In Short

• The S&P 500 Index, Nasdaq Composite and Dow Jones Industrial Average achieved all-time highs towards the end of the quarter
• With inflation data somewhat hotter than expected this year, markets are now pricing in three rate cuts instead of six, but we believe the equity market rally could have staying power if the economy remains resilient
• Divergence between the “Magnificent 7” stocks and the broader market lessened in March, perhaps indicating a shift toward a more diversified market rally
• We continue to believe that quality companies, diversification and active management should be well-suited to navigate an uncertain environment

Riding the Rally

March capped off the markets’ strong start to the year, as the S&P 500 Index, Nasdaq Composite and Dow Jones Industrial Average achieved fresh all-time highs toward the end of March. The first quarter was the S&P 500 Index’s best since 2019, with the index finishing all three months above its average monthly gain going back to 1928, and March providing a fifth straight month of appreciation. Most notably, in our view, the S&P 500 Index has had two back-to-back 10%+ quarters, a phenomenon that has not occurred since 2012.

As the global election calendar turned another page with Russians strongly backing Vladimir Putin for another term in mid-March, the candidates for the U.S. presidency solidified a repeat of the 2020 election, with current President Joe Biden (D) and former President Donald Trump (R) set to face off in November. Policies on trade and taxation will be in focus as markets, consumers and businesses navigate a higher interest-rate environment. Perceptions of the current state of the U.S. economy under President Biden and expectations as to where the economy is headed will likely be important factors on the campaign trail over the next seven months. Economic concerns, along with immigration, continue to rank as top-of-mind for most polled voters.

Inflation data has come in somewhat hotter than expected so far this year, and fixed income markets have repriced for three rate cuts from the originally anticipated six. Some signs of weakening demand could be an early indication of the lagging impact of “higher-for-longer” interest rates, including a recent crop of layoffs by retail companies such as Nike, Macy’s, Canada Goose and Etsy. In addition, brands like Lululemon and Nordstrom have noted signs of softer consumer behavior in discretionary purchases. January U.S. retail sales were revised lower to -1.1%, while the February numbers proved disappointing as well.

That said, consumer confidence has remained solid (after strong gains from November 2023 to January 2024, consumer views appear to have entered a holding pattern) alongside a resilient U.S. economy. The labor market remains strong, with a blockbuster jobs print in January and surpassed expectations in February. In our view, the resilience of the U.S. labor market and the continued push to hire workers could offset depleted excess savings and pressures from higher-cost consumer debt.

Earnings growth for the S&P 500 Index is also expected to remain positive in the first quarter at 3.6%, despite some downward revisions to EPS estimates by analysts since the end of the fourth quarter. According to FactSet, EPS estimates were lowered by 2.5%, but dropped at a rate that is less than long-term averages.

Looking at the market from a more technical perspective, as asset prices rose in the first quarter, volatility (measured by the CBOE’s VIX Volatility Index, or the “fear gauge”) remained low. Similarly, bullish sentiment hit its highest level since December, when markets were pricing in six rate cuts. With now half that number of anticipated cuts, we are still seeing similar levels of bullishness. The bull-bear spread—a contrarian indicator highlighting the difference between investors who see the stock market going higher and those who expect a decline—hit a net bullishness level of +27.6 at the end of March. While low volatility and bullish sentiment can be positive for equity markets, these levels may also suggest the nearing of a “euphoric” level of market confidence. We mentioned this dynamic in our August 2023 commentary, As Good as It Gets?, which was soon followed by a drawdown in equities. However, this dynamic also persisted in December and the S&P 500 Index is up over 10% since then.

Net Bullishness: Spread of Bulls Less Bears From AAII Survey

Source: Bloomberg, AAII as of March 28, 2024.

A Cyclical Shift

We believe the equity market rally could have staying power if the economy remains resilient. Going back to 1970, the S&P 500 Index has finished higher in the 12 months following an all-time high 75% of the time, with an average gain of 8.8%. Also, historically, an S&P 500 Index price/earnings multiple of 18 to 20 (the current level is around 20) has been followed by an average one-year excess return over cash of 4.7%. (For more information on opportunities to deploy excess cash, please see our publication, Make Your Money Move.) In today’s environment, following an outsized rally for mega-cap stocks, we believe that a broadening of returns may be necessary to keep market momentum.

The divergence between the “Magnificent 7” stocks,¹ which accounted for 62% of S&P 500 Index returns last year, and the broader market lessened in March, perhaps indicating a shift toward a more diversified market rally.

In the last two months, we’ve seen a rotation in the top performing S&P 500 Index sectors. During this time, the leading sectors were Energy (+14.1%), Materials (+13.4%), Industrials (+12.0%), Communication Services (+10.3%) and Financials (+9.1%). This is in stark contrast to January, when the best performers were Communication Services and Technology. These more cyclical sectors—parts of the market that are highly affected by the economic cycle—lagged compared to noncyclical stocks in 2023.

S&P 500 Sector Returns

Source: Bloomberg as of March 28, 2024.

We believe this rotation could be due in part to quarter-end dynamics, as there were some weeks late in the period that saw outflows from technology stocks as asset managers looked to take profits and rotate into more undervalued segments of the market. However, this could also be a sign of market broadening and a cyclical shift—positive signs for market momentum. While the market continues to reward some of the Magnificent 7 stocks, divergence among these names has been happening. Note that during the quarter, three of the seven Magnificent 7 stocks underperformed the S&P 500 Index, with two posting losses. Across all sectors, we believe that quality companies can be well-suited for an uncertain environment thanks to their moderate leverage (lower exposure to higher rates) and higher profitability (a cushion in a potential downturn). Simply put, in our view, quality continues to matter.

Finally, it is important to consider the benefits of diversification. We noted in our CIO Weekly Perspectives: A Major Change in the Markets that the correlation between stocks and bonds, which has been positive for the last two years, has shown signs of reversing toward their usual negative relationship (when stocks go up, bonds go down and vice versa). While the S&P 500 Index is up 10.6% year-to-date, the Bloomberg U.S. Aggregate Bond Index is down 0.8%. We see this as indicating a potential reemergence of bonds as diversifiers, which could become beneficial if equity markets pull back.

Portfolio Implications

Equities continued to rise during March, with value outperforming growth and developed non-U.S. outperforming domestic stocks. We maintain an overall neutral view across equities, with an overweight to small caps, a laggard sector that has priced in a hard-landing scenario. Given ongoing economic uncertainty, we believe that clients may want to consider adhering to their long-term strategic asset allocations. Within equities, we still favor lower-beta, higher-quality names, with a neutral view on value versus growth. In this more challenging environment, we also favor employing active management to select companies with high earnings visibility.

Fixed income prices generally moved higher, led by high yield, though Treasury yields held steady. We continue to favor credit markets, maintaining an overweight view on investment grade securities. With short-term rates set to decline, we believe that clients may want to consider moving away from overweight cash positions and locking in incrementally longer-term bond yields. We maintain a neutral view on high yield debt, given recent tightening of spreads (yield advantage over Treasuries), which has reduced the risk-adjusted return potential of the asset class. We are neutral on emerging markets debt due to overall global growth fears, particularly in China.

Within private markets in a challenged fundraising, exit and financing environment, significant opportunities exist for firms and strategies that can act as liquidity and solutions providers to help close the capital supply/demand gap and support value-added transactions. This backdrop, along with Neuberger Berman’s deep relationships and unique position within the private equity ecosystem, has translated into record levels of deal flow across our platform. We continue to see potentially compelling opportunities across secondaries, co-investments, private credit and capital solutions.

Index Returns

Source: Bloomberg, total returns as of March 28, 2024. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg ExEnergy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.