After a promising start to the year, investors are cautiously watching the market’s next moves, particularly with eyes on the Federal Reserve’s potential interest rate cut by June and the state of upcoming corporate earnings.
The S&P 500 concluded the first quarter with an impressive gain exceeding 10%, marking its best start since 2019, largely driven by the performance of major tech stocks like Nvidia and Meta Platforms, alongside a surge in sectors such as energy and industrials.
The continuation of this upward trend hinges on the Fed’s next steps, as it has yet to signal a decrease in inflation sufficient to warrant a rate reduction.
Initially, markets had anticipated up to seven cuts in 2024, but expectations have adjusted to three following signs of enduring strength in the U.S. economy.
“The market and the Fed are finally aligned on expectations, but that puts even more pressure on every economic report that comes out because it doesn’t take a lot to make everyone run the same way,” Joe Kalish of Ned Davis Research remarked, foreseeing increased volatility without further progress on inflation.
“Futures markets now suggest a 61% likelihood of a rate cut in June, potentially lowering rates to between 5 and 5.25%.
“The broadening of the market rally into cyclical and small-cap stocks suggests a search for value, with the Russell 2000 and the S&P 500 industrials sector showing notable gains.
“Right now the only thing the market cares about is whether the Fed remains in control even if the economy re-accelerates,” commented Jason Alonzo from Harbor Capital.
Upcoming economic reports, such as the ISM manufacturing data and non-farm payrolls, are eagerly awaited for further insights.
Historical patterns suggest that while the first quarter’s momentum often extends into the next, the pace may slow following a Fed rate cut.
“The market deserves the benefit of the doubt and at this point we think bull market rules apply,” Keith Lerner of Truist Advisory Services said, noting the potential risk of a sustained interest rate level.
Corporate earnings will play a crucial role in determining the market’s direction.
Surprisingly strong earnings have previously propelled the S&P 500 to record highs, despite reevaluations of interest rate policies.
With analysts anticipating a 5.1% earnings growth for the first quarter, the outcomes could significantly influence the Fed’s decision-making process regarding interest rate cuts.
“If earnings continue to surprise to the upside, the Fed will have a hard time justifying 3 cuts this year,” Emily Roland of John Hancock Investment Management concluded, highlighting the importance of earnings performance and inflation trends in shaping a sustainable economic recovery.