March 2024 Stock Market Forecast (2024)

The 2024 stock market rally has picked up steam as investors consider whether the latest batch of economic data will force the Federal Reserve to delay its upcoming—and long-awaited—interest rate cuts.

The S&P 500 gained 5.34% in February, bringing its year-to-date total return up to 7.11%. Investors are increasingly optimistic the Federal Reserve will achieve its goal of a soft landing for the U.S. economy.

Meanwhile, fourth-quarter earnings numbers have been better than expected as companies are effectively managing rising costs and interest rates that are at 22-year highs.

Interest Rate Cuts Ahead?

Inflation, interest rates and the labor market will likely continue to dominate Wall Street headlines in March.

At its last meeting in January, the Federal Open Market Committee opted to maintain interest rates at their current range of 5.25% to 5.5%, its highest target range in 22 years. Economists are expecting the FOMC to continue to maintain interest rates at current levels at its next meeting that concludes on March 20.

In the Fed’s January meeting minutes, officials noted they will not be comfortable cutting interest rates until they have “greater confidence” inflation is still declining. In addition, FOMC members highlighted the “risks of moving too quickly” on rate cuts.

Rob Swanke, senior equity strategist for Commonwealth Financial Network, says he expects the first Fed rate cut will not come until June.

“The Fed minutes are showing that we’re still likely a few meetings away from a rate cut,” Swanke says.

“While there’s some dissent within members that show concern over being too restrictive for too long, most are more concerned about the possibility that rates stay high.”

The bond market is pricing in just a 3.0% chance the FOMC will cut rates at its March meeting. However, the market is pricing in a 66.1% chance the FOMC will cut interest rates by at least 25 basis points by June.

Which Way Is Inflation Trending?

In February, the Fed factored mixed data into its efforts to secure a soft landing for the U.S. economy.

The consumer price index, or CPI, gained 3.1% year-over year in January. That was down from peak inflation levels of 9.1% in June 2022 but above economists’ estimates of a 2.9% gain. The headline CPI reading was also up 0.3% on a monthly basis, the highest monthly gain since September.

Shelter prices continue to account for a large portion of CPI inflation. They gained 6.0% year over year in January.

In addition to CPI inflation coming in above expectations, the personal consumption expenditures price index, or PCE, was up 2.4% year-over-year in January. That was down from its 2.6% gain in December.

Core PCE inflation, which excludes volatile food and energy prices and is the Fed’s preferred inflation measure, was up 2.8% in January. That was in-line with economists’ estimates but still above the FOMC’s 2% long-term target.

U.S. Recession Watch

As prices continue to rise, it is hard to find signs of cooling in the hot U.S. labor market.

The Labor Department reported the U.S. economy added 353,000 jobs in January, far exceeding economist estimates of 185,000 new jobs. December and January represent the first time the U.S. has reported back-to-back months adding more than 300,000 jobs since June and July of 2022.

U.S. wages were up 4.5% in January compared to a year ago, and the unemployment rate remained historically low at 3.7%.

In an interview on “60 Minutes” in February, Federal Reserve Chair Jerome Powell warned that the Fed’s monetary policy tightening will cause “some pain” for Americans, but said officials “just want some more confidence” they have inflation under control before they begin cutting interest rates.

It may be very difficult for the FOMC to justify a rate cut until the jobs market cools down. The longer the Fed is forced to maintain interest rates at current levels to get inflation under control, the higher the likelihood of economic fallout at some point down the line. This risk is reflected in the New York Fed’s U.S. recession probability index, which still projects a 61.5% chance of a recession within the next 12 months.

While FOMC officials are no longer forecasting a recession, the latest Federal Reserve economic projections in December suggest a sharp drop in U.S. GDP growth in 2024.

Earnings Rebound

Despite an uncertain economic outlook, the has rallied to new all-time highs in 2024 driven by remarkably strong underlying economic fundamentals. S&P 500 companies have reported their second consecutive quarter of year-over-year earnings growth in the fourth quarter.

Meanwhile, U.S. GDP growth came in at an impressive 3.2% in the fourth quarter.

The technology sector has reported 20.8% earnings growth in the fourth quarter as the rally in artificial intelligence stocks has continued in early 2024. AI chipmaker Nvidia (NVDA) reported a staggering 265% revenue growth in the fourth quarter, sending its stock price up more than 60% year-to-date.

While investors have cheered impressive earnings and all-time highs for the market, the S&P 500’s forward price-to-earnings ratio has crept up to 20.4, about 15% above its 10-year average of 17.7.

For now at least, analysts are anticipating S&P 500 earnings growth will continue to accelerate in the first half of 2024. Analysts project S&P 500 earnings will grow 3.9% year-over-year in the first quarter and another 9% in the second quarter.

‘Magnificent Seven’ Remain Magnificent

DataTrek Research co-founder Jessica Rabe says the underlying fundamentals of the so-called “magnificent seven” megacap tech stocks—Nvidia, Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), Apple (AAPL), Alphabet (GOOG, GOOGL) and Tesla (TSLA)—remain extremely strong.

“As long as they keep delivering on earnings results in the same manner as last quarter, most of these stocks should keep outperforming and driving the S&P higher. Even if we get more incremental rate volatility, investor confidence in their underlying fundamentals should support big tech names better than most large/super cap alternatives,” Rabe says.

How To Invest in March

The market’s early-year performance has been impressive up to this point, and investors are hopeful that momentum can continue in March. March and April have historically been a strong two-month stretch for the S&P 500.

In addition, since 1950, when the S&P 500 is higher in both January and February of the same year, it has continued higher over the next 12 months 27 out of 28 times and generated an average return of 14.8% during those 12 months.

Wall Street analysts project about 8% upside for the S&P 500 in the next 12 months. Analysts see 17.8% upside for the energy sectorin the next year, more than any other market sector.

Value Stocks vs. Growth Stocks

Value stocks have historically outperformed growth stocks when interest rates are high, but that trend has reversed since the beginning of 2020.

Popular growth-oriented exchange-traded funds include the Invesco QQQ Trust Series I (QQQ), the Vanguard Growth ETF (VUG) and the iShares Russell 1000 Growth ETF (IWF).

Investors can also gain diversified exposure to the high-growth tech sector via technology ETFs such as the Vanguard Information Technology ETF (VGT), the Technology Select Sector SPDR Fund (XLK) and the VanEck Semiconductor ETF (SMH).

Concerned About a Slowdown?

For investors who are concerned about a potential economic slowdown and stock market pullback, certain stock market sectors are considered more defensive than others because they generate relatively stable earnings and cash flows regardless of the economic cycle.

Utility stocks, consumer staples stocks and healthcare stocks are typically considered defensive investments and may be relatively insulated if economic growth slows to a crawl. For value investors, the market sector that currently has the lowest forward price to earnings ratio is the energy sector at 11.8.

David Bahnsen, chief investment officer at The Bahnsen Group, says the recent enthusiasm for tech stocks reminds him of the dot com bubble and investors should tread carefully.

“The AI hype is not sustainable because much of the stock gains seen due to AI are about the marketing of AI and the hype, and only one or two companies have actually experienced a specific revenue bump from AI,” Bahnsen says.

“Where there has been AI fever, and there has been a lot of it, it has priced in perfection and then some.”