio.” Another reader who donates to climate groups said, “I would donate to a climate/environment charity, if I know they work more towards cleaning the water, planting trees, or any natural way of helping the environment.”

— As for other charities readers care about, answers included, “Animal rights, prevention of cruelty, fostering and caring for injured wildlife,” and “We do a lot of work with our local animal shelters for the majority of our charitable giving.”

See you next time!

That's it for today on We Study Markets!

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