Key Points:
- S&P 500 ends the first quarter with over 10% gain, driven by tech stocks and economically-sensitive sectors.
- Historical data suggests the potential for market slowdown near a potential rate cut, but strong momentum may persist.
- Corporate earnings season is expected to provide critical insights into market sentiment and Fed policy implications.
- Upside earnings surprises could challenge the Fed’s dovish stance while stabilizing inflation could support sustained economic growth.
Following a strong start to the year for stocks, investors are cautiously optimistic yet vigilant as they navigate potential hurdles in the second quarter. The S&P 500 ended the first quarter with a remarkable gain of over 10%, marking its largest advance since 2019. Notably, tech giants like chipmaker Nvidia and Meta Platforms fueled much of this growth, while economically-sensitive sectors such as energy and industrials also experienced significant rallies.
Investor sentiment hinges largely on the Federal Reserve’s monetary policy decisions. While initial expectations suggested multiple rate cuts in 2024, recent signs of resilience in the U.S. economy have led to a recalibration, with markets now anticipating fewer cuts. Nonetheless, the prospect of a rate cut by June remains on the table, with futures markets indicating a 61% chance of a 25 basis point reduction at the Fed’s upcoming policy meeting.
Economic growth is expected to broaden further the market rally into cyclical sectors and small-cap stocks as investors seek attractive valuations. However, any deviation from the Fed’s current stance could trigger volatility and unsettle markets. Economic indicators, including ISM manufacturing data and non-farm payrolls, will be closely watched for insights into the economy’s trajectory.
Historically, the momentum from the first quarter often carries over into the second quarter, suggesting potential further gains for the S&P 500. However, corporate earnings performance will also influence the market’s trajectory. Strong earnings growth in the last quarter of 2023 provided significant support to the market, and analysts anticipate continued robustness in the upcoming earnings season, which kicks off in the second week of April.
Nevertheless, uncertainties persist, particularly regarding the Fed’s rate trajectory and the sustainability of economic growth amid inflationary pressures. Any surprises in either direction could significantly impact investor sentiment and market dynamics in the coming months.
