S&P 500 will have its best start to the year since 2019
As 2024 rolled along, many investors were filled with optimism. They were nonetheless caught unawares by the market’s strong first-quarter surge.
There was a record-breaking run for every asset class, from equities to bitcoin to gold. With just one trading session remaining, the S&P 500 is poised for its best start to the year since 2019, with a 10% gain in the first quarter. Because investors have been quick to buy the dip, the stock market’s weakness has only lasted a few sessions, and the index has since closed at 21 all-time highs.
Not only that, but the surge is including more than just a few of megacap tech stocks. The has seen gains across all but one of its eleven sectors. A 4.3% increase characterizes the small-cap Russell 2000 index. Compared to its growth-oriented cousin, a Russell index of value stocks performed better over the last month.
As predicted, the economy keeps surprising people. Concerns about the recession are no longer prominent. Investors have lots of reasons to keep purchasing, including resilient corporate profitability, enthusiasm around artificial intelligence breakthroughs, and anticipation that the Federal Reserve would begin decreasing interest rates.
Jeff Kilburg, CEO and creator of KKM Financial, remarked that I may have undervalued the power of momentum in my cautious optimism heading into 2024.
Some investors are wondering if the returns will continue to be challenging after this wild start to the year. Dow Jones Market Data reports that since the market bottomed out in October, the value of the S&P 500 has increased by over $9 trillion.
The Magnificent Seven were a tiny group of very successful technology companies who carried investors into 2024 on a wave of enormous gains. Due to the market value weighting of the S&P 500, these companies have a significant impact on the overall market sentiment and direction.
With sharp first-quarter pullbacks in Tesla and Apple, the Magnificent Seven’s dominance receded, but the market as a whole stayed strong. Half or more of the S&P 500’s equities have set fresh 52-week highs.
It was an extension of a run-up that began last spring, with AI-related equities in particular charging higher. The artificial intelligence (AI) chipmaker Nvidia has seen an 82% increase in its stock price. Micron Technology, Advanced Micro Devices, and Applied Materials are among the other semiconductor stocks that have gained over 20%. With its recent inclusion to the S&P 500, Super Micro Computer has seen an increase of almost 200%.
Upon being introduced to the firm by a student over twenty years ago, Mark Hatala, a 58-year-old professor from Kirksville, Missouri, made his first investment in Nvidia stock. The big rise at Nvidia has now convinced Hatala to retire early in 2019. According to Hatala, it is absurd to continue working due to the stock returns.
Evidently, there is a lot of risk-taking. Among the most talked-about IPOs in recent memory, Reddit’s stock price increased 48% on the first day it was available to the public. Bitcoin has risen 61% year-to-date, spurred by a purchasing frenzy in cryptocurrencies that began with the introduction of bitcoin exchange-traded funds in January.
Aside from risky assets, even gold’s value has skyrocketed. March’s 7.1% increase in front-month gold futures was the biggest monthly advance since July 2020.
In March, the monthly survey conducted by Bank of America found that the degree of bullish mood among fund managers hit its highest point since the beginning of 2022. The study also revealed that their stock allocation and risk appetite are at multi-year highs.
The wagers of investors are supported by a Goldilocks economy. Companies are still hiring, consumers are still spending a lot of money, and the unemployment rate is still around 4%. Despite a run of higher-than-expected inflation data, Federal Reserve Chair Jerome Powell maintains that inflation is still on the decline.
Investors anticipated six rate cuts by the Federal Reserve for its benchmark short-term rate in 2024. That was a little optimistic, it turned out. Three rate cuts are already penciled in for this year by Fed policymakers.
Treasury yields rose as market participants adjusted their expectations for a rate drop. A benchmark for borrowing costs from mortgages, car loans, and corporate bonds, the 10-year U.S. Treasury yield increased from 3.860% at the end of 2023 to 4.195% on Wednesday.
According to Marta Norton, chief investment officer of the Americas for Morningstar Wealth, the market has been extremely accurate in predicting when the Fed will pivot, if it has been incorrect about anything at all in the last several years. Stocks like consumer staples and utilities, she noted, have seen increased holdings by her firm.
According to past performance, equities have a decent chance of continuing the good times. According to a Dow Jones Market Data examination of index performance since 1950, the S&P 500 finishes the year higher 94% of the time with an average return of 9.7% over the next three quarters when it adds 8% or more in the first quarter.
In years like this, when a president is elected, the stock market often ends up higher. Dow Jones Market Data shows that the S&P 500 has gained an average of 7.3% in years where there is a presidential election, and that this trend has occurred 83% of the time since 1950.
Some investors, though, are still concerned that investor exuberance may outstrip the fundamental strength of business profitability. Companies included in the S&P 500 are anticipated by analysts to announce earnings increase for the third consecutive quarter. In comparison to the same period last year, FactSet predicts a profit increase of almost 3% for the first quarter. Earnings rise of 11% is anticipated for the year by analysts.
According to Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, momentum can swiftly turn around if fundamentals fail to keep pace.
Companies may not achieve their predicted earnings, leading to the perception that stocks are overvalued. Companies in the S&P 500 are trading around 21 times their projected earnings over the next 12 months, above the five-year average of 19, according to FactSet.
Mark Hackett, chief of investment research at Nationwide, believes the momentum in markets and a strong underlying economy could carry the S&P 500 higher the rest of the year. But he worries that investors could turn complacent, becoming oblivious to potential risks such as stickier-than-expected inflation or weaker-than-expected earnings.
Are we getting to the point where it is just too easy? He spoke.
