Is a Market Correction Coming? | U.S. Bank (2024)

The U.S. stock market experienced a volatile April 2024. After reaching all-time highs in late March, the benchmark S&P 500 mostly retreated in April, but also experienced significant volatility. The S&P 500 lost more than 5% of its value through April’s first three weeks, then regained some of that lost ground. “Investors are trying to determine if the market has fully priced in reduced expectations for Federal Reserve (Fed) interest rate cuts,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Dating back to late 2023 and including the first three months of 2024, markets seemed to anticipate that rate cuts were imminent, with expectations of up to six rate cuts in 2024 priced into stocks.”

The Fed opened the door to rate cuts beginning late last year, but more recent economic data, including a stubbornly elevated inflation rate, tempered expectations. This appeared to trigger the market’s April retreat, though the extent or duration of the current pullback is unclear. “It’s notable that this is the first real pause in the current bull market rally since October 2023,” says Haworth. “Investors appear to be resetting their positioning.” In 2022 and 2023, the Fed raised the fed funds rate eleven times, to a range of 5.25% to 5.50%. The last change in interest rates occurred in July 2023. The Fed has held rates steady since then and projected three rate cuts in 2024.¹ “Markets are reacting to recent Fed indications that rate cuts aren’t on the immediate horizon,” says Haworth. He adds that now it’s possible that no more than one or two rate cuts might occur this year, depending on the direction of forthcoming economic data.

While the Fed succeeded in its effort to slow inflation, it has had difficulty bringing inflation down to its 2% target range. “Data points like a strong jobs report (more than 300,000 jobs created in March) and still elevated inflation (the Consumer Price Index stood at 3.5% for the 12 months ending in March)² corroborate the Fed’s current view that it’s too early to cut rates,” says Haworth.

What factors are likely to affect the stock market today and for the remainder of 2024?

A shift in market leadership

In 2023, communications services, information technology and consumer discretionary stocks vastly outpaced the rest of the S&P 500.³ “What kept driving the markets to new highs were companies that are insensitive to persistently higher interest rates,” says Haworth. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.”

The impact of higher interest rates is reflected at the bottom end of the scale for S&P 500 sector performance. The interest-rate sensitive real estate sector, for instance, is down for the year.

Large-cap stocks continue to dominate

The S&P 500 index of large-cap stocks topped 5,000 for the first time in February and continued to reach new highs through the end of March, before retreating in April.

The environment has been less beneficial to smaller stocks. “The Fed’s interest rate policy matters meaningfully to smaller companies that likely must borrow more to fund operations and business growth,” says Haworth. “As a result, small-caps stocks are under more pressure in the current environment.”

Investors appeared to recognize this based on stock market results in 2023 and 2024, comparing the S&P 500 to the Russell MidCap Index and the Russell 2000 small-cap stock index.⁴

Key stock market drivers in 2024

What are the keys to a sustained bull market? Haworth says three primary considerations deserve the most attention:

• Inflation trends and future Fed policy moves. With headline inflation stubbornly hovering above 3%,² “There’s some longevity to the inflation story,” says Eric Freedman, chief investment officer at U.S. Bank Wealth Management. “It’s not going away as fast as people might like.” In addition, a key measure monitored by the Fed, the core personal consumption expenditures (PCE), stands at 2.8%, little changed since December 2023.⁵ Freedman says “the current fed funds target rate over 5% is not sustainable, but until the Fed sees more clear evidence of inflation moving down, it’s in a tough spot.” As a result, Freedman believes the first fed funds rate cut may continue to be delayed.
• Consumer spending. “Consumers’ willingness to maintain reasonable spending growth has been the linchpin for the economy,” says Haworth. This is likely due in part to the strength of the labor market and more significant wage growth. While the initial read of first quarter 2024 economic growth came in at a disappointing 1.6% annualized rate,⁵ consumer spending still proved to be the main growth driver. Freedman anticipates more differentiation among consumers in the months ahead. “Higher end consumers still have the ability to spend, but those on the lower end of the income spectrum are more challenged,” says Freedman.
• Corporate earnings. First quarter earnings reports are rolling out, and Haworth says the general direction is positive. “We’re seeing better-than-expected first quarter earnings and revenue,” according to Haworth. However, he says markets are closely watching what happens going forward. “There is some disappointment in the forward-looking earnings expectations that companies provided to this point,” says Haworth.

Additional risks to the market include the impact of global tensions highlighted by the Israel-Hamas conflict and the Russia-Ukraine war. The heated lead-up to what appears likely to be a closely contested Presidential election may ultimately draw more investor attention.

Keeping a proper perspective

Freedman says it’s important to maintain an appropriate perspective about the markets. He encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman. “Markets will do things at the exact opposite time you expect them to.”

Freedman says investors can follow a more productive path. “Our best advice is having a plan, a programmatic approach to investing. That takes the emotion out of it.” Freedman says such an approach helps investors avoid buying too much when the market is up and selling too quickly if stocks decline.

In the near term, investors should prepare for the market’s recent volatility to persist. “Expect continued choppiness in the markets, and not necessarily a straight upward path for stocks in the coming months,” says Haworth. Yet he says investors may be better served by positioning their portfolios for the long-run. “We’re encouraging investors who may have taken a more cautious approach before to adjust back to their long-term strategic target portfolio today.” Haworth says for those who still have a sense of caution about the stock market, “consider putting a portion of your portfolio to work in equities in a systematic way, such as dollar-cost averaging available cash over a series of months.”

Check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.

The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.

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