Bubble or bliss? Why we think stocks could grind higher.

Q1 is in the books, and the rally has been pretty astounding.

The S&P 500 finished March in the green. That means stocks have now been on a winning streak for five consecutive months.

What’s even more impressive is how the rally has evolved on the coattails of last year. This edition of Top Market Takeaways dives into the moves that defined the quarter and breaks down what it all means.

2024 has flipped the script

2023 ended with a bang, with stocks and bonds rallying in tandem thanks to expectations for dramatic Fed rate cuts. Back in January, the resounding take was for the Fed to stick the “soft landing” by delivering more than 160bps of rate cuts. Now, those expectations have been pretty much cut in half. Both we and the Fed now expect just 75bps worth of easing, or 3 cuts, this year.

Similarly, remember the Magnificent 7? The largest mega cap stocks accounted for around two-thirds of the S&P 500’s entire gain last year. This year, one of those names is the worst performing stocks in the S&P 500. And another is down 10%. 

Given all this, you would be forgiven if you thought the market would be down. But…the exact opposite has happened.

The S&P 500 boasts a 10% gain so far in 2024 – that’s about in line with its historical average for a full year. So, what’s happened and what does it mean?

Do such big gains point to a “bubble”?

We don’t think so. Let’s break it down.

The S&P 500 has made over 20 new all-time highs so far this year, rallying well above the 5000 mark. This is especially notable given the “Magnificent 7” has lost two of its larger anchors (with Apple and Tesla underperformers this year). That said, two of the biggest stars from last year have continued to support further gains. Nvidia has been the best performing member of the S&P 500 again this year (aside from Super Micro Computer, which was just added to the index recently). After rallying more than 200% last year, the chipmaker is up a further 80% this year.

These huge gains have led to some talk of a “bubble,” but consider this: even after the stock’s massive gains, its valuation (proxied by its next-12-months P/E ratio) is still below its 5-year average. Its earnings growth has actually outpaced its price gains. Meta is also one of the index’s best performing members. 

Moreover, like we saw into the end of last year, there are also lots of stocks in the S&P 500 that are outperforming the index. Building on our previous note, 195 names in the S&P 500 now have a better year-to-date return than the index’s 10% return. The median market cap of these names is around $50 billion, and span beyond tech. The two best performing sectors in March have been energy and materials – sectors associated with a more cyclical tilt. All that’s to say, the rally is getting broader:

What does this mean? It’s not only mega cap tech that is rallying. We think that opens up opportunities in active management to help achieve strong returns.  

So, what’s been driving the gains? 

In one word: earnings. Although the U.S. economy never fell into recession, earnings did go through a correction. S&P 500 earnings were contracting for three straight quarters last year. That earnings recession now ended, with the last two quarters marking a return to profitability. And while it’s true that the “Magnificent 7” accounts for around 25% of S&P 500 earnings and drove much of the profit growth last year, we expect that growth to broaden throughout the year. We’re already seeing this take place – a likely key reason why the rally has marched on even with less Fed rate cuts in the cards.

Finally, in addition to posting profits, we’re also seeing other activity that suggests that corporates are feeling more confident. After 2021’s blockbuster year for IPO activity, the last two years were incredibly tough with macro uncertainty high. Now, the market is heating back up: this year has already seen the high-profile IPO of Reddit, and many other private companies have been waiting to go public as well. We expect more to come: the 3-month sum of equity capital markets activity is at its highest levels since late 2021, but is still down more than 80% from the peak.

We don’t think you’ve “missed it”

It’s important to take a step back: the big gains into year-end helped set the stage for this year. The S&P 500 is up more than 25% since last October’s lows – that’s the strongest 100-day return since September 2020. Gains this large in this short of a period may make a lot of people feel like they’ve missed it.

The opposite is true. Over the past 50 years, whenever the S&P 500 has rallied at least 25% in a 100-day period (like it has recently), the index was, on average, another 15% higher a year later and positive overall 98% of the time.

Such strong double-digit returns are indeed unique, but it also serves as a reminder that it’s about time in the market, not timing the market. A risk-free 5% yield in cash may be tempting, but riskless does not mean costless. Year-to-date, the S&P 500 has outperformed cash by more than 8%. Over the past year, that number has been more than 25%. Cash certainly has a role in all portfolios, but it should always be considered in the context of long-term goals.  

We’re constructive on the path ahead

To sum up, Q1 was a strong one. Some of the factors that supported markets last year have carried over, but there are also new drivers that keep us optimistic. Your J.P. Morgan team is here to discuss how we can best achieve your goals.

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Index Definitions

The CAC 40 is a benchmark French stock market index. The index represents a capitalization-weighted measure of the 40 most significant stocks among the 100 largest market caps on the Euronext Paris.

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Nikkei 225, or the Nikkei Stock Average, more commonly called the Nikkei or the Nikkei index, is a stock market index for the Tokyo Stock Exchange.

The Russell 2000 Index is a small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.

The Standard and Poor's Midcap 400, or simply the S&P Midcap 400, is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The Standard and Poor's 500, or simply the S&P 500, is a capitalization-weighted stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.

The Stoxx Europe 600 Index is derived from the Stoxx Europe Total Market Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region.

The Bloomberg U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

The MSCI World Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1969. MXWO includes developed world markets, and does not include emerging markets. MXWD includes both emerging and developed markets.

The EURO STOXX 50 Index, Europe's leading blue-chip index for the Eurozone, provides a blue-chip representation of supersector leaders in the region. The index covers 50 stocks from 11 Eurozone countries. The index is licensed to financial institutions to serve as an underlying for a wide range of investment products such as exchange-traded funds (ETFs), futures, options and structured products.