Webinar
Spring 2024 Investment Outlook – April 10
Capitalizing on today’s market opportunities to meet your financial goals.
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Key takeaways
With major stock indices hovering near all-time highs, investors want to understand the dimensions of this bull market.
While outsized gains continue to be dominated by tech stocks, the market rally appears to be broadening to other S&P 500 sectors.
Interest rate cuts later this year could fuel more positive market momentum.
S&P 500 gains continue to be driven by information technology and communication services stocks. However, so far in 2024, markets are showing a bit more balance compared to 2023’s lopsided results, when technology-oriented stocks dominated the index.1
“What keeps driving the markets to new highs are companies that are insensitive to persistently higher interest rates,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.” In contrast, smaller companies that often need to borrow or issue debt to raise capital, face higher interest costs. As a result, small-cap stocks lagged large-cap stocks in 2024’s opening months.2
What factors are likely to affect the stock market today and throughout 2024?
Interest rates contribute to narrow stock market leadership
Much of the stock market’s movement since 2022 was driven by Federal Reserve (Fed) monetary policy. The bear market of 2022 was, in large part, the market’s reaction to the Fed choosing to raise the short-term federal funds target rate it controls. Those actions were in response to a sudden inflationary surge. The most-watched measure of inflation, the Consumer Price Index, peaked at 9.1% for the 12 months ending in June 2022, but has since dropped to 3.2% for the 12 months ending in February 2024.3 The Fed raised the fed funds target rate 11 times, most recently in July 2023. As the market anticipated an end to rate hikes and expectations of Fed rate cuts grew,4 a stock market rally followed. Markets soared in the last two months of 2023 and continue to maintain positive momentum in 2024’s first quarter. Market leadership, however, is still dominated by the communication services and information technology sectors.
“What keeps driving markets to new highs are companies that are insensitive to persistently higher interest rates,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.”
“While the markets may have to wait longer than initially anticipated for the Fed to begin cutting interest rates, that may be the most visible external threat present in the equity markets at this time,” says Haworth. “But persistently high interest rates are being reflected in market leadership.” The environment has, in relative terms, benefited large, technology stocks with limited interest rate sensitivity. Year-to-date, as was the case in 2023, tech-oriented sectors are the major beneficiaries. However, the spread between the top sectors and the rest of the market today is narrower than it was in 2023.
Growth momentum continues
Coming off solid gains of 26.29% in 2023, the U.S. stock market kicked off 2024 in impressive fashion, but not without some volatility. The S&P 500 topped 5,000 for the first time in February. However, markets suffered minor setbacks along the way before recovering lost ground.
Many of February’s gains came on the strength of strong earnings reports from technology companies closely associated with the development of artificial intelligence (AI). Nvidia, a dominant supplier of AI-related hardware and software, is capitalizing on soaring demand for its products. Its stock gained nearly 240% in 2023, and after reporting strong, fourth quarter earnings in late February, Nvidia stock has already gained another 86% in a little more than two months in 2024.5
Large-cap stocks continue to dominate
Large-cap stocks, such as those represented in the S&P 500 Index, are off to a solid start in 2024. Along with information technology and communication services stocks, other sectors such as financial, health care, industrial, and energy stocks are generating solid results.
The environment has been less beneficial to smaller stocks. “The Fed’s interest rate policy matters meaningfully to smaller companies that are likely to have to borrow more to fund operations and business growth,” says Haworth. “As a result, the Fed’s decision to maintain higher rates for longer creates a headwind for smaller companies.”6
Investors appeared to recognize this based on stock market results in 2023 and 2024, comparing the S&P 500 to the Russell MidCap Index and the Russell 2000 small-cap stock index.
Key stock market drivers in 2024
What are the keys to a sustained bull market? Haworth says three primary considerations deserve the most attention:
- Inflation trends and future Fed policy moves. With headline inflation stubbornly hovering above 3%, “There’s some longevity to the inflation story,” says Eric Freedman, chief investment officer at U.S. Bank Wealth Management. “It’s not going away as fast as people might like.” Yet Freedman thinks the Fed won’t wait for inflation to reach 2%, its stated inflation target, before it begins cutting the fed funds target rate. If interest rates come down, it could alter market leadership, according to Haworth. “We may see the stocks that lagged technology-related sectors in 2023 and early 2024 start to recover under that scenario,” he says. “Small companies in particular need interest rates to come down to relieve borrowing stress.”
- Consumer spending. “Consumers’ willingness to maintain reasonable spending growth has been the linchpin for the economy,” says Haworth. This is likely due in part to the strength of the labor market and more significant wage growth. Freedman anticipates more differentiation among consumers in the months ahead. “Higher end consumers still have the ability to spend, but those on the lower end of the income spectrum are more challenged,” says Freedman.
- Corporate earnings. With most companies reporting fourth quarter 2023 earnings, profits are close to 4% higher than in the fourth quarter of 2022.7 Haworth notes that earnings results vary by sector. “Technology stocks have performed very well, due in large part to stronger earnings, which could continue in the current environment.” Overall, Haworth believes market valuations are reasonable assuming earnings expectations are met.
Additional risks to the market include the impact of global tensions highlighted by the Israel-Hamas conflict and the Russia-Ukraine war. The threat of a government shutdown lingers as Congress tries to finish work on the fiscal 2024 federal government budget before a March 22 funding deadline. The heated lead-up to what appears likely to be a closely contested Presidential election may ultimately draw more investor attention.
Keeping a proper perspective
Freedman says it’s important to maintain an appropriate perspective about the markets. He encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman. “Markets will do things at the exact opposite time you expect them to.”
Freedman emphasizes that having a plan in place that helps inform your investment decision-making is critical, particularly in times like these. “That’s the foundation of investing,” he says.
In the near term, investors should prepare for the market’s recent volatility to persist. “Expect continued choppiness in the markets, and not necessarily a straight upward path for stocks in the coming months,” says Haworth. Yet he says investors may be better served by positioning their portfolios for the long-run. “We’re encouraging investors who may have taken a more cautious approach before to adjust back to their long-term strategic target portfolio today.” Haworth says for those who still have a sense of caution about the stock market, “consider putting a portion of your portfolio to work in equities in a systematic way, such as dollar-cost averaging available cash over a series of months.”
Check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.
The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
Frequently asked questions
Stocks are shares of publicly traded companies can be bought and sold. These transactions occur on exchanges and over-the-counter (OTC) marketplaces. The activity of pricing, buying and selling stocks is all activity that occurs in what is generally called “the stock market.”
Stocks move up and down frequently. Between November 2023 and early March 2024, the stock market moved higher (following a generally downward trend between August and October 2023). The market’s recent strength seems to reflect, in part, expectations of a major change in Federal Reserve (Fed) monetary policy. The Fed indicated at its December 2023 meeting that it may reverse course, and begin cutting its short-term, federal funds target rate in 2024.4 That’s a major shift from Fed policy that saw 11 consecutive rate hikes between March 2022 and July 2023, a move designed to slow what had been a surging inflation rate. “The Fed’s interest rate stance is a prime consideration for equity investors in today’s market,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “In the early weeks of 2024, the markets are digesting the most recent news from the Fed, along with other factors such as the direction of corporate earnings.”
These three indices are frequently quoted on daily news reports reflecting daily performance of the stock market. The Dow Jones Industrial Average, perhaps the most quoted index, reflects the performance of 30 prominent stocks listed on U.S. exchanges. The Standard & Poor’s 500 tracks a broader universe of 500 large U.S. stocks. The NASDAQ Composite Index provides a measure of performance of 2,500 stocks listed on the National Association of Securities Dealers (NASD) Automated Quotations exchange. These represent small-, mid- and large-cap stocks. Investors often track these indices, particularly over time, to measure broader stock market performance.
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