March saw the S&P 500 scaling unprecedented peaks, marking its most robust first quarter performance since 2019.

With a solid 3.2% increase in March, fuelled by encouraging economic indicators, the S&P 500 has surged ahead by 10.6% year-to-date in 2024. Diminished concerns regarding a potential U.S. economic downturn have redirected investor focus towards the Federal Reserve's potential shift from monetary tightening to easing policies. Buoyed by historical trends favouring April as a strong month for the S&P 500, investors are hopeful that the market will sustain its positive momentum.

Recap of the First Quarter Market Performance

In addition to significant gains for the S&P 500, a continued surge in artificial intelligence-related stocks and reassuring comments from Federal Reserve officials propelled the Dow Jones Industrial Average by 6.1% and the Nasdaq by 9.3% in the initial quarter. Driving these advancements were the technology, consumer cyclical, and consumer defensive sectors, each yielding total returns of approximately 8% or higher. Notably, the market rally exhibited broad strength, with only the real estate sector closing the quarter in negative territory.

Top and Bottom Performers in Stock Market

Super Micro Computer (SMCI), a leading AI server manufacturer, emerged as the standout performer in the S&P 500 for the first quarter, boasting a remarkable year-to-date gain of 255%. Investors' fervor for AI-related stocks fueled this surge, with Super Micro Computer witnessing an astounding 502% increase since the start of 2023.

Similarly, AI chipmaker Nvidia (NVDA), the top-performing S&P 500 stock in 2023, sustained its bullish trajectory into the first quarter of 2024. With a year-to-date increase of 82% and an impressive 321% surge since last year's commencement, Nvidia's market capitalization has soared to $2.29 trillion.

Conversely, electric vehicle manufacturer Tesla (TSLA) faced a challenging quarter, emerging as the worst-performing stock in the S&P 500. Intensifying competition in China compelled Tesla to slash prices on its electric vehicles, resulting in a meager 3% year-over-year growth in automotive revenue during the fourth quarter. In a similar vein, Boeing (BA) experienced a tumultuous period, witnessing a steep decline of over 25% in the first quarter. Quality control issues continued to plague the company, exerting downward pressure on its stock price.

Potential Shift in Fed Policy

For the S&P 500 to sustain its impressive performance in 2024, the Federal Reserve is expected to further tackle inflation to remain on course for potential interest rate cuts later in the year.

In February, the consumer price index rose by 3.2% year-over-year, a decrease from the peak inflation levels of 9.1% in June 2022 but still significantly above the Federal Reserve’s long-term target of 2%.

While the Federal Reserve has made notable strides in curbing inflation, concerns persist among economists regarding the persistence of "sticky" inflation, which could pose challenges in the final phase of the Fed's objectives. Notably, shelter prices continued to climb, registering a monthly gain of 0.4% and an annual increase of 5.7% in February.

In March, the Federal Open Market Committee (FOMC) chose to maintain interest rates within the current target range of 5.25% to 5.5%. However, Fed Chair Jerome Powell hinted at the possibility of gradually easing policy restraints later in the year, indicating a potential shift in the Fed's stance.

Anticipating Interest Rate Adjustments

The Federal Reserve's revised long-term economic outlook indicates a potential for three interest rate cuts of 25 basis points each by the conclusion of 2024.

The Bureau of Economic Analysis recently disclosed a 3.4% growth in U.S. GDP during the fourth quarter, suggesting that the current elevated interest rates are not significantly impairing U.S. corporations, contrary to some economists' concerns.

Bill Adams, the chief economist at Comerica Bank, emphasises the robust state of the U.S. economy, citing solid growth in real GDP propelled by strong consumer spending and vigorous investment in nonresidential structures. Adams forecasts a moderate economic expansion in 2024, as inflation gradually retraces towards the Federal Reserve's target, reflecting a positive trajectory for the U.S. economy.

Bond Market Dynamics

The bond market is currently reflecting a 95.8% probability that the Federal Open Market Committee will maintain interest rates at their current levels during its upcoming meeting, concluding on May 1. Additionally, bond investors perceive a 63.6% likelihood that the FOMC will commence interest rate cuts by June, as reported by CME Group.

Jeremy Straub, CEO and chief investment officer at Coastal Wealth, suggests that while interest rate reductions could bolster the stock market rally, they might not be imperative for the S&P 500 to sustain its positive trajectory.

“Although rate cuts from the Federal Reserve would be a boon for stocks, they are not indispensable for a resilient market. Over the past 18 months, the market has demonstrated its ability to rally despite elevated interest rates, indicating that investors are adapting to this new era of higher interest rates,” Straub explains.

Monitoring the Risk of U.S. Recession

The Federal Reserve finds itself at a pivotal juncture in its battle against inflation. The coming months are crucial for the central bank as it aims to steer the U.S. economy towards a soft landing, avoiding both recessionary pressures and a resurgence of inflation.

While concerns about recession have eased in recent months, the New York Fed's recession model still suggests a 58.3% probability of a U.S. recession within the next 12 months.

One encouraging sign of a potential soft landing is the resilience of the U.S. labor market. Despite a slight uptick in the unemployment rate to 3.9% in February, the Labor Department reported the addition of 275,000 jobs, surpassing economists' expectations of 198,000 jobs added.

Sam Millette, director of fixed income at Commonwealth Financial Network, highlights the positive momentum carried over from the previous year, contributing to solid initial estimates for first-quarter U.S. GDP growth.

"While first-quarter growth may decelerate compared to the robust performance at the end of last year, any slowdown still signifies growth. The supportive economic backdrop is expected to continue benefiting the markets," says Millette.

Key Insights into the First Quarter Earnings Season

Rising interest rates pose challenges for both U.S. consumers and corporations by elevating borrowing costs, which in turn, can strain the economy and the stock market. Moreover, inflation escalates input expenses for U.S. companies, squeezing profit margins and exerting downward pressure on earnings.

Despite these hurdles, S&P 500 companies reported a 3.6% year-over-year increase in earnings during the fourth quarter, with seven out of eleven market sectors recording positive earnings growth.

As the first-quarter earnings season commences in April, analysts anticipate another period of modest growth. Consensus estimates from Wall Street analysts forecast a 3.6% rise in earnings and a 3.5% increase in revenue for S&P 500 companies.

Analysts are optimistic about full-year S&P 500 earnings growth in 2024, projecting an 11.0% increase, albeit with varying degrees of enthusiasm across market sectors.

Looking ahead, the communication services sector boasts the highest percentage of analyst buy ratings at 63%, followed closely by the energy sector at 62%. In contrast, the materials sector lags behind with just 45% of analyst buy ratings.

With a consensus 12-month analyst price target of 5,614 for the S&P 500, indicating approximately 6.8% upside potential from current levels, Adam Turnquist, chief technical strategist at LPL Financial, notes a strong uptrend heading into earnings season.

"While stocks may be trading at elevated levels, this market backdrop suggests that pullbacks should be viewed as buying opportunities," advises Turnquist.

In the first quarter of 2024, the financial landscape showcased remarkable resilience and volatility across various sectors and indices. The S&P 500 surged to new all-time highs, buoyed by gains in technology, consumer cyclical, and consumer defensive sectors, alongside a robust rally in AI-related stocks. Despite inflationary pressures and concerns about interest rates, the Federal Reserve hinted at potential policy adjustments to sustain economic growth. Analysts remain cautiously optimistic about the market's trajectory, with expectations for continued earnings growth and positive momentum. Amidst evolving economic conditions, market participants navigate opportunities while monitoring risks to ensure a balanced approach to investment strategies.