Q1 Recap - A Strong Start to 2024, Can It Continue?
8min read The S&P 500 and Dow Jones Industrial Average wrapped up an impressive first quarter, reaching new record highs on Thursday. Despite ongoing debates about the rally's longevity, investors found much to appreciate. Encouraging signs from the Q4 earnings season and economic indicators point to a robust economy and corporate strength, particularly highlighted by advancements in AI. However, attributing the rally solely to an AI boom would be a mistake, as the growth was broad-based, with 10 out of the 11 sectors experiencing expansion, demonstrating the rally's widespread support.
The Dow's first-quarter rise of 5.7% represented its strongest start to a year since 2021, which saw a 7.8% increase. The S&P 500 surged over 10%, its most impressive first-quarter growth since a 13% jump in 2019. Although the Nasdaq achieved 9% increase, it fell short of surpassing its 16.8% gain from the same period in the previous year.
The S&P hit 22 record highs during the quarter—the most since 1998's first quarter. With a 10.2% increase in the first quarter of 2024, it's one of the few instances since 2000 that the index has climbed 8% or more in this period, standing alongside significant gains in 2012, 2013, and 2019. This level of first-quarter growth has been rare since 1950, happening only 17 times.
This surge follows a 24% increase in the previous year, prompting some to speculate about an overextended market driven by the continued excitement over artificial intelligence, stirring fears of a potential tech bubble.
Bears also point to FOMO as a driver for increased market investments. However, optimism is supported by solid earnings and economic performances, such as Nvidia's strong results affirming AI's substantial market impact. Moreover, the S&P 500's advancement is more than just tech-centric this year. Energy was the top performer, posting a 13,5% gain. Health Care and Consumer Staples sectors have seen their best quarters since late 2022, while Financials and Consumer Staples have been pushing toward a five-month winning streak, their most robust since 2018.
Bullish investors have reasons to remain optimistic when looking at historical trends of the S&P 500. Considering the 16 occasions from 1950 to 2023 when the S&P 500 surged 8% or more in the first quarter, there was only one instance, in 1987—the year of the infamous Black Monday crash—where the index didn't maintain its upward trajectory through the end of the year. Of the remaining 15 instances, the index not only kept its gains but added an average of 9.7% over the following three quarters. This pattern suggests that a strong first quarter has historically indicated a 94% likelihood of continued gains for the year.
Looking ahead to the remainder of 2024, while the momentum from the first quarter is promising, it's prudent to manage expectations regarding the scale of future gains. Historical data shows that in 10 out of those 15 fruitful years, the gains made in the initial quarter surpassed those in the subsequent three, exemplified in 2012 when a 12% first-quarter increase was followed by a more modest 1.3% rise for the rest of the year. Yet, there were years like 2013 and 2019 where the latter quarters outperformed the first, underscoring that while the start has been strong for 2024, the precedence for such a robust beginning often leads to a fruitful year, barring any unforeseen market events.
The quarter witnessed some impressive gains, with NVDA surging an outstanding 82%, marking it as one of the top performers. Other significant gainers included CEG, which rose by 58%, and GE, CAT, LLY, DIS, and META, which all enjoyed gains of over 30%. Noteworthy advancements were also seen in MRK, AXP, and AMZN, each appreciating by around 18% to 21%. Financial institutions such as JPM and BRK.B had a positive quarter as well, both rising by 18%. Not to be overlooked, SMCI experienced a meteoric rise of 255%, standing out as the quarters top gainer. The energy sector also reflected strong performance, with MPC, FANG, VLO, and DVA all posting gains close to or exceeding 30%.
On the downside, TSLA led the decline with a notable drop of 29%. Other significant decliners included LULU and HUM, both down by 24%, BA with a 26% fall, and BIIB decreasing by 16%. Tech giants AAPL and INTC were not spared, recording losses of 11% and 12%, respectively, while NKE also slid by 13%.
The Sector Breakdowns
10 of the 11 S&P Sectors posted gains in Q1. The Energy Sector Fund (XLE) led the charge with a substantial gain of 13.52%. Following closely were the Communication Services Sector Fund (XLC) and the Financial Sector Fund (XLF), which increased by 12.69% and 12.44%, respectively. The Industrial Sector Fund (XLI) also posted strong gains at 10.84%, with the Materials Sector Fund (XLB) close behind at 8.98%.
The Health Care Sector Fund (XLV) and the Technology Sector Fund (XLK) showed notable growth as well, with rises of 8.71% and 8.38%, respectively. More modest increases were seen in the Consumer Staples Sector Fund (XLP) at 6.79% and the Utilities Sector Fund (XLU) at 4.52%. The Consumer Discretionary Sector Fund (XLY) had a modest uptick of 3.07%.
The Real Estate Sector Fund (XLRE) experienced a decline, closing the quarter 0.65% lower than it started. The rise in interest rates during the quarter and fears of a commercial real estate crash have kept investors out of these names.
Energy (XLE)
In the first quarter, the energy sector rode a 13% rally in crude oil. The sector was, led by a 15.46% increase in Exploration & Production, reflecting strong demand and tight supply. The Integrated Oil & Gas companies also posted significant gains, rising by 11.93%, indicating a solid performance in both upstream and downstream operations. The Pipelines and Oil Equipment & Services sectors showed healthy increases of 8.80% and 5.39%, respectively. The broader Energy Sector Fund (XLE) recorded a Q1 growth of 13.52%, underscoring the overall strength of the industry during this period. However, the coal sector deviated from the positive trend, experiencing a decline of 6.99%, which reflects the ongoing global shift towards cleaner energy sources and the industry's structural challenges. One should watch this sector though as a significant amount of coal passed through the Baltimore Harbor which could lead to supply issues.
Telecommunications (XLC)
In the first quarter, the Communication Services Sector Fund (XLC) posted solid 12.69% growth. The sector saw impressive gains across various industries, led by the Internet subsector, which surged by 15.75%, signaling strong performance and possibly an expansion in digital services. The Mobile Telecommunications followed with a 8.04% rise, while Media Agencies and Broadcasting & Entertainment also saw healthy increases of 7.63% and 6.82%, respectively. Fixed Line Telecommunications showed a growth of 4.53%. In contrast, the Publishing industry faced a minor setback, with a slight decline of 0.84%, hinting at the ongoing challenges faced by traditional media in a digitally evolving landscape.
Financials (XLF)
The financial sector experienced a prosperous first quarter, with the Financial Sector Fund (XLF) achieving a 12.44% increase. Notably, Property & Casualty Insurance soared with a significant 20.51% gain, leading the subsectors in performance as rising insurance prices, a primary driver of inflation, continue. Specialty Finance also performed exceptionally well, posting a 17.94% rise, followed closely by Reinsurance and Full Line Insurance, which increased by 15.47% and 14.80%, respectively. The Mortgage Finance sector saw a solid 13.18% rise, with Banks and Insurance Brokers not far behind, both exceeding 12% growth. Consumer Finance and Life Insurance showed strong gains as well, while Financial Administration, Asset Managers, and Investment Services demonstrated healthy increases, contributing to a robust overall quarter for the financial industry.
Industrials (XLI)
The industrial sector displayed a strong first quarter with the Industrial Sector Fund (XLI) registering a 10.84% growth, reflecting a bullish sentiment across various industries. Leading the pack, Marine Transportation surged with a 21.46% increase, closely tailed by Heavy Construction, which posted a 20.25% gain, signaling robust activity and expansion. Industrial Suppliers, Commercial Vehicles & Trucks, and Waste & Disposal Services also saw substantial increases, with gains ranging from 15.68% to 17.50%, while Building Materials & Fixtures and Diversified Industrials each rose by over 14%. Industrial Machinery, Trucking, and Airlines achieved double-digit growth as well, contributing to the sector's overall positive momentum. Meanwhile, Business Support Services and Defense experienced moderate gains, and the Railroad and Aerospace subsectors reported more modest increases. Notably, Transportation Services remained unchanged, and Delivery Services saw a slight decrease of 0.31%, which could reflect specific headwinds or market adjustments in those areas. Overall, the industrials sector's Q1 performance painted a picture of robust expansion and investor confidence.
Materials (XLB)
In the first quarter, the Materials Sector Fund (XLB) demonstrated solid growth, posting an 8.98% increase. The sector was energized by gains in the Paper industry, which soared by 20.99%, and Steel, which strengthened by 13.49%, indicative of robust demand and sector strength. Nonferrous Metals also enjoyed a lift with a 10.45% rise, while Containers & Packaging grew by 8.11%. The Commodity Chemicals and Specialty Chemicals subsectors contributed positively as well, with increases of 7.19% and 5.02%, respectively. However, not all areas flourished; Aluminum saw a marginal decline of 0.62%, and more significant downturns were observed in Gold Mining and Mining, which fell by 7.66% and 8.54%, despite gold rallying to record highs during the quarter.
Healthcare (XLV)
The Health Care Sector Fund (XLV) experienced a healthy first quarter, registering an 8.71% growth. This sector was led by Pharmaceuticals, which saw a robust 13.73% increase, reflecting potentially strong product pipelines or positive clinical trial results. Medical Supplies and Medical Equipment sectors also saw substantial gains of 11.85% and 9.85%, respectively. The Biotechnology subsector grew by 5.66%, which may indicate investor confidence in biotech advancements or regulatory approvals. Meanwhile, Health Care Providers had a modest increase of 1.51%, indicating steadier, more incremental growth in this area.
Technology (XLK)
The Technology Sector Fund (XLK) concluded the first quarter with an overall gain of 8.38%, showcasing a vibrant technology market. Semiconductors were the standout performers, surging by an impressive 38.09%, likely driven by strong demand and perhaps technological breakthroughs. Electrical Components & Equipment also enjoyed healthy growth at 16.07%, indicating robust sector activity. Gains were seen across the board with Computer Services and Electronic Equipment increasing by 9.69% and 9.31%, respectively, while Software ticked up by 8.92%. Telecommunications Equipment saw a moderate rise of 5.92%. The sector did face some setbacks, notably in Renewable Energy Equipment and Computer Hardware, which declined by 2.02% and 8.16%, respectively, suggesting market corrections or competitive pressures in those industries.
Consumer Staples (XLP)
The Consumer Staples Sector Fund (XLP) saw solid growth in the first quarter, rising by 6.79%. General Retailers led with a 16.01% jump, suggesting strong consumer spending patterns, while Food Retailers & Wholesalers also performed notably, with a 15.17% rise, potentially reflecting robust sales and operational efficiency. Nondurable Household Products experienced a significant uptick of 10.51%, and the alcoholic beverages industry, including Distillers & Vintners and Brewers, enjoyed healthy increases of 7.77% and 5.01%, respectively. Drug Retailers also saw gains, increasing by 7.51%. Personal Products, Soft Drinks, and Food Products subsectors contributed to the sector's positive momentum with modest rises. Even Tobacco marked an increase, albeit a more modest 0.91%, rounding out a quarter that painted a picture of steady demand and growth within consumer staples.
Utilities (XLU)
The Utilities Sector Fund (XLU) witnessed moderate growth in Q1, registering a 4.52% increase, indicative of a sector often viewed as a stable investment. Conventional Electricity led the utility subsectors with a solid 6.04% rise. Gas Distribution saw a moderate gain of 3.22%, and Multiutilities also moved up slightly with a 1.47% increase, hinting at a cautious but positive response from the market. However, the Water subsector deviated from the upward trend, experiencing a 5.64% decrease. Overall, the utilities sector demonstrated resilience, with the majority of its components showing growth despite the dip in water utilities.
Consumer Discretionary (XLY)
The Consumer Discretionary Sector Fund (XLY) experienced modest growth of 3.07% in Q1, showcasing varied performances across its subsectors. Specialty and Broadline Retailers led the gains with significant increases of 19.45% and 16.73%, respectively, reflecting strong consumer spending in these areas. The Home Construction, Hotels, Home Improvement Retailers, Travel & Tourism, and Specialized Consumer Services also posted notable advances, signaling a robust demand in housing, travel, and consumer services. However, the sector saw declines in specific areas, with Automobiles dropping a sharp 23.68%, and Clothing & Accessories, Toys, Footwear, and Tires also experiencing downturns. This mixed performance highlights the diverse impacts of economic conditions on consumer discretionary spending, with strength in retail and home markets contrasted by weaknesses in automotive and apparel.
Real Estate (XLRE)
The Real Estate Sector Fund (XLRE) saw a slight decline of 0.65% in Q1. While Hotel & Lodging REITs and Real Estate Services showed positive momentum with increases of 6.22% and 2.93% respectively, indicating specific areas of growth, other subsectors faced challenges. Retail and Residential REITs experienced minor decreases, and more significant declines were observed in Specialty, Industrial & Office REITs, with Diversified REITs and Real Estate Holding & Development facing substantial drops of 12.92% and 15.11%, respectively. This performance suggests a nuanced real estate market, where certain segments like hospitality and services found footing for growth, whereas broader industry pressures impacted others, highlighting the sector's sensitivity to economic and market conditions.