March was another positive month for markets, continuing the rally to start the year. Improving corporate fundamentals and a supportive economic backdrop drove solid single-digit returns for U.S. markets during the month. This capped off a strong quarter for U.S. stocks, an encouraging sign that the economic and market momentum from 2023 has carried over into 2024.
While stocks performed well during the month and quarter, fixed income was a bit more mixed. Investment-grade bonds were up in March but ended modestly down for the quarter due to rising interest rates. High-yield bonds, typically less driven by interest rate movements, ended both March and the quarter in positive territory.
Strong economic growth. U.S. stocks benefited from stronger-than-expected economic growth at the end of last year and the start of this year. GDP growth came in above economist estimates in the fourth quarter, and we saw solid job growth and consumer spending to start 2024. More than 500,000 jobs were added between January and February, which was strong on a historical basis and above economist estimates.
High inflation. The economic growth in the first quarter was largely positive, but it also caused inflation to remain stubbornly high. While there were modest improvements in getting year-over-year inflation down in 2024, both headline and core inflation remained above the Fed’s 2 percent target, and the pace of improvement slowed. This result caused investors to reassess their expectations for monetary policy going forward, contributing to the rising interest rates we saw during the quarter.
A shift in market expectations. Given the impressive economic resilience and still-high inflation we saw in the first quarter, markets have adjusted their Fed expectations for the rest of the year. We started the year with futures markets pricing in six interest rate cuts by the end of 2024; we ended March with futures markets calling for just three interest rate cuts by the end of the year, which is in line with Fed guidance. This adjustment helped explain the rising rates we saw during the quarter and may lower the risk of Fed-driven volatility for the rest of the year.
Continued earnings growth. Improved earnings growth for U.S. companies partly drove the stock market rally to start the year. Earnings growth for the S&P 500 came in well above analyst estimates during the fourth quarter of 2023. And further earnings growth is expected ahead, with analysts calling for earnings growth in all four quarters this year. Over the long run, fundamentals drive market performance, so this anticipated return to consistent earnings growth could be a positive sign for investors in 2024.
Political and international risks. Despite the solid start to the year for markets and the economy, some risks remain for investors. The continued conflicts in Ukraine and the Middle East could spark further uncertainty in these regions and pressure the shaky global supply chains. The November election will also be worth watching, as we’ll likely see further political uncertainty as we approach the end of the year. Ultimately, while these risks are real and should be acknowledged, they’re not necessarily pressing at this time.
All things considered, we’re in a pretty good spot for both markets and the economy. The economic backdrop remains supportive, and we saw businesses take advantage of the growing economy by improving their fundamentals. The most likely path forward is further economic growth and market appreciation, but we may face short-term setbacks along the way.