In the first quarter of 2024, the equity markets continued their upward trajectory, buoyed by strong economic growth and robust corporate earnings. Notably, major indices such as the S&P 500^® Index, the Nasdaq Composite, the Dow Jones Industrial Average and the Russell 2000^® Index all experienced significant gains. In addition, the outlook for the U.S. economy generally remains positive. With all of this in mind, in this edition of Economic & Market Perspective, we will examine several topics, including inflation (and why it remains sticky), the tight labor market, rising interest rates and geopolitical uncertainties to gain insights into the impact these may have on future growth and market stability.

Equity Markets Roar

The S&P 500 had its strongest start since 2019, gaining 10.6% in the first quarter and closing at record highs 22 times. March marked the fifth consecutive month of gains, with the momentum from 2023 carrying into the new year. Over this five-month period, equity markets saw impressive returns: The S&P 500 was up 26.1%, the Nasdaq rose 28.0%, the Dow increased 21.6% and the Russell 2000 was up 28.7%. Despite higher bond yields, the market remained resilient, driven by robust economic growth and strong corporate earnings.

The impressive performance of the Magnificent Seven during 2023 gave way in the first quarter of 2024 to three standout stocks—Nvidia, Meta Platforms and Amazon—while others in the group either matched or underperformed the market. While the market continues to focus on anything related to artificial intelligence (AI), it is beginning to discern which companies are the true beneficiaries. Speculative activity was notable, with Bitcoin surging 61% after various Bitcoin ETFs were made available to the public. Similarly, despite generating only $4 million in sales in 2023, former President Donald Trump’s social media platform, Truth Social, commanded an $8 billion market capitalization. While Reddit has never reported a full-year profit since its inception in 2005, it saw a 48% increase on its first day of trading as a public company, with a market capitalization of $7 billion.

In terms of the style of equity investments, growth stocks outpaced value in the quarter, with the Russell 1000^® Growth returning 11.4% compared with 9.0% for the Russell 1000^® Value. However, in March, the tables turned, with value stocks gaining 3.8%, while growth stocks gained 2.4%, indicating a more balanced equity market.

Bonds Disappoint

It was a different story for the bond market due to higher-than-expected inflation data, fueled by a stronger economy, leading to increased yields and decreased prices. The 10-year Treasury yield rose from 3.88% at the end of 2023 to 4.20% by the end of March, while the 2-year Treasury climbed from 4.25% to 4.62%. For the quarter, the Bloomberg U.S. Aggregate Index saw a negative return of 0.78%, and the Bloomberg Corporate Index was down 0.40%. However, over the last five months, the Aggregate Index returned 7.7%, and the Corporate Index returned 10.1%, as yields across the curve decreased from near-term peaks achieved in October 2023.

No Recession Here

A year ago, economists were predicting a recession due to slowing leading indicators, an inverted yield curve and significantly higher interest rates. However, despite these concerns, U.S. Gross Domestic Product (GDP) expanded by a healthy 2.5% for 2023. Nonetheless, there are signs of economic deceleration. The first-quarter real GDP growth is forecasted by both the Atlanta Fed’s GDPNow estimate and the Federal Reserve’s March Summary of Economic Projections to be 2.1% for 2024. The key takeaway is that while the economy is slowing, it doesn’t seem to be on the brink of a recession.

Sticky Inflation

In March, various key government inflation gauges surpassed consensus forecasts. The Consumer Price Index (CPI), which measures out-of-pocket expenditures of all urban households, surged 3.5% year over year, while the core CPI, which excludes food and energy, rose 3.8%. This marked the third consecutive month that the CPI exceeded expectations, averaging 3.2% over the past six months. Meanwhile, the Federal Reserve’s preferred measurement, Personal Consumption Expenditures (PCE), which measures the change in goods and services consumed by all households, recorded a yearly increase of 2.8% in February, aligning with expectations on the surface. However, the Core PCE, which excludes volatile food and energy prices, rose by 3.5% on an annualized basis over the past three months.

These indicators suggest that efforts to curb inflation may have hit a roadblock, with inflation showing signs of becoming more persistent and starting to look “sticky.” It’s not surprising that investor expectations for future rate cuts have drastically decreased. This is a significant change in sentiment from the fourth quarter of 2023, when investors “priced in” an imminent pivot by the Federal Reserve with rate cuts coming in the months ahead.

Fed Fund Futures now indicate a mere 17% probability of a rate cut in June, a significant departure from the beginning of the year when investors anticipated as many as seven cuts totaling 175 basis points during 2024. As of now, the outlook has shifted to just two or three cuts amounting to 50 basis points this year.

Although investor expectations regarding the timing of rate cuts remain uncertain, it’s unlikely that we will see a return to the ultra-low rates that occurred after the Great Financial Crisis of 2008–09 and during the COVID-19 pandemic. Most Fed officials anticipate that the short-term rate will likely settle between 4.5% and 5.0% by the end of 2024, with only one official foreseeing the Fed Funds Rate dropping below 2.5% in the long term.

Jobs Are Plentiful

The headline nonfarm payrolls report showcased a robust addition of 303,000 jobs to the U.S. economy in March, easily surpassing expectations. Wage growth remains solid, with average hourly earnings increasing by 4.1% year over year, through the end of March. The unemployment rate declined to 3.8%, while the participation rate—which refers to the percentage of the U.S. population that is either working or actively looking for a job—increased from 62.5% to 62.7%. This remarkable 26-month streak below 4% underscores the persistently tight labor market.

Furthermore, the latest Job Openings and Labor Turnover Survey (JOLTS) continues to reveal a significant number of job openings, holding steady at around 8.7 million. As we noted in the outlook of our February essay, a tight labor market has the potential to put upward pressure on wages, a key contributor to inflation. Strong employment figures will further support healthy consumer spending.

Doubling Down on Debt

The rise in interest rates has triggered several consequences, primarily resulting in increased borrowing costs for companies and governments. This impact is particularly significant for companies that are heavily reliant on financing to sustain their operations—a category that encompasses a majority of U.S. companies, as well as the U.S. government.

As of March 2024, the U.S. public debt had reached $34.6 trillion, doubling from $17.6 trillion in 2014. The Congressional Budget Office projects a deficit of $1.6 trillion in 2024, equivalent to 5.3% of GDP, with spending primarily driven by a 10% increase in Medicare payments and a 9% increase in Social Security payments. Additionally, $8.9 trillion of government debt is set to mature within the next year, adding upward pressure on rates. Interest payments are forecasted to surge to $870 billion in fiscal 2024, marking a 32% increase from the previous year. By 2025, interest payments are expected to reach $951 billion, comprising 3.2% of GDP; by 2034, they are projected to hit $1.6 trillion, representing 3.9% of GDP. Notably, the highest interest-to-GDP ratio since World War II was 3.2% in 1991. 

In essence, the large amount of debt and the increasing cost of refinancing it contribute significantly to the U.S. government’s heavily leveraged balance sheet. In the long run, this situation may lead to consequences, such as certain bond investors (commonly referred to as bond vigilantes) seeking higher yields for holding treasuries, which could have an effect on future economic growth. Eventually, the government will need to either reduce spending on entitlements or increase taxes to address this unsustainable situation.

Cost of Home Ownership

This year, borrowing costs have seen some relief, with the average 30-year mortgage rate dropping by approximately one percentage point since October of 2023, though they remain around 7%. However, other expenses associated with home ownership have surged and show little indication of slowing down. Non-mortgage expenses, such as property taxes, home maintenance and insurance, now comprise more than half of a homeowner’s expenditures, according to a 2022 analysis by Fannie Mae economists.

The most notable increase has been observed in insurance premiums, which rose by over 10%, on average, in 19 states following significant losses from floods, wildfires and other natural disasters, according to data from S&P Global Markets Intelligence. Furthermore, there has been a rise in homeowners relocating to regions prone to natural disasters. The escalating costs pose challenges for first-time buyers looking to enter the housing market.

Geopolitical Concerns Abound

On the international stage, the persistent trade tensions between the U.S. and China, along with the ongoing Russia–Ukraine conflict and instability in the Middle East, have led to continued uncertainties and risks in 2024. While the direct impact on the U.S. economy has been minimal, there is significant concern that potential supply shocks in crucial commodities and goods—such as energy, food and semiconductors—could have a major impact on global politics than in previous cycles, especially given the current climate of heightened political tension in the U.S.

Markets Need a Landing

The first quarter of 2024 experienced consistent gains with minimal setbacks, but it’s important for investors to keep in mind that markets rarely advance in a straight line. Through the end of March, the largest decline was a modest 2%, and a larger pullback would not be unexpected. This is especially relevant considering that the S&P 500 is trading at 21 times projected 2024 earnings, significantly higher than the 25-year average of 16.4 times. While the 21 times multiple is historically elevated, in March 2000, the S&P 500 reached 25.2 times earnings before the market experienced a nearly 50% drop over two years. Notably, the 10 largest companies in the S&P 500 index are trading at a 28.4 times multiple. The high forward multiples are even more concerning given that 2024 earnings are projected to grow by an ambitious 10.7%. Achieving this growth would require a “soft landing or no landing” scenario. As it stands, the equity markets appear to have already factored in a significant amount of optimism.

Summary and Outlook

The S&P 500’s strong performance in the first quarter of the year was driven by robust economic growth and strong corporate earnings. While equity markets demonstrated impressive returns, speculative activity in areas such as AI and cryptocurrencies has increased. Bond markets, on the other hand, experienced challenges due to higher inflation and rising yields. The outlook emphasizes a potential shift in Federal Reserve rate cut expectations, indicating uncertainty in the timing and magnitude of future rate cuts. Despite economists’ initial concerns about a potential recession, the economy has shown resilience, with job growth remaining strong even as inflation shows signs of stickiness. Geopolitical concerns and heightened levels of U.S. government debt present challenges that may impact future economic growth. With these factors in mind, investors should remain cautious, as the financial markets may face pullbacks, given the elevated valuations and the need for sustained economic growth to justify the optimism priced into equity markets.

Jamie Zendel is EVP, Head of Quantitative Strategies, and Erik Wennerstrum is VP, Quantitative Research, at Mutual of America Capital Management LLC.

Past performance is no guarantee of future results. The index returns discussed above are for illustrative purposes only and do not represent the performance of any investment or group of investments. Indexes are unmanaged and not subject to fees or expenses. The index returns above reflect the reinvestment of distributions. It is not possible to invest directly in an index.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

The information has been provided as a general market commentary only and does not constitute legal, tax, accounting, other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. The information has been provided without taking into account the investment objective, financial situation or needs of any particular person. Mutual of America is not responsible for any subsequent investment advice given based on the information supplied.

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