In Short

• Markets recalibrated in April as investors digested a third consecutive month of hotter-than-expected CPI readings and a disappointing Q1 GDP print
• Even with a pullback of about 4% in April, the S&P 500 Index is still up 6% year-to-date with eight months to go in 2024
• With Q1 earnings season in full swing, the S&P 500 Index is on track to post a blended earnings growth rate of 4.5% (with about 60% of constituents reporting), which is better than the expected 3.4% growth rate
• Overall, we are positive on the economic outlook given enduring growth and the likely trend of lower inflation and interest rates, albeit at a slower and less linear pace

Wait and See…

At the end of 2023, the market was expecting six interest rate cuts in 2024, suggesting a more dovish pivot than had been telegraphed by the Federal Reserve (Fed). This high level of investor optimism for the path to more palatable rates boded well for equities: The S&P 500 Index posted its best first quarter since 2019, returning over 10% and marking its fifth-straight month of positive returns. Meanwhile, fixed income markets appeared to be more focused on inflation’s path and maintained a holding pattern, with the Bloomberg U.S. Aggregate Bond Index closing down 0.8%.

In April, markets seemed to recalibrate as investors digested a third consecutive month of hotter-than-expected Consumer Price Index (CPI) readings, resulting in the data-dependent Fed taking, in our view, a “wait-and-see” approach that could last well into the year if the economy does not significantly weaken. Officials had previously said they were seeking greater confidence that inflation was returning to their 2% target, with Fed Chair Jerome Powell noting in a policy forum that the data instead indicated “that it is likely to take longer than expected to achieve that confidence.” Following the March inflation read and Powell’s comments, expectations fell to approximately two rate cuts by end of the year, and the U.S. two-year Treasury yield briefly rose above 5% for the first time since November.

Higher For Longer: Market Has Recalibrated Rate Cut Expectations

Source: Bloomberg as of end of April 2024

Later in the month, the Fed’s preferred inflation gauge (Personal Consumption Expenditures or PCE) came in hotter than expected. In the same week, the first reading of first-quarter GDP missed expectations. These surprises led to another “cutting of the cuts,” with expectations dwindling to a single rate reduction by the end of 2024 and the two-year Treasury once again climbing to 5%. The U.S. economy has been extremely resilient in the wake of the fastest rate hikes in history, with the labor market still representing a healthy level of job creation over the past couple of months. Given all available data, our in-house fixed income team expects two rate cuts in 2024, and as a result is still expecting both rates and inflation to be modestly lower by year-end.

Despite a reset of expectations, we believe some consolidation is normal in efficient markets, especially coming off outsized strength. The first quarter of the year was much stronger than usual for the S&P 500 Index (the average quarterly return for the index is 2.4%), and it came on top of a very solid 2023. Even with a pullback of about 4% in April, the S&P 500 Index is still up 6% year-to-date with eight months to go in 2024.

Though the S&P 500 Index was down for the month, some areas worked as a hedge against the broader market, many of which were laggards in 2023. This dynamic played out in April, as developed non-U.S. equities and emerging market equities outperformed the U.S. while commodities led equities and fixed income. From a sector perspective, more defensive areas of the market benefitted as markets recalibrated. Though the S&P 500 Index was down in April, Utilities posted a positive return (+1.65%), while Energy wasn’t far behind, closing nearly flat for the month. Meanwhile, Technology—a clear winner in 2023—struggled in April (-5.43%). Even in a down market, we believe that could suggest continued broadening of performance and be a positive sign for market momentum.

Sentiment may have also become overextended. In our March publication, we mentioned a higher level of net bullishness among investors. This pulled back significantly over the course of April, ultimately closing at -1.8, down from +27.6 a month earlier. This follows a nearly six-month period of positive bullish sentiment. While negative sentiment could signal near-term choppiness for equity markets, we do not view it as a long-term indicator of performance, given that fundamental economic and company-specific data are holding steady.

Higher For Longer, Longer the Stronger

With Q1 earnings season in full swing, the S&P 500 Index is on track to post blended earnings growth of 4.5% (with about 60% of constituents reporting), which is better than the expected 3.4%. If the S&P 500 Index achieves positive growth in Q1, this would mark its third-straight quarter of year-over-year earnings gains.

Big-box retailers report toward the end of May, and will likely provide more useful insights into the health of U.S. consumers. However, executive commentary has already reflected a persistent theme of more cautious spending. Many companies note that while consumers are still shopping, they appear more thoughtful about their spending. Starbucks CEO Laxman Narasimham, for example, noted that “many customers are being more exacting about where and how they choose to spend their money,” while Amazon CEO Andy Jassy said that "customers are shopping but remain cautious, trading down on price when they can, and seeking out deals.”

2024 Earnings Growth Estimates Shifts for S&P 500 Index Sectors

Source: Bloomberg as of end of April 2024

There were also many mentions of inflation—both in labor and goods—which continues to be more persistent than expected and is the main source of the Fed’s caution. These concerns were further confirmed with the release of the Employment Cost Index (ECI)—a closely watched measure of labor costs—which showed that compensation growth accelerated much faster than expected during the first three months of the year. As expected, the FOMC held its policy rate steady for the sixth consecutive time during its May meeting, reaffirming that there has been a “lack of further progress” in reducing inflation. However, Powell made it clear that he did not believe it was likely the Fed would need to consider interest rate increases in the near future.

Higher-for-longer U.S. interest rates, which have trickled through markets in various ways, pushing up credit card rates, the cost of auto loans and mortgage rates, will likely continue to affect consumers who have been spending down excess savings; credit card delinquencies have already seen an uptick. However, although mortgage rates have moved substantially (30-year mortgage rates now sit at around 7%, down from a peak of 8% in October and up from less than 3% in early 2020), about 60% of homeowners have locked in mortgage rates below 4% (FHFA, National Mortgage Database).

Interestingly, despite a rising U.S. dollar, international markets outperformed domestic stocks in April. We believe this dynamic is likely due to expectations that the European Central Bank will cut rates at its next policy meeting in early June—a move that could come in response to signs of moderating eurozone inflation. Rate cuts are expected to come this year from other banks such as the Bank of England, although the Bank of Japan is still marching to its own drum, holding its key rate near zero.

It is our view that any source of uncertainty could lead to market volatility. When considering methods of portfolio construction, we continue to see the merits of active management and diversification. In months like April, when equities and fixed income were broadly negative and a hypothetical 50% bond/50% stock portfolio was down nearly 3%, portfolios with exposure to active managers and/or commodities likely benefited from some downside protection. In particular, the Bloomberg Commodity Index posted a positive return of 3.3% during the month and has outperformed the Nasdaq Composite year-to-date. Our Asset Allocation Committee currently has an overweight assigned to this asset class, which, in our view, offers a hedge against inflation, global growth surprises and geopolitical shocks.

Overall, we are positive on the economic outlook given enduring growth and the likely trend of lower inflation and interest rates, albeit at a slower and less linear pace. Nonetheless, our asset-class views remain largely neutral relative to long-term strategic asset allocations—which implies broad stock and bond market exposure—as many assets appear fully priced and we anticipate a shift away from the recent narrow leadership.

Portfolio Implications

Equities broadly declined in April, with domestic large caps outperforming small caps and emerging markets leading developed markets. We maintain an overall neutral view across equities, with an overweight to small caps, a segment that had priced in a hard-landing scenario. Within equities, we still favor lower-beta, higher-quality names, with a neutral view on value versus growth. In this more challenging environment, we favor employing active management to select companies with high earnings visibility.

Fixed income declined during the month, with longer-dated bonds pulling back as yields rose. We continue to favor credit markets, maintaining an overweight view on investment grade securities. With short-term rates set to decline, we believe that clients may want to consider moving away from overweight cash positions and locking in incrementally longer-term bond yields. We maintain a neutral view on high yield debt, given the recent tightening of spreads (yield advantage over Treasuries), which has reduced the risk-adjusted return potential of the asset class.

In a challenged fundraising, exit and financing environment, we believe significant opportunities exist within Private Markets for firms and strategies that can act as liquidity and solutions providers to help close the capital supply/demand gap and support value-added transactions. This backdrop, along with Neuberger Berman’s deep relationships and unique position within the private equity ecosystem, has translated into record levels of deal flow across our platform. We continue to see potentially compelling opportunities across secondaries, co-investments, private credit and capital solutions.

Index Returns as of April 2024

Source: Bloomberg, total returns as of April 30, 2024. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg ExEnergy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.