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Stocks Strong Out of the Gate in 2024

Equities picked up where they left off at the end of 2023, rallying nearly 10% to notch multiple new highs in the first quarter of 2024.  Unlike their strong performance in 2023, which was mostly driven by the technology sector, stocks’ rally so far in 2024 has been broad-based.  Of the eleven sectors represented in the S&P 500 Index, only one was not positive for the quarter.  The broadening of the equity rally seems to indicate that investors are expecting healthy profit growth from a much wider array of companies in the new year than last year, when much investor money primarily chased the stocks of the largest and most profitable technology companies.

Economy Remains Strong

In the face of pressure from Fed rate hikes, the U.S. economy remains on solid footing and is showing few signs of a slowdown.  The Bureau of Labor Statistics (BLS) recently reported that the economy added a whopping 303,000 jobs in March, marking an acceleration from the previous month.  The unemployment rate of 3.8% and month-over-month rise in average hourly earnings of 0.3% all point to a healthy, growing economy.

Investors Now Face Sticky Inflation

The April 10 inflation data, however, knocked the Dow back by 400 points as investors begin to suspect that anticipated interest rate cuts by the Federal Reserve are again being pushed out.  The Labor Department reported that the Consumer Price Index (CPI) increased 3.5% for March, slightly higher than February’s 3.2% and a bit higher than economists were expecting.  Progress on bringing inflation down has apparently stalled for the moment.

Higher for Longer—Still Our View

We have believed that today’s inflation will remain sticky, and that the Fed would delay interest rate cuts for several more months until the trajectory of inflation begins to trend lower again.  The surprise to us, however, has not been that inflation has gotten more stubborn in recent months, but rather how resilient the equity markets and the overall economy have been to the pressure of higher interest rates.  Entering this year, investors were expecting up to six quarter-point rate cuts from the Fed.  Now, with the CPI number for March hotter than predicted, Wall Street only expects two rate cuts for the year, with a June cut seen as highly unlikely.  We would not be shocked to see investors’ expectations watered down further in the coming months to one or no rate cuts for 2024.

Bad News for Investors?

While Wall Street has been hoping for rate cuts for many months, we do not think a further pushout of rate cuts will unduly harm equity markets, as long as inflation continues to trend flat or lower and does not spike higher, forcing the Fed to consider a rate hike.  In fact, we would welcome some sideways action in markets so investors can digest the recent gains and give valuations some time to improve.  Corporate profits, the underlying driver of stock prices, appear to be headed higher in 2024 and will likely be more broadly spread across different sectors.  Stocks will, however, also contend with valuation concerns.  The S&P 500 is now trading at about 21 times expected profits for 2024, which is not only considerably higher than the long-term average of about 18 times, but also high when considered in relation to today’s higher bond yields.  The elevated P/E ratio indicates that investors are predicting strong earnings growth, thus making the market susceptible to disappointment if investors’ lofty expectations are not met.

Geopolitical Wild Cards

Of course, geopolitical events can always interrupt a market advance, but what has been remarkable in the past several months is how a widening conflict in the Middle East has not (yet) pressured markets.  Even Iran’s missile and drone attack on Israel over this weekend did not appear to materially dent investor confidence.  For now, investors seem more tuned into the Fed than the unsettling events happening around the world.

As always, we welcome your comments and feedback.  Please contact us if there is anything you would like to discuss about your investments or the markets.

*Photo credit: Photoerngo via

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Picture of Peter Thoms, CFA, MBA

Peter Thoms, CFA, MBA

Peter Thoms, CFA, founded Orion Capital Management LLC in April 2002. Peter has extensive experience managing investment portfolios for clients pursuing a wide range of financial goals.

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