Stocks Are Soaring in the First Quarter. What That May Hold for the Rest of 2024?

As the first quarter draws to a close, the S&P 500 index is poised for a substantial price increase of nearly 10%, having surged almost 30% from its closing low on October 27. This remarkable rally prompts investors to consider how much positive news has already been factored into the market.

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Indeed, according to a report by Joy Wiltermuth over the weekend, the extent of the market's upsurge has raised concerns among investors and strategists, leading them to contemplate precautionary measures against what many perceive as an overdue pullback.

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The year-to-date performance of the market seems to suggest that a considerable amount may already be priced in. Jefferies analysts noted in a weekend briefing that, based on data dating back to 1970, there have only been 9 first quarters with superior performance. Such robust starts might understandably make investors wary of chasing the rally. However, Jefferies pointed out that strong beginnings often indicate the potential for the rally to persist, at least for a certain period.

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As of Friday's close, the S&P 500 had surged by 9.7% year-to-date, while the Dow Jones Industrial Average had gained 4.7% and the Nasdaq Composite had advanced 9.4%. Analyzing data from 1970, Jefferies found that when the S&P 500 outperforms its average first-quarter gain of 2.5%, the subsequent second quarter tends to surpass its average gain by 60 basis points, with the S&P 500 being up approximately 69% of the time in such scenarios.

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Moreover, if the S&P 500 achieves a first-quarter return exceeding 10%, Jefferies noted that the boost to the next three months is even more significant, with the second quarter averaging a gain of 3.3% and rising 78% of the time.

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However, there is a caveat. While a strong start to the year often leads to further outperformance in the second quarter, Jefferies found that performance in the latter half of the year tends to suffer, with the third quarter experiencing a decline of 1% compared to an otherwise flat average performance. Additionally, fourth-quarter performance has only slightly exceeded its long-term average in years marked by a strong first quarter.

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Sam Stovall, chief investment strategist at CFRA, conducted a historical analysis dating back to 1945. He found that the S&P 500 is on track for its 12th strongest first-quarter performance since World War II. This trend suggests that strong first quarters are typically followed by robust second-quarter performances and strong full-year gains.

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However, investors should be prepared for potential volatility. Stovall highlighted that out of the top 15 first-quarter advances, 13 saw declines of 5% or more, with an average pullback of 11.1%. Additionally, the majority of these pullbacks were followed by second declines that averaged 12.6%, with many proving deeper than the initial selloff.

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Despite potential volatility, Stovall emphasized that most of the top first-quarter years ultimately ended up with double-digit full-year price gains, indicating a promising outlook for the S&P 500's performance for the rest of the year.

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