The strong momentum from the last two months of 2023 carried into 2024. The S&P 500 rose 10.2% in Q1, the best start to the year since 2019 and the 14th-best since 1926. Gains were broad-based, with all seven major MSCI country/region indices, all nine Russell style boxes, and 10 out of 11 S&P 500 sectors ending the quarter ahead of where they started. Unlike late-2023, stocks did not get any help from bonds. The Bloomberg U.S. Aggregate Index slipped 0.8% in the first three months of 2024.

The narrative for much of 2023 was that a handful of mega-cap tech stocks were masking underlying weakness. For parts of the year, it was an accurate description. By early November, the median year-to-date return of eight broad asset classes was on pace to be negative for only the 10th time since 1972. The year-end rally changed the narrative. Not only did the S&P 500 surge 15.8% from its October 27 low into year end to bring its 2023 gain to 24.2%, but also gains were extraordinarily broad-based.

After a torrid start to the year, equities pulled back in the third quarter. Not only did the S&P 500 Index post its first negative quarter since Q3 2022, all nine Russell style boxes, nine out of 11 S&P 500 sectors, and five out of seven MSCI major country/region indices fell in Q3. Pinning the direction of the $43 trillion U.S. stock market on any one factor would be an oversimplification, but the overarching theme of the third quarter was the transition from relief that a U.S. recession was not imminent to uncertainty over what stronger-than-expected growth and potentially troughing inflation rates mean for monetary policy. The macro backdrop also explains why economically-sensitive commodities and the Energy sector outperformed while inflation-sensitive bonds underperformed in Q3.