S&P 500 rallied across Q1, but valuations a 'concern': Strategist

The S&P 500 (^GSPC) is on track for its best first quarter of a fiscal year since 2019. AI stocks and cooling inflation have fueled the rally. With looming interest rate cuts from the Federal Reserve, and an ongoing presidential election season, can the market continue to soar?

WealthWise Financial CEO Loreen Gilbert joins Market Domination to discuss the performance of the S&P 500 and how the broader market may move going forward.

Several factors could derail the market's persisting rally, Gilbert explains: "I think valuations are always a concern, and I think we've seen just in the last few days some concerns about technology and has there been over-exuberance in the area of AI, and has it kinda gotten ahead of itself? I think you have to be mindful of the prices that you're paying for stocks, because how much has already been embedded to those future earnings that are going to happen. So, definitely being mindful of the price, and that could derail certain areas or certain stocks."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JOSH LIPTON: We're closing out the quarter here. What a run, Loreen. You look at the S&P 500. We're on track for our best first quarter, Loreen, since 2019. What do you think? Do we just keep steadily moving higher from here?

LOREEN GILBERT: You know, it's been an amazing first quarter. And last week, the Fed made it clear that we're not going to go into a recession. So all of our hopes for a soft landing seem to be here.

And that's significant. It's significant for the markets. And the markets have already had a run up.

But history would show us that when we have a run up like this, like we did in the '90s, that run up can continue. And so let's not also forget that we're in an election year, which also tends to be positive for the markets as well.

AKIKO FUJITA: Loreen, so looking ahead here to Q2. Obviously, the market's certainly going to be focused on when the Fed is going to move forward with that rate cut as well. I mean, as you look to how much more the market can run, what's the one factor you think that could potentially derail the rally we've been seeing?

LOREEN GILBERT: Well, you know, I think valuations are always a concern. And I think we've seen just in the last few days, some concerns about technology, and has there been overexuberance in the area of AI and has it kind of gotten ahead of itself. So I think you have to be mindful of the prices that you're paying for stocks because how much has already been embedded to those future earnings that are going to happen.

So definitely being mindful of the price. And that could derail certain areas or certain stocks. But I will say, overall, we're very bullish for the rest of the year.

JOSH LIPTON: I'm interested, Loreen, we did hear from Federal Reserve Governor Christopher Waller. And it was interesting. Basically he's saying, listen, he's in no rush to cut rates. You know, that's going to be data dependent.

It all depends on the data he gets and whether it cooperates. And whether you think we've kind of switched narratives here, whether we're even our investors even as focused as they are about those Fed cuts, Loreen, or whether no now the focus is really on the economy and the revival of corporate profit growth.

LOREEN GILBERT: Well, all of those things are important. So, you know, like I said, that we're not going into recession, that's key. We the Fed made it clear last week. There's still three rate cuts on the table for this year.

And so our expectation is that's probably June, September, and December. And you have one member who's saying, yeah, we're going to hold. And, of course, the Fed's job is to talk tough until they actually make a move.

But our expectation is we are going to see those three rate cuts, this year two rate cuts next year, three rate cuts the year after that. So the trend is our friend. And the trend is lower rates. And that's very good for stocks and it's very good for bonds. So all the way around, it's good for both.

AKIKO FUJITA: Loreen, we have seen this rally broadening out beyond the mega cap stocks that really led the gains at least in Q1. As you think about where this can go, what are you buying into right now?

LOREEN GILBERT: Well, you're right. We needed a broadening out of the market. And last year, the market was very narrow. The Magnificent Seven really took over the whole market.

And so now, we're looking at small caps, which we have said for quite a while was an area of opportunity with valuations. And we definitely like the small cap market. As rates come down, that is a positive catalyst for small caps. It's easier for them to get financing.

So we definitely like that. We also like some areas of international but I'll say we've been very underweight international. We just got news that the UK has been in a recession.

And I think that when we get revisions for the rest of Europe, we're going to see many European countries also in that same situation of having been in a recession. So we've been staying away from that more so we like now Japan with it being shareholder friendly now versus stakeholder friendly. And so I think there are some definite opportunities when we look at valuations there in Japan.

And now, deflationary fears coming off the table. So that's an area that we like.

JOSH LIPTON: Loreen, final question, your advice for fixed income investors listening right now. What would be your guidance there?

LOREEN GILBERT: So our guidance would be not to really stretch for yield because those spreads are tight. And so we're not going out to the high yield. But we see just within investment grade opportunities in treasuries, the 10-year, we think is an opportunity right where we are right now to not only get coupon, but also some capital appreciation this year. That would land us probably around 6% for the year. So we like that. And then investment grade corporates.