Stocks headed down 'rougher road' after stellar Q1 performance

In the first three months of 2024, the stock market appears to be on a straight line upward trajectory as the Standard & Poor's 500 Index (^GSPC) posted its best first quarter return in five years.

Since the beginning of April, things have been different.

The S&P 500 fell nearly 4% this month as investors' hopes for a Fed rate cut continued to wane.

"We said at the FOMC meeting that we need to have greater confidence that inflation is moving sustainably towards 2% before it is appropriate to ease policy," Fed chief Jerome Powell said on Tuesday." Rather than giving us greater confidence, the recent data clearly suggests that realizing that confidence may take longer than expected."

Following the comments, 2-year Treasury yields surged, topping 5% for the first time since November, while stocks fell to rock-bottom lows.

"We continue to expect a bumpier road ahead compared to the exceptionally smooth first quarter," wrote Keith Lerner, Truist's Premier Information Officer, in a note to customers released late Monday.

Lerner points out that the 4% decline in the S&P 500 over the year is still a far cry from the 14% decline averaged over the last four decades. Lerner points out that in years where the S&P 500 rises 10% in the first quarter (such as 2024), the average maximum annualized S&P 500 retreat is 11%, and that since 1980, there have been only three times when the S&P 500 did not have an annualized decline of at least 5%.

"In fact," Lerner writes, "cyclical fluctuations are the market's entry fee." They come in mass with bad news.

"We've gone too far, too fast," Jay Woods, Premier Global Strategist at Liberty Capital Markets, told Yahoo Finance.

"Beyond individual earnings, I don't see the next catalyst to move the market higher. Now, with [bond] yields rising again ...... the rally in small-panel, utility stocks expanding, the story is over for now.

As Powell said earlier this month, the downward path of inflation has proved to be "bumpy", with three consecutive Consumer Price Index (CPI) reports showing higher-than-unanimously-expected price rises.

At the same time, the economic growth data continue to be higher than expected, further aggravating the concern about inflation, which will lead to the market's expectations for this year's interest rate cuts to shrink.

The market now expects two rate cuts this year, down from a peak of seven in January, according to Bloomberg data.

As Fed expectations have been rewritten, bond yields have risen. in April, the 10-year Treasury yield (^TNX) rose about 50 basis points to 4.67%, its highest level since November. As seen last year, rising bond yields may act as a headwind for further stock market adventures.

"[10-year Treasury yields] haven't sent out any warning signs of real risk yet," Liz Young, SoFi's director of investment strategy, told Yahoo Finance." But I think there needs to be some modest adjustments to equity valuations."

Even so, there are some on Wall Street who are calling the further downward movement of the market a "buyable decline".

Strategists say the trend of accelerating economic growth while inflation remains subdued is still helping to boost earnings and push stocks higher.

"The overwhelming evidence in our work continues to suggest that we are in a bull market, but this positive period may have a longer way to go in terms of price and/or timing," Lerner wrote.

"For investors on the sidelines and below their target equity allocations, we will use dollar-cost averaging and look for more aggressive strategies in the event of a deeper and more normal correction.

Josh Schafer is a reporter for Yahoo Finance. Please.In X @_joshschaferConcerned about him. The

Click here for in-depth analysis of the latest stock market news and events affecting stock prices.The

Read the latest financial news from Yahoo!