From First Trust Advisors L.P.
Sources: Bloomberg and Investment Company Institute and yCharts.
UP, up, not so up…. The S&P 500 Index (“Index”) climbed a wall of worry and stood at an all-time high of 5,254.35 on 3/28/24, according to data from Bloomberg. The S&P MidCap 400 Index also rose to an all-time high of 3,046.36 on 3/28/24. This contrasts the performance of small capitalization stocks . The S&P SmallCap 600 Index remained 8.28% below its record closing high as of the same date. In March, the Index posted a total return of 3.22%. Each of the 11 major sectors that comprise the Index registered positive total returns for the month. The top-performer was Energy, up 10.60%, while the worst showing came from Consumer Discretionary which was up 0.10%. The S&P 500 Index posted a total return of 29.86% over the trailing 12-month period ended 3/28/24. All 11 of the major sectors were up on a total return basis. The Index’s top performer was Communication Services, up 49.76%, while the worst showing came from Utilities which rose by 0.42%. On a quarterly basis, the Index increased by 10.55% on a total return basis. The figure represents the best first quarter for the Index since 2019, when it rose by 13.65%. Earnings estimates for the companies that comprise the Index remain strong. FactSet reported that the year-end bottom-up EPS estimates for the 2024 calendar year were reduced by just 0.4% between 12/31/23 & 3/27/24. For comparison, the average decline in the annual bottom-up EPS estimates for the Index during
In the bond market, the yield on the benchmark 10-year T-note closed trading on 3/28/24 at 4.20%, down 5 basis points from its 4.25% close on 2/29/24, according to Bloomberg. The 4.20% yield stood 186 bps above its 2.34% average for the 10-year period ended 3/28/24, but 79 bps below its most recent high of 4.99% set on 10/19/23. The yield on the 2-year T-note stood 42 bps higher than the yield on the 10-year T-note at the end of March, up from a difference of 30 bps in January. This marks 21 months in a row where the yield curve has remained inverted between these two benchmarks.
Earlier this year the market looked as though it expected the Federal Reserve to make up to 6 rate cuts totaling 158 bps. As of 3/28/24, the federal funds rate futures market indicated that investors now expect fewer than three rate cuts in 2024, totaling just 73 bps. Default rates have risen. Moody’s reported that its global speculative-grade corporate default rate stood at 5.0% in February 2024, up from 2.8% in February 2023. Moody’s puts the historical default rate at 4.2%. the first three months of the year was 1.6% over the past 10 years, 2.5% over the past 15 years, and 2.3% over the past 25 years.
U.S. equities posted strong returns to start the year. The S&P 500 Index surged to record values to close out both February and March 2024, culminating in the Index’s best first quarter in five years. In First Trust’s view, ( which I agree with) the Index’s recent performance can be attributed, in part, to the promise of scaled efficiencies brought on by Artificial Intelligence. Additionally, earnings estimates reflect strength. As of 3/29/24, the companies that comprise the S&P 500 Index were forecast to see record earnings per share of 243.35 and 275.55 in 2024 and 2025, respectively, according to Bloomberg. Add in the potential of an increasingly accommodative Fed and you have the recipe for record valuations. That said, most traditional equity markets act as forward-looking discounting mechanisms, pricing in the sum-effect of all present and future (expected) events. If expectations about the future fail to materialize (or get better!), equities should adjust accordingly.
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