Drilling down

U.S. stocks set new highs

The S&P 500 Index surged 10.16% as the U.S. economy continued to exceed expectations, solidifying the view that it would see a soft landing in 2024. More hawkish comments from the Fed reinforced this view, while also pushing back expectations for interest rate cuts. Over the period, the index rose from 4,769.83 at the end of December, to 5,254.35 at the end of March. The total return of the S&P 500 Index (including dividends) was 10.56%.

The NASDAQ Composite Index^® rose 9.11% over the quarter, from 15,011.35 at the end of December, to 16,379.46 at the end of March.

Retail sales cool

Retail sales in February rose 0.6% from the previous month and 1.5% from February of last year. However, January’s reported 0.8% increase was revised to a 1.1% decline, according to the Department of Commerce report issued March 14. The February rise was supported by a 1.6% increase in car and car parts, strong electronics and appliance sales (up 1.5%), rebounding building material and garden equipment sales (up 2.2%) and a rise in gasoline sales, reflecting higher gas prices. Online sales slipped, falling 0.1% in February.

Job growth remains strong

Monthly job creation rose each month in the first quarter, culminating in a 303,000 gain in March, well above the consensus expectations closer to 200,000. Job growth in January and February was also revised up by 22,000, according to the April 5 report from the Department of Labor. The unemployment rate fell 0.1%, from 3.9% in February to 3.8% in March, though this was broadly in line with expectations. At the sector level, job growth was led by health care, followed by government hiring and leisure and hospitality.

Average hourly earnings rose 0.3% in March, up from 0.2% in February. However, the year-on-year growth slowed to 4.1% from 4.3% in February.

Stocks see a broad-based rally

Of the S&P 500 Index’s 11 sectors, all but real estate (which fell just 0.55%) rose over the quarter. Communication services led, rising 15.82%, followed by energy (up 13.69%), information technology (up 12.69%) and financials (up 12.46%). Unlike previous quarters, the strength was broad-based, with all sectors (except real estate) rising more than 4%, and all but three sectors rising more than 7%.

The chart below shows the results of the 11 sectors for the past month, first quarter, and year to date.

Treasury yields rise again

The yield on 10-year U.S. Treasuries rose over the quarter, from 3.88% at the end of the year to 4.20% at the end of March. In mid-March, the Treasury yield curve set a new record for the longest period that the curve remained inverted—that is, with short-dated Treasuries paying higher yields than longer-dated securities. The previous record was set in 1978. While yields are still well below the highs seen last fall, stronger than expected inflation data, still robust economic growth, delayed rate cuts and concern about supply pressure in the quarters ahead pushed yields higher over the period.

As interest rates rose, the Bloomberg U.S. Aggregate Bond Index fell 1.41% over the quarter.

Corporate earnings projections keep rising

Corporate 12-month earnings projections for the S&P 500 Index continued to rise. Earnings per share (EPS) estimates rose just under 3% (2.90%) over the quarter, a sign of increasing optimism about the outlook for economic growth.

Forward P/E ratio climbs

The forward 12-month price-earnings ratio (P/E) of the S&P 500 Index rose over the first quarter, from 19.52 at the end of last year to 20.96 at the end of March. A higher P/E ratio means stocks are more expensive relative to their EPS.

The forward 12-month earnings yield, which is the inverse of P/E, fell 6.59% over the period. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The March-end equity earnings yield, at 4.78%, is still above the 4.20% yield offered by 10-year U.S. Treasuries at the end of March, but the gap continues to narrow.

Dollar gains vs. euro and yen

The U.S. dollar appreciated versus the euro and Japanese yen during the quarter, with the euro falling 2.23% relative to the dollar, and the dollar rising 7.35% relative to the yen. Expectations that interest-rate cuts would be pushed back while the economy remained relatively robust helped support the dollar.

Oil prices recover

Oil prices turned higher over the quarter, with the price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, rising 16.08%, from $71.65 at the end of last year to $83.17 at the end of March. While geopolitical tensions have increased in the Middle East and the Red Sea, the strength was primarily the result of renewed optimism for global growth prospects and the extension of production cuts—which were scheduled to expire at the end of March—announced by OPEC+ (a consortium of oil producing nations), including Saudi Arabia and Russia.

Gasoline prices at the pump rose 10.22% over the quarter, from $3.24 at the end of last year to $3.57 at the end of March.

Gold surges

Gold prices surged in the first quarter, up 8.4%, from $2,071.80 at the end of last year to $2,249.20 at the end of March. The rise was primarily due to gold investors becoming more comfortable that the Fed will be lowering interest rates, diminishing the opportunity cost of holding gold. Additionally, foreign demand, and the desire to hold assets that could be a hedge against political risk, contributed to price increase of gold.

International equities march higher

Every major global equity region (except China) rose in the first quarter, supported by signs the global economy was turning up, rallying U.S. stocks and expectations for a soft landing in the U.S. While U.S. momentum waned in the final weeks of the quarter, benchmark indices in the U.K., France, Spain and Germany remained strong, with each outperforming the S&P 500 Index in March. Globally, growth stocks outperformed value stocks over the quarter. The MSCI EAFE Index, which tracks developed-economy stocks in Europe, Australasia and the Far East, rose 5.06% over the quarter.