What the Q1 stock gains may tell us about the 2024 market

The first quarter of 2024 was undoubtedly a welcome one for investors. But can this exceptionally strong start for stocks set the tone for the rest of the year?

Here are our Q1 reflections and Q2 forecast:

Q1 review: A momentous start for stocks

After the S&P 500 Index rose nearly +26% in 2023, stocks continued to soar higher in the first three months of the year thanks to a strong U.S. economic backdrop, moderating inflation pressures, improving profit conditions and expectations the Federal Reserve will lower its federal funds rate in the second half of this year. The S&P 500 Index finished the first quarter higher by +10.6% for its fifth positive quarter out of the last six. The double-digit gain is just the fourth time since 2000 that the Index has gained more than +8.0% in the first quarter and only the 17th time since 1950, according to Dow Jones market data.

Also bolstering this performance was building enthusiasm around artificial intelligence (AI). Expectations that accelerating profit growth across the AI ecosystem could keep lifting not only Big Tech higher in 2024 — but also smaller-sized companies associated with the theme — gave major averages a lift. However, dispersion in performance across the Magnificent Seven (which includes Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) in Q1 indicates investors are becoming more discerning about which companies they are willing to push higher, given already extended valuations across a handful of mega-cap stocks.

Interestingly, health care and consumer staples logged their best quarters since the fourth quarter of 2022, while financials recorded its fifth straight month of gains — its best run since 2018. In our view, a still-strong U.S. economy, healthy consumer/business spending trends and the potential for lower interest rates by year-end fueled investors’ appetite for relative-value opportunities outside of tech/growth as Q1 came to a close. We believe reduced recession odds for this year, given central bankers’ perceived willingness to cut rates in 2024, also helped the rally broaden in Q1. 

Q2 forecast: Is history foreshadowing a positive year?

Looking ahead, history suggests a strong start to the year for stocks can bode well for investors through the rest of the year. In the other 16 years that the S&P 500 rose +8.0% or more in the first quarter, only in 1987 did the Index close the year lower. Per Dow Jones market data, the other 15 years saw the S&P 500 close the year higher for an average gain of +9.7% over the subsequent three quarters.

That said, investors should expect some bumps in the road at some point:

• The Fed is very unlikely to cut its target rate before its June meeting and may disappoint investors on the number of rate cuts for this year “if” inflation trends firm over the coming months.
• Year-over-year profit growth expectations accelerate as the year moves forward. FactSet estimates currently call for S&P 500 earnings per share (EPS) to grow by roughly +3.0% in Q1, +9.0% in Q2, +8.0% in Q3, and by an eye-popping +18.0% in Q4. Given we see economic growth slowing over the course of the year and consumer trends normalizing, outsized profit growth (at least versus expectations later in the year) could be somewhat difficult for companies in aggregate to achieve.
• Notably, the major U.S. stock averages have not had to deal with an extended period of consolidation or a typical downdraft of 5%, 10% or even 15%, which can occur during any given year. Investors should expect stocks to face some headwinds at some point for reasons that are likely less obvious today. One example could include interest rates remaining elevated due to stronger-than-expected growth and inflation pressures.

What investors should watch in Q2

Any disappointing trends on the economic/profit front over the coming months, or sticky inflation that changes interest rate expectations, could create risk for stocks in the second quarter. Yet, given underlying consumer/business strength and recession risks for this year coming down, we believe near-term stock weakness could be met with eventual buying activity. So, at the start of the second quarter, investors should consider sticking relatively close to strategic targets, diversifying across sectors (including cyclical value areas) and favoring the U.S. as well as developed markets, such as Europe and Japan. A broadening of stock opportunities here and abroad may further gain steam in the second quarter if the soft-landing scenario continues to evolve favorably, which we believe it can.

Position your portfolio for the rest of the year

When stocks surge higher, like they have in the past five months, it’s possible that your portfolio’s asset allocation may have drifted away from its original targets. If you haven’t already in 2024, consider reaching out to your Ameriprise financial advisor for a portfolio review. They can make strategic recommendations, such as rebalancing your portfolio, and help identify potential investment opportunities that could benefit you.