Historic S&P 500 Rally In Q1 Flashes Bullish Signals For 2024: 'Only The Ninth Time Since 1940'

The S&P 500 enjoyed a total return of 10.6% in the first quarter, following a robust rally in the final quarter of 2023 that have taken its cumulative gains since the end of September to 22.3%.

“The S&P 500's current streak of gains is nothing short of historic,” said the Market Intelligence Team at Nasdaq in its quarterly review and outlook.

“The first quarter marked the index’s second-consecutive quarter of double digit gains for only the ninth time since 1940. Historically, this has been a bullish signal, as the prior eight occurrences were all followed by positive 12 month gains.”

The SPDR S&P 500 ETF SPY, which mirrors the S&P 500, posted returns of 10.1% in the first quarter and 22.3% across the past two quarters.

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Economic And Earnings Resilience

So what has been the driving force of this rally in 2024, and how will it be sustained in the coming quarter?

“Where the rally in Q4 was due in large part to a dramatic shift lower in the yield curve on expectations of a dovish Federal Reserve pivot, the continuation of equity gains in Q1 came despite the hawkish repricing of monetary policy,” the Nasdaq analysts said.

Indeed, markets began 2024 expecting around six rate cuts over the year, with the first coming in March. However, persistently sticky inflation saw the Fed delay pulling the trigger and, now, those expectations have dwindled to three cuts, with the first likely not until July.

However, market participants have been impressed by the performance of the economy and the resilience of corporate earnings through the first quarter.

As Q1 earnings season approaches, let’s have a quick recap of earnings in the final three months of 2023, which have just been reported.

The strong rebound in earnings that began in the third quarter continued. Overall, S&P 500 earnings were up 4.1% year-on-year, substantially higher than the 1.5% that had been forecast at the end of December. Earnings were most outstanding in four sectors that reported growth of 20% or more.

Those sectors were:

• Communications services: this sector included big guns such as Meta Platforms Inc META, Alphabet Inc GOOGL and Netflix Inc NFLX. These are covered in the Communication Services Select Sector SPDR ETF XLC
• Consumer discretionary: top stocks here include Amazon.com Inc AMZN, Tesla Inc TSLA and Home Depot Inc HD and are holdings in the Consumer Discretionary Select Sector SPDR ETF XLY
• Technology: which includes Microsoft Corporation MSFT, Apple Inc AAPL and Nvidia Corporation NVDA all included in the Invesco QQQ Trust ETF QQQ
• Utilities: with top stocks including NextEra Energy Inc NEE and Southern Company SO and covered in the Utilities Select Sector SPDR ETF XLU

Looking Ahead

The Nasdaq report said the Street is expecting S&P 500 companies to report annual earnings per share growth for the fourth consecutive quarter, following declines in the prior three.

The next earnings season, where companies will be reporting their financial performances during Q1, will commence in the coming weeks and Nasdaq expects EPS growth of 3.4%.

Meanwhile, as expectations of rate cuts and continued growth dominate the economic backdrop, the breadth of the equity rally will expand beyond the large cap stocks mentioned above into small cap companies.

“The Russell 2000 remains 15% below its prior cycle highs however last month the small cap index broke out from a 20-month trading range and has since been trending higher,” said the analysts.

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Image generated using artificial intelligence via Midjourney.