S&P 500 delivers best Q1 in five years (NYSEARCA:SPY)

The S&P 500 (SP500) on Thursday advanced 10.16% for Q1 2024 to end at 5,254.35 points, posting gains in all three months of the quarter. Its accompanying SPDR S&P 500 Trust ETF (NYSEARCA:SPY) added 10.06% for Q1.

The benchmark index notched its best first quarter performance since Q1 2019. In the process, the gauge shattered several historic milestones – on February 8, it scaled 5,000 points for the first time ever, and followed that up by taking out the 5,100 and 5,200 levels on February 23 and March 20, respectively. The S&P 500 (SP500) currently sits at an all-time closing high.

“Not a bad quarter. Nearly 40% of all trading days in Q1 were record closing highs for the S&P 500 (SP500). Most since Q1 2013,” Bespoke Investment Group noted on X (formerly Twitter), adding that Q1 also marked the first back-to-back double-digit quarterly percentage gains for the S&P (SP500) in 12 years.

The seeds for the S&P’s (SP500) impressive Q1 were planted towards the end of 2023, especially after the Federal Reserve in its final monetary policy meeting of the year delivered a long-awaited dovish pivot that led to markets pricing in anticipated interest rate cuts in 2024. Meanwhile, last year’s massive runup in megacap technology stocks on the back of the craze around artificial intelligence only intensified in Q1, and was one of the chief drivers of Wall Street’s rally.

Economic data in Q1 2024 largely supported the Fed’s turn towards expected rate cuts. Consumer and producer inflation came in slightly hotter than anticipated in both January and February, but Fed chair Jerome Powell was largely ambivalent about the readings. Meanwhile, economic growth has continued at a strong pace and the labor market has remained resilient. The Fed at its policy meeting last week stuck to its forecast of an expected three rate cuts this year.

“(Q1) follows a red-hot bull market in 2023 which shot like a rocket up out of the 2022 lows. It puzzles us to see commentators who remain bearish at this moment. At some point, the bull will turn, of course, but we will all know when it turns, because prices will be going down,” Alex King, investing group leader of Cestrian Capital Research, told Seeking Alpha.

“All manner of genius is presently simply embarrassed by the market’s failure to stop going up. Our view remains simple which is, we are looking up towards year end. If and when inflation once again becomes not-transitory and cuts become hikes, well, probably stocks will fall then. But that’s not likely to be tomorrow. We remain bullish,” King added.

Where Do We Go From Here?

Investors are now looking ahead to the rest of the year to see whether equities can continue their bull run. With interest rate cuts anticipated as soon as June, the current rally could possibly build even further.

The S&P’s (SP500) advance has powered it past the 5,200 points mark significantly earlier than several high profile brokerages predicted, as many of them had penciled in a 5,200 level only by year end. Goldman Sachs recently said that it sees a scenario in which continued gains in megacap tech stocks could boost the benchmark index to 6,000.

“The S&P 500 was up more than 10%, including dividends, in the first quarter. A common question for investors is what, if anything, has this meant for the rest of the year,” Keith Lerner, co-chief investment officer at Truist, said in a note.

The following chart from Truist shows the S&P 500’s (SP500) returns and pullbacks after a total Q1 return of more than 10%:

As per the data, following periods of a Q1 gain of more than 10%, the S&P 500 (SP500):

• Was higher the next quarter 9 out of 11 times, with an average gain of 5%.
• Was higher the rest of the year 10 out of 11 times, with an average gain of 11%.
• The maximum pullback seen at any point the rest of the year, even while the market ultimately ended higher in 10 of 11 instances, averaged 11% (median = 6.9%).

“The historical data, which should only be used as a starting point, shows strong first quarter returns are typically a positive sign and tend to lead to further market gains by the end of the year. This is consistent with previous studies that we have shown that suggest strong price momentum tends to be a positive sign and a characteristic of bull markets,” Truist’s Lerner said.

“The data also suggests investors should be prepared for normal pullbacks along the way. This is consistent with our view that investors stay with the primary market trend, which is up, and look to pullbacks as opportunities,” Lerner added.

Quarterly Sector Performance

Turning to the quarterly performance of the S&P 500 (SP500) sectors, all 11 ended in the green with the exception of Real Estate. Communication Services showed the biggest improvement, with an outsized advance of more than 15% in Q1 2024. Energy and Information Technology rounded out the top three gainers, with both rising more than 12% each.

See below a breakdown of the performance of the sectors as well as their accompanying SPDR Select Sector ETFs from December 31, 2023 close to March 28, 2024 close:

#1: Communication Services +15.57%, and the Communication Services Select Sector SPDR Fund (XLC) +12.37%.

#2: Energy +12.68%, and the Energy Select Sector SPDR ETF (XLE) +12.57%.

#3: Information Technology +12.48%, and the Technology Select Sector SPDR ETF (XLK) +8.20%.

#4: Financials +11.97%, and the Financial Select Sector SPDR ETF (XLF) +12.02%.

#5: Industrials +10.57%, and the Industrial Select Sector SPDR ETF (XLI) +10.51%.

#6: Materials +8.44%, and the Materials Select Sector SPDR ETF (XLB) +8.59%.

#7: Health Care +8.40%, and the Health Care Select Sector SPDR ETF (XLV) +8.32%.

#8: Consumer Staples +6.81%, and the Consumer Staples Select Sector SPDR ETF (XLP) +6.01%.

#9: Consumer Discretionary +4.75%, and the Consumer Discretionary Select Sector SPDR ETF (XLY) +2.84%.

#10: Utilities +3.59%, and the Utilities Select Sector SPDR ETF (XLU) +3.66%.

#11: Real Estate -1.12%, and the Real Estate Select Sector SPDR ETF (XLRE) -1.32%.

For investors looking into the future of what’s happening, take a look at the Seeking Alpha Catalyst Watch to see next week’s breakdown of actionable events that stand out.

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