It was a brilliant start to the year for the stock market.
The S&P 500, one of the world's most-watched stock indexes, rose more than 10 percent in the first three months of 2024, buoyed by 22 record highs.
Around 40 percent of the stocks in the index are trading above their level twelve months ago. And even if the index has lost ground, it hasn't been by much, as the S&P 500 has only fallen more than 1 percent on three days so far in 2024 through the close.
The move was driven by renewed demand for shares. Investors poured around $50 billion into funds that buy stocks in the United States in March, according to data from EPFR Global.
A modest rally in January based on expectations that the Federal Reserve would begin cutting interest rates this year has given way to broader optimism that the central bank could reduce inflation to its 2 percent target without affecting the economy causing too much damage, the long-awaited “soft landing”.
New inflation and spending figures released Friday were in line with economists' expectations and confirmed prevailing forecasts for Fed rate hikes. “We don’t need to be in a hurry to cut interest rates,” Jerome H. Powell, the Fed chairman, said at an event on Friday.
In markets, the exuberance has spread to the riskier corners of the financial system. Bitcoin continues to trade above $70,000, a threshold it reached for the first time this month, after regulators made it easier for ordinary investors to buy funds that track the cryptocurrency's price. At the same time, mergers and acquisitions have increased sharply and the public appearances of Reddit and Trump Media were greeted with large price jumps on the first day of trading. And in credit markets, where investors finance companies through bonds and loans, demand and desire for credit have increased – a sign of optimism about the outlook for corporate America.
Even though the Fed is considering cutting interest rates up to three times this year, by up to three-quarters of a percentage point in total, returns to investors are still well above those elsewhere in the world, helping to keep money flowing in United States.
“I see it from all over the world,” said Andrew Brenner, head of international fixed income at National Alliance Securities.
But Mr. Brenner also sees reason for caution. Cracks are beginning to appear in the economy and consumer finances are beginning to erode. Credit card debt has risen and the number of people delinquent on their auto loans has risen at its fastest rate in more than a decade. Some companies are also starting to struggle, with defaults more than doubling in the past year, according to S&P Global.
The Russell 2000 index of smaller companies, a measure of companies more vulnerable to the ups and downs of the domestic economy, also rose in the first three months of the year, but only by 4.3 percent. It's a reminder that the biggest companies are driving up the stock market – especially those surfing the wave of optimism about artificial intelligence.
“Stocks are working for people right now,” Mr. Brenner said. “I just wonder how long it will be before we get into trouble.”
The so-called “Magnificent Seven” group of stocks that drove the market higher last year continued to have an outsized influence, accounting for nearly 40 percent of the S&P 500's rise in the first three months, according to data from S&P's Howard Silverblatt.
However, sharp declines at Apple and Tesla led to an even smaller cohort of companies – Nvidia, Meta, Amazon and Microsoft – driving the market to new heights. They were solely responsible for half of the index's gains.
“Earnings are good, interest rates are below their all-time highs and employment remains high and consumers are willing to spend their paychecks,” Mr. Silverblatt said. “So the market continues to go up.”