The first quarter continued the rally that began in October resulting in gains on the S&P 500 for Q1 2024 exceeding 10% and total return over the last12 months just shy of 30%. Gains continued to be disproportionately concentrated among a handful of large technology companies. In fact, four companies were responsible for almost half of the S&P 500 gains. Other indices that do not have such a high concentration of large capitalization technology names greatly underperformed the S&P 500. A case in point was the S&P600 small capitalization index which only gained 2.46% for the first quarter and the Dow Jones Industrial average which was up just over 5%.
Earnings growth for Q1 2024 remained strong with year over year estimated earnings growth of 3.6%. However, the market continues to trade on the expensive side with the forward 12-month price to earnings ratio of the S&P 500 standing at 21.1. This is significantly higher than the 10-yearaverage P/E ratio of 17.7.
Markets began the year with a hope for a soft landing with inflation continuing to abate. Not only has the economy avoided recession but growth has been stronger than expected. Consumer price inflation held above 3%during the first quarter with services inflation of roughly 5% acting to buoy overall inflation. The strength in the labor market was impressive with the unemployment rate holding below 4% since early 2022. As employment remains steady more consumers are likely to spend, which is making inflation sticky. As a result, rate cuts that were thought to begin in March have now had expectations pushed out to June. In addition, the market is forecasting two rate cuts for 2024 instead of the three that were expected just a few months ago.
Like Q4 2023, the market in the first quarter of 2024 was very strong with few pullbacks. Sustained market increases provided a tailwind for our hybrid momentum models which posted strong gains. There was a bit more choppiness in the markets than last quarter which allowed our counter-trend model to produce modest gains. Unlike the last few quarters, short-term spikes in volatility resulted in losses for our relative value model. Although the relative value model has a modest weighting in our diversified model it still resulted in muted returns for our diversified portfolio.