The first quarter of 2024 was a period of significant growth in global equity markets, continuing the rally from late 2023. The S&P 500 index rose above 5,000 for the first time, hitting new all-time highs north of 5,200. This was driven by a combination of stable economic growth, falling inflation, an expectation towards impending Fed rate cuts, and on-going enthusiasm towards artificial intelligence (AI). The S&P 500 finished up nearly +10.4% (‘SPY’ ETF Proxy), the strongest first quarter performance for markets since 2019, despite a modest rebound in interest rates.

The year began with a slight uptick in volatility as traders initially booked profits following the strong gains of 2023 when fears of potentially higher-than-expected rates pushed stocks temporarily into negative territory. However, the declines did not last more than a week. Fourth-quarter corporate earnings were better than feared, helping stocks recover. Then, in late January, the US Federal Reserve signaled that rate hikes were done and hinted at upcoming cuts while NVIDIA, the semiconductor company at the heart of the AI boom, posted much-stronger-than-expected earnings and guidance. Investors seized on these positive developments, and the stocks never looked back.

The first quarter also reflected a much more evenly distributed rally compared to the prior quarter, where tech and tech-aligned sectors handily outperformed the rest of the markets. However, there were some notable laggards. Small caps, for instance, registered a positive return for the first quarter but lagged large caps as concerns about stubbornly high interest rates weighed, as they are more sensitive to higher funding costs. Switching to fixed income, the Bloomberg Barclays US Aggregate Bond Index realized a slightly negative return (-0.7% ‘AGG’) on mixed inflation readings that delayed the expected start of Fed cuts from March until June.

In summary, market expectations for a June rate cut from the Fed and three rate cuts in 2024 overall have been central to the first quarter rally. However, these rate cuts are not guaranteed, and any deviation from market expectations could lead to disappointment and potential declines in stocks and bonds. Additionally, investor enthusiasm for AI has contributed to the bull market, but its impact on non-hardware earnings remains uncertain. Finally, after two strong back-to-back quarters, a consolidation period leading into the summer would not be a surprise. Despite the current positive backdrop, we therefore remain vigilant about managing both reward and risk in portfolios, as this historic rally could become more susceptible to negative news. Meanwhile, here is to the reemergence of sunshine and green grass – enjoy the spring!

Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice – please speak with your advisor about your particular situation.