Q1's top three takeaways: Mag 4, markets meet the Fed

The S&P 500 (^GSPC) is on track for the best first quarter performance of a fiscal year since 2019. Some of that is partly due to the AI-led rally that has been carrying much of the stock market, along with cooling inflation. However, there have been some changes in trends that investors should keep an eye on.

Yahoo Finance Head of News Myles Udland joins The Morning Brief to break down the top takeaways from the first quarter of 2024.

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

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

Video Transcript

- With all three major indexes trading at record highs, where do investors go from here? To break it down for us, we've got Yahoo Finance's very own Myles Udland. I had to remind him that it ends at 4:00 o'clock here today.

MYLES UDLAND: Not a second later.

- Not a second later.

MYLES UDLAND: Let's not forget. Yeah, I mean, it's been an interesting first quarter in that everything people thought was going to happen for the whole year happened all at once. I think the question like, you know, where do we go from here?

It's like, well-- I don't know. Everyone's ideas happened within-- everyone's 12-month ideas were really only three-month ideas. But I think there's really three key themes that I know.

You guys have talked about ad nauseam over the last few weeks, really. We'll start with stocks. The Magnificent Seven becomes the Magnificent Four. Almost three.

I mean, I feel like we're giving-- Amazon gets some credit, you know? Yesterday, they come out with the AI News. But, you know, it's really like the three around Meta, NVIDIA, and Microsoft of all companies-- sleepy old Microsoft getting the credit there.

The market meeting the Fed, probably the biggest driver of the market this year, you would say. Overall sentiment, the stuff Jared's talking about, broadening of the rally, regional banks getting involved, some of the meme action-- I mean, cannabis is a meme trade. It's like it's not serious.

But those stocks going up 100%, like, there you go. That's something that's only going to happen when spirits are high. That's really about investors coming to meet the Fed.

And then, the Wall Street catch-up trade is partly on the strategist's price target. You know, 5,500 now is where we see the street high. We've had the team over at Barclays, I think it was late last month, floating 6,000 in an upside scenario.

Capital Economics has been talking about 6,500 by the end of next year. Everyone's throwing out the biggest price targets they can. But the GDP numbers are an interesting part of it as well.

And seeing the street say, well, we're going to have another year of above-trend GDP growth, basically, I think, another part of this story-- that's given the lag on that data and how that feeds into actual profits. Maybe that's more of a Q2/Q3 story, Q3/Q4, even. But the way that those estimates changed in the first quarter was certainly an interesting angle.

- And then that also lends to the argument that this rotation that we have seen take place in the first quarter out of some of those tech-heavy names into where we've seen other leadership when it comes to financials, materials, industrials, et cetera. You make the argument that the economy is holding up. Then, you can make the argument that rotation might have further to run.

MYLES UDLAND: Yeah, absolutely. You look at small caps. On balance, they're more levered to the US economy than the S&P 500. S&P 500 gets about 60% of its revenues from overseas. So you have an international play there.

So when you're buying small caps, which, by the way, are still huge underperformers on an index level relative to the S&P, you are saying-- you're basically making a bet on the domestic economy. And also, I think you're making-- not, I think.

Investors are making rates play with the Russell as well in a way that you're not doing that with the S&P. The S&P, on balance, those companies have the kind of financial-- let's just say financial resources, the ability within the market to go out and raise capital at more reasonable levels.

Russell 2000-type companies, often more at the whims of rates. But if investors believe, as they do, that while rates may not going down as fast as they expected, they're probably not going any higher. The outlook for Russell 2000 companies to figure out any kind of maturity walls, things like this, and you need to raise additional working capital. Those things can be worked out in a better way.

- Which is interesting because we've-- and Liz Ann Sonders of Charles Schwab has brought this up repeatedly with us. If you're looking at small caps and you want to strip out those unprofitable companies, the S&P 600 is where they're telling clients to really focus in on some of those small cap plays that could be still apparent within the market right now.

MYLES UDLAND: Yeah, I mean, it started last year with the discussion of the S&P equal weight. Then, it became small caps. Now you've got the S&P 600.

We could go through mid-cap 400. We could talk about all different ways to slice it. I think probably that, those companies, let's call it the Russell-- call it the Russell 1000, companies 500 to 2000 up to where you get to the Russell 2000.

That's an interesting place to play because that's where you get a lot of, you know, very big companies that-- brand names that we might know that are probably smaller on a market cap basis than you would expect but have the kind of ability to both play-- use an economic expansion to their benefit and find a way to get the rates trade, to be more attractive as you go out and needing to raise capital roll matures, whatever it is, just kind of financial engineering stuff that. It's a little bit above our heads. But it's fine.

- It's going to be top table talk for Easter.

MYLES UDLAND: I mean, who wouldn't? Who wouldn't want to talk about this kind of stuff?

- Half a deviled egg. And let's talk about some financial--

MYLES UDLAND: I mean, like, it's-- it's like, oh, here here's how big my S&P price target is. And then you get into the details, you're like, oh my gosh, really?

- Oh, my gosh.

MYLES UDLAND: You are doing this?

- I'm not doing Easter at your house. That's for sure. All right.

[LAUGHTER]