Investors entered 2024 with high hopes, and the market's strong first-quarter rally still managed to surprise many.
Various assets, including stocks, bitcoin, and gold, reached new highs. With one trading session remaining, the S&P 500 is up by 10% in the first quarter, on track for its best start since 2019.
Any dips in the stock market have been short-lived, with investors buying on the downturn and sending the index to 21 all-time closing highs.
The rally isn't limited to a few large tech stocks. Almost all sectors of the S&P 500 have seen gains, and the Russell 2000 small-cap index is up by 4.3%. Additionally, value stocks have outperformed growth stocks in the past month.
The economy has continued to defy expectations, with recession concerns largely disappearing. Strong corporate profits, excitement surrounding advances in artificial intelligence, and optimism about potential interest rate cuts by the Federal Reserve have given investors plenty of reasons to keep buying.
Jeff Kilburg, CEO of KKM Financial, admitted that his cautious optimism underestimated the momentum of the market.
Despite the strong start to the year, some investors are concerned about the sustainability of these returns.
The S&P 500 companies have collectively gained over $9 trillion in market value since last October's low, largely driven by a few big technology stocks known as the Magnificent Seven.
However, the influence of these stocks has waned, with Tesla and Apple experiencing significant pullbacks in the first quarter, though the broader market has remained strong.
AI-related stocks have seen significant gains, with Nvidia, a major AI chip manufacturer, seeing an 82% increase in its stock price.
Other semiconductor stocks, such as Advanced Micro Devices, Applied Materials, and Micron Technology, have also posted strong gains. Super Micro Computer, a recent addition to the S&P 500, has surged by more than 200%.
Risk appetite remains high, as seen in the enthusiastic reception of Reddit's IPO, which surged by 48% on its debut day.
The introduction of bitcoin exchange-traded funds has also fueled a rally in cryptocurrencies, with bitcoin up by 61% year-to-date.
Even traditionally safe-haven assets like gold have experienced significant gains, with gold futures rising by 7.1% in March, the largest monthly gain since July 2020.
According to a Bank of America survey, bullish sentiment among fund managers in March reached its highest level since the beginning of 2022. They are also allocating more to stocks, indicating a strong appetite for risk.
The overall economic environment remains favorable, with robust consumer spending, ongoing job creation, and unemployment below 4%. Fed Chair Jerome Powell believes that inflation is on a downward trend, despite recent reports showing higher-than-expected prices.
At the beginning of the year, investors expected the Fed to cut rates six times in 2024, but now, Fed officials are only projecting three rate cuts.
This shift has led to an increase in Treasury yields, with the 10-year U.S. Treasury yield rising to 4.195% from 3.860% at the end of 2023.
While some investors are concerned about the pace of corporate profit growth, analysts expect S&P 500 companies to report a third consecutive quarter of earnings growth.
First-quarter profits are projected to be over 3% higher than the same period last year, with a full-year growth expectation of 11%.
Despite these positive indicators, some investors worry about the sustainability of the market's momentum. Stocks are trading at around 21 times their projected earnings over the next 12 months, above the five-year average of 19, according to FactSet.
Mark Hackett, chief of investment research at Nationwide, believes that while the strong market momentum and underlying economy could push the S&P 500 higher, investors should remain vigilant against potential risks such as unexpected inflation or weaker-than-expected earnings.
"Are we getting to the point where it is just too easy?" he said.