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

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

The S&P 500 looks set to finish March in the green. This 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

We saw that 2023 ended with a bang, with stocks and bonds rallying in tandem thanks to expectations for dramatic Federal Reserve rate cuts. Back in January, the resounding take was for the Fed to stick the “soft landing” by delivering more than 160 basis points (bps) of rate cuts. Now, those expectations have been pretty much cut in half. Both we and the Fed anticipate just 75 bps worth of easing, or three 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 has boasted 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 5,000 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, some of 2023's biggest stars have continued to support further gains. For example, aside from Super Micro Computer (which was recently added to the S&P 500), Nvidia has been the best-performing member of the index again this year. 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 five-year average. Its earnings growth has actually outpaced its price gains. Meta is also one of the index’s best-performing members. 

Moreover, as we saw into the end of last year, there are also many stocks in the S&P 500 that are outperforming the index. Building on our note last week, 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 their industries 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 this 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 contracted for three straight quarters last year. That earnings recession has now ended, with the last two quarters marking a return to profitability. And while it’s true 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— likely a 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 corporates are feeling more confident. After 2021’s blockbuster year for IPO activity, the last two years were incredibly tough, with high macro uncertainty. 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 three-month sum of equity capital markets activity is at its highest levels since late 2021, but it’s 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 (as 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 they also serve as a reminder that it’s about time in the market, not timing the market. A risk-free 5% yield in cash may 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 return differential 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 are keeping us optimistic. Your J.P. Morgan team is here to discuss how we can best achieve your goals.