U.S. stocks are off to their best start to a year since 2019

The U.S. stock market has enjoyed a surprisingly robust start to the new year, with the S&P 500 and the Dow industrials advancing 6.3% and 3.2% in the first two months of 2024, respectively, on pace for their best start to a year since 2019. The Nasdaq Composite
COMP
has surged 6.3% over the same period, on track for its best first two months of a year since 2023, according to Dow Jones Market Data.

For the month, all three major benchmark indexes were on pace for their best month since the end of 2023, while the S&P 500 and the Nasdaq were on track to score their best February since 2015, per Dow Jones Market Data. 

What’s more, all 11 of the large-cap index’s sectors were on pace to finish in the green this month, as some long-suffering sectors of the stock market have rebounded to help drive a surge that has lifted the S&P 500 by over 4.9% in February, according to FactSet data.

While information technology
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consumer discretionary
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and communication services
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sectors — home to the “Magnificent Seven” — received most of the attention after blockbuster fourth-quarter earnings, some lagging sectors also managed to come out as winners.

Those include industrials
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and materials
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two cyclical sectors that outpaced the information technology sector this month by 1.13 percentage points and less than 1 percentage point, respectively, according to FactSet data. 

See: A growing number of stocks are joining the market’s rally — even as Big Tech still gets the most attention

Phillip Colmar, managing partner and global strategist at Macro Research Board Partners, said the sector rotation is “constructive” given the potential “no-landing” outcome of the Fed’s monetary tightening cycle, which could result in a solid trend or above-trend economic growth with inflation still edging lower to a 2% target.

Meanwhile, improvement in corporate earnings growth expectations offset the rise in Treasury yields
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over the past month, further supporting the broad rally in the stock market and a rotation to the laggards, Colmar told MarketWatch in a phone interview on Wednesday. 

See: Soft landing for the economy? How about no landing? The U.S. is still growing fast.

Of course, Wall Street hasn’t fully bought into the no-landing or the soft-landing narratives, despite a recent round of surprisingly strong labor-market data.

“For me to say that [the broadening participation] is sustainable, there needs to be a widespread [corporate] profitability improvement story to be told,” said Matt Stucky, chief portfolio manager for equities at Northwestern Mutual Wealth Management. 

“Given our view that inflation pressures are getting stickier, and the Fed is unlikely to be able to pivot to an accommodative stance [soon], I don’t know how sustainable this rotation would be at the end of the day, because it’s not a very fertile environment for profit growth for corporate America right now,” Stucky said via phone. 

Investors came into 2024 pricing in at least six quarter-percentage-point rate cuts over the course of the year, beginning in March. However, they dialed back their expectations after a hotter-than-expected January consumer-price index report, as well as remarks from Fed officials reiterating that cutting rates in the near-term is unlikely. Fed-funds futures traders bet on the first cut to arrive in June, according to the CME FedWatch Tool. 

Indeed, inflation and rate-cut uncertainties still keep some of the investors on the sidelines as they await for more “clarity” and “concrete proof” that economic growth remains firm, and “the recent blip in inflation is not a trend,” said Jack Janasiewicz, portfolio manager and lead portfolio strategist at Natixis Investment Managers Solutions. 

“Once they get that, then I think you start to see [the stock rally] broadening out a bit more, and that’s when you see outside of the big-cap tech — the broader tech space starts to catch up,” he told MarketWatch Wednesday. 

See: Small-cap stocks haven’t been this volatile in nearly a year. What it means for the long-suffering segment.

While market breadth is seen having scope to improve over the next couple of months, questions remain as to whether that will entail the Magnificent Seven stocks underperforming the rest of the market, or the laggards rushing into the rally. 

Janasiewicz said his base case is that the megacap technology stocks are moving to become “market performers” from “market leaders,” while the rest of the market could take advantage of the widening breadth.

“But you’re not gonna see them [Magnificent Seven] underperform by any means,” he added. 

It’s worth noting that the Magnificent Seven group of stocks is no longer the monolith that it was in 2023.

While most of the big names have reclaimed their leadership of the stock rally in the first two months of 2024, three stocks in this group haven’t made much contribution. Tesla shares
TSLA,
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have tumbled over 19% so far this year, while Apple Inc.
AAPL,
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was off 6.2% and Alphabet Inc.
GOOGL,
+0.41%
has fallen 2% over the same period, according to FactSet data. 

“The markets are discerning winners and losers here as the ones that are performing well are still somewhat related to the artificial intelligence and the semiconductor trade,” said Janasiewicz, adding that it could be a good sign for the markets as investors are not “blindly piling into those seven names” and “differentiating in terms of the fundamental drivers” of the underlying stocks.