Weekly Market Perspectives: Market breadth drives S&P to new highs in Q1

Published: April 1, 2024

Investors continue to be impressed with the level of economic growth and resilience of the consumer rather than solely focusing on the path of monetary policy and inflation figures. Confirming the positive sentiment, the final Q4 GDP print showed the US economy expanded at a healthy 3.4% annualized rate in Q4 on stronger household demand and business investment. And while the first quarter just closed, the Atlanta Fed GDPNow model estimates the US economy is growing at 2.3% annually so far in 2024, driven by robust consumption figures. The continued economic strength has been lifting consumer’s spirits—sentiment figures rose in March to the highest level since mid-2021. The positive economic developments have regularly pushed the domestic equity market to new all-time highs.

To close the first quarter, the S&P 500 Index ended higher by 10.6%, while the Bloomberg US Aggregate Bond Index fell 0.8%. The equity gains in the first quarter were well spread as February posted the best month with a 5.2% gain, while January was up 1.6% and March up 3.2%. The market rally dates back to early November when the Federal Reserve pivoted to communicating rate cuts. Since the market lows in late October 2023, the S&P 500 is up an impressive 27.6% and has not posted a negative month since. Indicative of the risk-on mood, the volatility index—otherwise known as the fear gauge—has been fairly subdued, averaging in the low teens so far in 2024 and never rising above 16.

However, fixed income markets presented a different picture. January (down 0.3%) and February (down 1.4%) both posted losses, and March was only able to modestly offset with a 0.9% gain (as measured by the Bloomberg US Aggregate Bond Index). Economic strength has pushed yields higher across the curve, dragging fixed income values lower. Perhaps little consolation, bond investors can now re-invest at higher yields. Additionally, breaking the positive correlation between equities and fixed income improves the diversification benefit of a well-rounded portfolio.

Historical Momentum Rally: The Strategy of Buying Recent Winners Had a Strong First Quarter
Bloomberg US Pure Momentum Index—Quarterly Total Return

Source: Bloomberg.

The S&P 500 Index Posted Its Best Opening Quarter Since 2019
S&P 500 Index—Quarterly Total Return

Source: Bloomberg.

For the second straight quarter, the S&P 500 Index rose more than 10% and posted the strongest first quarter gains since 2019. The Q1 rally saw the index post a new all-time closing high 22 times, including the final day of the quarter, and boosted equity value by more than $4 trillion. Driving the market higher were the momentum and market cap factors, as large cap and cyclical winners powered to new highs.

Broadening Out: 85% of S&P 500 Companies Are Trading Above Their 200-Day Moving Average
% of S&P 500 Index Constituents Above Their 200-Day Moving

Source: Bloomberg.

The good news for investors is the market is broadening with more stocks participating in the rally than in 2023. Sectors such as energy, financials, industrials, and communication services are leading the market higher in Q1, whereas 2023 was dominated by technology and consumer discretionary.

As Market Breadth Expanded in Q1, Magnificent Seven Constituents Lost Leadership
YTD Returns: Magnificent Seven vs S&P 500 Index

Source: Bloomberg.

Some of the top seven names that drove market performance in 2023 have shown fatigue of late. While Nvidia continues to ride the artificial intelligence wave and META (fka Facebook) benefits from cost cuts, Apple and Tesla have been meaningful drags on the index as investors worry about revenue growth. It is a positive development for investors as different industries and more companies lead the market to new all-time highs.

– Written by Eric Schmitz, CFA