After a strong start to the year, investors are watching for second-quarter bumps as they await the Federal Reserve's June interest rate cut and results.
The S&P 500 (.SPX), opens new tab gained more than 10% in the first quarter, its highest rise since 2019. The Magnificent Seven stocks like Nvidia (NVDA.O) and Facebook parent Meta Platforms (META.O) led the quarter's gains, although economically vulnerable sectors like oil and industrials have gained over the past six weeks.
Whether the rise continues through June depends on the Fed, which has not yet signaled that inflation has fallen sufficiently to justify a rate decrease. After US economic robustness strengthened investor confidence in a soft landing, markets now expect 3 cuts over 2024, down from 6 to 7.
"The market and the Fed are finally aligned on expectations, but that puts even more pressure on every economic report because it doesn't take much to make everyone run the same way," said Ned Davis Research Chief Global Macro Strategist Joe Kalish. "We are expecting more volatility if we don't see more progress on the inflation front."
According to CME's FedWatch Tool, futures markets are predicting a 61% possibility of a 25 basis point decrease rate at the Fed's June 12 policy meeting, bringing benchmark rates to 5 to 5.25%.
According to Harbor Capital multi-asset strategies portfolio manager Jason Alonzo, continued US economic growth would likely widen the market rally into cyclical sectors and small-cap stocks as investors seek better prices. Russell 2000 (.RUT), opens new tab index of small-cap companies increased 4.8% in the first quarter, while the S&P 500 industrials sector rose over 11%.
Next week's economic data includes ISM manufacturing, ISM services, and the closely-watched non-farm payrolls report, which Reuters experts anticipate to show 198,000 job gain in March.
Sam Stovall, CFRA Research's senior investment strategist, said investors shouldn't be surprised if the market gain slows as the Fed considers a rate cut. He said the S&P 500 has gained 15.5% between the last rate hike of a cycle and the first rate drop since 1989, but only 5.4% in the six months after the first cut.
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