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Reaching new all-time highs in March, the S&P 500 has finished its best first quarter since 2019.
The S&P 500 posted a total return of 3.2% in March, propelled by relatively positive economic data. It is now ahead 10.6% year-to-date in 2024 as concerns over a U.S. economic recession have subsided and investors have shifted their attention to the timing of a Federal Reserve pivot from monetary policy tightening to policy easing.
Investors are optimistic the market can maintain its mojo in April, which has historically been one of the strongest months of the year for the S&P 500.
First Quarter Market Recap
In addition to big gains for the S&P 500, an ongoing rally in artificial intelligence related stocks and dovish commentary by Federal Reserve officials drove the Dow Jones Industrial Average higher by 6.1% and the Nasdaq higher by 9.3% in the first quarter.
The technology, consumer cyclical and consumer defensive sectors led the market gains in the first quarter, each generating total returns of around 8% or more. The stock market rally has been broad-based, with only the real estate sector finishing the quarter in the red.
Best and Worst Performing Stocks
AI server maker Super Micro Computer (SMCI) was the best-performing S&P 500 stock of the first quarter by a wide margin, gaining 255% year-to-date as investors continue to pile into AI stocks. Super Micro Computer’s stock has returned a staggering 502% since the beginning of 2023.
The top-performing S&P 500 stock of 2023, AI chipmaker Nvidia (NVDA), also continued its bullish momentum in the first quarter of 2024. Nvidia shares are up 82% year-to-date and 321% since the beginning of last year, pushing the company’s market capitalization to $2.29 trillion.
On the other end of the spectrum, struggling electric vehicle maker Tesla (TSLA) was the worst-performing stock in the S&P 500 in the first quarter. Growing competition in China is forcing Tesla to cut prices on its EVs, and Tesla’s once enviable automotive revenue growth slowed to just 3% year-over-year in the fourth quarter.
Boeing (BA) shares also tumbled more than 25% in the first quarter as the company’s quality control problems continue to weigh on its stock price.
Fed Pivot Coming?
For the S&P 500 to continue its hot start to 2024, the Federal Reserve will likely need to make further progress in bringing down inflation so it can stay on track to begin cutting interest rates sometime this year.
The consumer price index gained 3.2% year-over-year in February, down from peak inflation levels of 9.1% in June 2022 but still well above the Federal Reserve’s 2% long-term target.
While the Federal Reserve has made significant progress on inflation, some economists are worried so-called “sticky” inflation will make the last leg of the Fed’s mission the hardest of all. For example, shelter prices continue to rise, gaining 0.4% on a monthly basis and 5.7% on an annual basis in February.
In March, the FOMC opted to maintain interest rates at the current target range of 5.25% to 5.5%, but Fed Chair Jerome Powell noted that “it will likely be appropriate to begin dialing back policy restraint at some point this year.”
Are Interest Rate Cuts Still Coming?
The Fed’s updated long-term economic projections are calling for three interest rate cuts of 25 basis points each by the end of 2024.
The Bureau of Economic Analysis reported U.S. GDP growth of 3.4% in the fourth quarter, suggesting elevated interest rates aren’t hurting U.S. corporations as much as some economists had feared.
Bill Adams, chief economist for Comerica Bank, says there’s simply no denying the U.S. economy is in good shape.
“Real GDP is growing solidly, fueled by solid consumer spending and brisk growth of investment in nonresidential structures,” Adams says.
“The economy will likely grow moderately in 2024 as inflation continues to gradually move back to the Fed’s target.”
How the Bond Market Is Reacting
The bond market is currently pricing in a 95.8% chance the Federal Open Market Committee will continue to keep interest rates at their current levels at its next meeting, which concludes on May 1. Bond investors see a 63.6% chance the FOMC will begin cutting interest rates by June, according to CME Group.
Jeremy Straub, CEO and chief investment officer at Coastal Wealth, says interest rate cuts would add fuel to the stock market rally, but they may not be necessary for the S&P 500 to maintain its positive momentum.
“While rate cuts from the Federal Reserve would be welcome news for stocks, they are not a requirement for a strong market. The market has been able to rally for the past 18 months even with high interest rates and we believe stock investors are adjusting to this new normal of higher interest rates,” Straub says.
U.S. Recession Watch
The Fed is reaching a critical point in its battle against inflation. The next couple of months will be crucial to the central bank’s effort to navigate a so-called soft landing for the U.S. economy without tipping it into a recession or allowing a potentially devastating rebound in inflation.
Recession fears have subsided in recent months, but the New York Fed’s recession model still predicts a 58.3% chance of a U.S. recession sometime in the next 12 months.
One of the most convincing signs that a soft landing is possible has been the resilience of the U.S. labor market.
The Labor Department reported the U.S. economy added 275,000 jobs in February, exceeding economist estimates of 198,000 jobs added. However, the U.S. unemployment rate of 3.9% was up slightly from January and is currently at its highest level since January 2022.
Sam Millette, director of fixed income for Commonwealth Financial Network, says all indicators suggest initial estimates for first-quarter U.S. GDP growth will be solid.
“While the strong growth to end 2023 was impressive on its own, it also helps explain the economic resilience that we’ve seen throughout the first quarter, as the positive momentum from the end of last year has carried over into 2024,” Millette says.
“While economists still expect to see slowing growth in the first quarter compared to the end of last year, slowing growth is still growth and the economic backdrop is expected to remain supportive for markets.”
Critical First-Quarter Earnings Season
Elevated interest rates increase borrowing costs for both U.S. consumers and corporations. Typically, that puts pressure on the economy and the stock market. Inflation also increases input costs for U.S. companies, squeezing profit margins and weighing on earnings.
Despite the challenges, S&P 500 companies reported 3.6% year-over-year earnings growth in the fourth quarter, with seven out of eleven market sectors reporting positive earnings growth.
First-quarter earnings season kicks off in April, and analysts are expecting another quarter of modest growth. Wall Street analysts’ consensus estimates predict 3.6% earnings growth and 3.5% revenue growth for S&P 500 companies in the first quarter.
Analysts project full-year S&P 500 earnings growth of 11.0% in 2024, but analysts are more optimistic about some market sectors than others.
Looking Ahead at Performance
The communication services sector has the highest percentage of analyst buy ratings at 63%, followed by the energy sector at 62%. The materials sector has the lowest percentage of analyst buy ratings at just 45%.
The consensus 12-month analyst price target for the S&P 500 is 5,614, representing about 6.8% upside from current levels.
Adam Turnquist, chief technical strategist for LPL Financial, says the S&P 500 is in a strong uptrend heading into earnings season.
“While stocks are extended to the upside, this backdrop suggests pullbacks should be used as buying opportunities,” Turnquist says.
Investors will get their first meaningful feedback on the fourth quarter when big bank stocks Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC) kick off earnings season and release their quarterly reports on April 12.
How To Invest in April
Since 1950, when the S&P 500 is up in each of the first three months of the year, it averages a 1.8% gain in April, a 3.1% gain in the second quarter and a 9.8% gain in the remaining nine months of the year.
In addition, in years the S&P 500 has gained at least 10% in the first quarter, it has averaged a 6.5% gain over the final nine months of the year.
Carol Schleif, chief investment officer at BMO Family Office, says investors shouldn’t necessarily be spooked if companies don’t live up to sky high expectations this earnings season.
“Current levels in stocks leave little room for disappointment and we wouldn’t be surprised to see a pullback at some point, and such a retracement would be normal in the overall bullish trajectory that we are in,” Schleif says.
