In an unprecedented move, the S&P 500 witnessed a substantial surge of 10.6% in the first quarter, continuing the strong rally from the final quarter of 2023, resulting in cumulative gains of 22.3% since September.
Hailed as historic by the Market Intelligence Team at Nasdaq, the first quarter marked the S&P 500’s second consecutive quarter of double-digit gains, a phenomenon observed only nine times since 1940. This pattern historically indicates a bullish trajectory, with positive 12-month gains following previous occurrences.
Reflecting this momentum, the SPDR S&P 500 ETF SPY mirrored the positive outcomes, boasting returns of 10.1% in the first quarter and a remarkable 22.3% over the past two quarters.
Economic and Earnings Strength
The driving force behind this exceptional rally in 2024, and its potential sustenance, has intrigued market analysts, prompting a closer examination.
While the rally in Q4 2023 was fueled by a dramatic drop in the yield curve on expectations of a dovish Federal Reserve stance, the continuation of equity upsurge in Q1 persevered despite a more hawkish adjustment in monetary policy, as highlighted by Nasdaq analysts.
Although the market initially anticipated approximately six rate cuts in 2024, with the first anticipated in March, the Fed’s cautious approach due to persistent inflationary pressures led to a reduction in these expectations to only three cuts, with the initial cut likely postponed until July.
Despite these monetary shifts, market participants lauded the resilient performance of the economy and corporate earnings throughout the initial quarter of the year.
With the approach of Q1 earnings season, a review of the earnings in the final three months of 2023, recently reported, reveals significant insights.
Earnings across sectors demonstrated a strong rebound, with S&P 500 companies reporting a 4.1% year-on-year earnings growth – a significant leap from the forecasted 1.5% increase at the end of December. Notably, four sectors saw earnings surge by 20% or more.
These standout sectors included:
- Communications services, encompassing renowned companies such as Meta Platforms Inc META, Alphabet Inc GOOGL, and Netflix Inc NFLX, included in the Communication Services Select Sector SPDR ETF XLC
- Consumer discretionary, featuring top players like Amazon.com Inc AMZN, Tesla Inc TSLA, and Home Depot Inc HD, held within the Consumer Discretionary Select Sector SPDR ETF XLY
- Technology, housing giants like Microsoft Corporation MSFT, Apple Inc AAPL, and Nvidia Corporation NVDA, all part of the Invesco QQQ Trust ETF QQQ
- Utilities, featuring major players like NextEra Energy Inc NEE and Southern Company SO, tracked in the Utilities Select Sector SPDR ETF XLU
Anticipating Future Developments
Financial analysts anticipate a positive trajectory for S&P 500 companies, with the potential for four consecutive quarters of annual earnings per share growth, following three quarters of decline.
As market expectations gravitate towards additional rate cuts and sustained growth, the equity rally is poised to extend beyond large-cap stocks into small cap companies.
Emerging as a focal point, the Russell 2000 – positioned 15% below its peak in the previous cycle – recently broke free from a 20-month consolidation phase and has since been ascending, signaling potential opportunities for investors.
Stay informed, keep a watchful eye on updates, and seize the moment to navigate the ever-evolving financial landscape.
Image generated using artificial intelligence via Midjourney.
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