Wall Street could be in for another good quarter after an exuberant start to the year, history shows

Published Thu, Mar 28 20243:00 PM EDTUpdated Thu, Mar 28 20244:04 PM EDT

Wall Street could be in for another solid quarter as stocks have embarked on a strong start to the year. The S & P 500 posted its best first-quarter performance going back to 2019, up 10%, as stocks rode a wave of enthusiasm around the prospect of rate cuts coming later this year, as well as the potential of artificial intelligence to bolster corporate profits. Nvidia , the poster child for the AI rally, is up more than 80% in the first quarter. The VanEck Semiconductor ETF (SMH) has leapt nearly 30% in the period. Meanwhile, the Dow Jones Industrial Average is a stone's throw away from reaching 40,000 for the first time ever. Those gains have many investors deliberating whether the rally can continue in the second quarter, or if stocks are due for some sort of consolidation — even a correction — over that period. Many stocks are triggering overbought signals. Some macroeconomic observers worry the strain on consumers from higher-for-longer interest rates will soon be felt in the economy. Historically speaking, at least, it appears as though the party can continue a while longer. In 10 out of 11 prior instances when the S & P 500 registered a first-quarter gain of 10% or more, the broad market index was higher for the remainder of the year, according to Ryan Detrick, chief market strategist at Carson Group. Specifically, in the second quarter, the S & P 500 was higher 9 out of 11 times, averaging a 2.7% gain. "We've been in the very rare camp a year ago saying there'd be no recession, this is probably a bull market," Detrick told CNBC's " Squawk Box " on Wednesday. "We've been in that camp ever since." Significantly, two occurrences of those 10% first-quarter gains Detrick reviewed took place during election years, with the S & P 500 ending higher on the year. In 1976, the S & P 500 went on to register a 1.5% increase in the second quarter, and a 4.6% jump for the rest of the year. In 2012, the broad market index registered a 3.3% loss in the second quarter, but managed to notch a 1.3% advance for the remainder of the year. Other market strategists reached similar conclusions from the historical data. CFRA Research's Sam Stovall noted the 15 strongest first-quarter returns since World War II have returned 12.5%, on average, while the subsequent second quarters averaged a 3.7% increase. "I think that gives investors something to feel optimistic about," said Stovall, chief investment strategist of CFRA. 'Cool the engines' To be sure, many investors do see some digestion of gains after the recent rally. In fact, given that S & P 500 is already higher on the year by just over 10%, many anticipate that the remainder of the year could get more volatile. This week, Piper Sandler said the S & P 500 is due for a 5% to 10% correction in the coming weeks, and notably dumped Nvidia from its model portfolio, citing extended valuations. The Wall Street firm maintained its year-end S & P 500 target of 5,050, representing a 3.8% slide from Wednesday's close. "As investors show complacency within the current uptrend and exhibit a Fear-Of-Missing-Out (FOMO), we believe now is the time to be more vigilant and 'Cool The Engines,'" Craig Johnson, chief market technician at Piper Sandler, wrote Wednesday. One bearish strategist expects stocks could plunge in the second or early third quarter as the macroeconomic picture worsens. Brian Nick, senior investment strategist at the Macro Institute, said he's looking for signs of rising pressure on the consumer. Recently cooling housing prices, for example, may be an early sign the market could take a turn for the worse, as home sellers are forced to slash prices to attract buyers, he said. He expects stocks would deteriorate as a result. "If stocks start to discount a recession, you would typically see a decline in the area of 20%, at least, from these valuations today," Nick said. "And given the significance of the rising rates that we've seen, and the fact they think that's really only started to impact the economy, we are probably looking for something even a bit worse than the typical recession." "So, something in that 30% to 35% range would not be at all unexpected, again, based on where valuations are, and based on what we think is the likely severity of the coming slowdown," Nick added. A 'too conservative' target But others expect any slide in the second quarter will be a more of a healthy pullback in what is still expected to be an upwardly trending market. Many on Wall Street remain bullish on the overall direction of the market. Oppenheimer's John Stoltzfus, for example, raised his forecast to 5,500 from 5,200, making his target the highest on CNBC's market strategist survey. The 5,500 level represents a roughly 15% pop for 2024. The S & P 500 was last around 5,250. Ayako Yoshioka, senior portfolio consultant at Wealth Enhancement Group, said she anticipates the second quarter will likely be weaker compared to the first, but she maintained the overall trend remains to the upside for equities so long as the Fed lowers rates three times this year. "It's hard to say that we're going to be up another 10%," Yoshioka said. "I think that would be a little expensive, a lot more expensive, than it is today. And so, I think that might be a tougher ask." CFRA's Stovall similarly remains bullish on equities. The chief investment strategist has a 5,200 year-end target on the S & P 500, but said that target is subject to review now that the broader index has risen past that level. "I mean, right now, my full year estimate was for about a 9% increase," Stovall said. "But history says, 'no, I'm actually being too conservative,' and that the gain is probably going to be something closer to 15-plus percent." Next week will also bring the release of the March jobs report. Economists polled by FactSet anticipate that the U.S. economy added 180,000 jobs last month, a drop from the 275,000 jobs recorded in the prior month. The unemployment rate, meanwhile, is expected to have dipped slightly, to 3.8% from 3.9%. Week ahead calendar All times ET. Monday April 1 9:45 a.m. Markit PMI Manufacturing final (March) 10 a.m. Construction Spending (February) 10 a.m. ISM Manufacturing (March) Tuesday April 2 10 a.m. Durable Orders final (February) 10 a.m. Factory Orders (February) 10 a.m. JOLTS Job Openings (February) Wednesday April 3 8:15 a.m. ADP Employment Survey (March) 9:45 a.m. PMI Composite final (March) 9:45 a.m. Markit PMI Services final (March) 10 a.m. ISM Services PMI (March) Thursday April 4 8:30 a.m. Continuing Jobless Claims (03/23) 8:30 a.m. Initial Claims (03/30) 8:30 a.m. Trade Balance (February) Earnings: Lamb Weston Holdings , Conagra Brands Friday April 5 8:30 a.m. March Jobs Report 3 p.m. Consumer Credit (February)