April Market Outlook: New Quarter, Same Worries as Investors Eye Inflation, Jobs Data Ahead of Earnings Kickoff

The market's tone could be set early in Q2 as investors look for signs of inflation and cooling jobs data following a hot start to 2024. Q1 S&P 500 earnings are another focus in the new month, with analysts expecting sequential weakness.

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Key Takeaways

  • CPI, PCE, and PPI all could set tone for April and quarter beyond

  • March jobs report follows mixed signals from previous labor data

  • Q1 earnings season begins with analysts expecting backloaded 2024 results

The term “exuberance” is a third rail for Wall Street. It gained that distinction in 1996 when then-Federal Reserve Chairman Alan Greenspan coined the phrase “irrational exuberance” to describe the market’s positive tone.

Exuberance might be a fitting word to describe the market’s performance in Q1 this year, though only time will tell how rational or irrational it was. April kicks off Q2 with Wall Street near all-time highs, the Fed still forecasting three rate cuts in 2024, and most U.S. economic metrics are resilient.

The question for April and perhaps beyond is whether things have gone too far too fast, in which case people might start channeling Greenspan’s famous remark once more. 

Data triumvirate kicks off month as earnings loom

Continued exuberance in April likely hinges on the March Nonfarm Payrolls report due April 5 and the following week’s March U.S. inflation readings. All are milestones for the rate path and for investors hoping to see the economy grow but not too—forgive the term—exuberantly.

There’s also a Federal Open Market Committee (FOMC) meeting to wrap up the month, though the policy decision won’t come until May 1. At this point, the market doesn’t anticipate a rate move then, with eyes instead focused on June for the potential first rate cut since early 2020. The March FOMC meeting reinforced dovish thoughts on rate policy despite lingering inflation fears.

April also turns the page to the first corporate earnings of 2024. On Friday, April 12, Q1 gets rolling when the biggest U.S. financial institutions begin reporting. Excitement will build during the final two weeks of the month when the most widely watched semiconductor firms check in. Advanced Micro Devices (ADM), Intel (INTC), and Texas Instruments (TXN) are a few to watch following strong results last month from Nvidia (NVDA) and Micron (MU), which helped drive the sector to new all-time highs.

Results in April from companies like Microsoft (MSFT), IBM (IBM), and Alphabet (GOOG) could also have an impact on the semiconductor space because demand for cloud computing often drives demand for AI and other chips.

Historically, earnings growth drives the market. In April, however, corporate results might take a back seat to data because investors have pushed major index valuations well above historic norms. This doesn’t mean earnings aren’t critical, only that the market’s been moving less on earnings and more on other factors, notably the idea that the Fed could cut rates.

It’s unclear how much the economy and companies even need rate cuts because both have done relatively well since last July when the Fed’s target range topped 5% for the first time in 16 years following the most dramatic rate increases in decades. Still, falling rates, if they do come, could give consumers a tailwind and help sectors like financials, real estate, and utilities that historically struggle when rates stay high.

Prices, jobs reports could set tone

The FOMC made clear in March that rates could fall this year, but how soon and how much could be determined by the data we get in April. It really starts tomorrow with the last February inflation reading in the form of February Personal Consumption Expenditure (PCE) prices. That data comes out on Good Friday when markets are closed and won’t be traded on until April 1. So let’s call it an April event.

The PCE, the Fed’s favored inflation gauge, comes after the latest Consumer Price Index (CPI) and Producer Price Index (PPI) stoked inflation concerns. Recent PCE reports painted a somewhat tamer picture of inflation than the CPI and PPI figures, in part because the PCE report has a smaller footprint from shelter prices, which have stayed stubbornly high. 

Analysts anticipate a monthly PCE price increase of 0.4% and an annual rise of 2.4%, according to Trading Economics. The more closely watched core PCE report is anticipated to show a 0.3% monthly and a 2.8% annual rise, with monthly core down from 0.4% in January but annual core even with January’s increase. Core strips out volatile food and energy prices.

The PCE report “probably has the most potential to move markets if it contains any ‘surprises’ compared with expectations,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “But markets have been able to overlook ‘sticky inflation’ data so far this year, so it’s unclear what will really rattle the bulls at this point in the rally.”

PCE prices are just one leg of the inflation table heading into April. The January and February CPI reports were both rather “sticky,” as Peterson noted. Wall Street optimists hope the early 2024 inflation bumps were seasonal, setting the stage for slower growth in March. That remains to be seen, but rising energy costs as winter turned into spring don’t exactly bode well, at least for headline CPI and PPI that partly reflect rising energy costs.

The question is whether shelter costs started to decline, something many economists have forecast for some time. Resilient February housing data suggest strong demand, which doesn’t usually correspond with falling prices.

Before the inflation data, investors get a look at March jobs growth on April 5 in the Nonfarm Payrolls report. February’s report was a mixed affair, with a robust headline number of 275,000 but downward revisions to the December and January reports. That helped quell some concerns about rising jobs growth contributing to inflation.

It’s important to look well beyond the headline for a sense of whether the jobs faucet is flowing any lighter.

“It’s not just the headlines of payrolls and the unemployment rate,” said Liz Ann Sonders, chief investment strategist at Schwab. “The innards of the jobs report are becoming more important. Investors need to keep an eye on the differential between the establishment (payrolls) and household surveys, wage growth, hours worked, and labor force participation. To get the real story, you have to use a fine-toothed comb to go through those data points.”

Sonders was referring to the growing differential in recent jobs data between the government’s payrolls report, which collects data from employers, and the household survey, which surveys people at home. The payrolls survey was stronger than the household one in February.

Beyond data: Watch Treasuries, seasonal patterns

April brings all the other typical data and marks the last month of what’s historically a seasonally stronger time of year. Though seasonals aren’t completely reliable, late spring and summer months sometimes feature lackluster trading, and historically April’s been a strong month. April is also a stronger month in the energy market as refinery demand grows ahead of the U.S. summer driving season. Crude oil traded above $80 per barrel in March for the first time since last fall. Any further gains could drag on profits for airlines and other transport stocks.

Treasuries are also an important direction marker in April. The sharp rally late last year in fixed income faded in Q1 as inflation stayed stubborn, the Bank of Japan hiked rates, and investors dialed down U.S. rate cut expectations for 2024 from six to three.

The benchmark 10-year U.S. Treasury note (TNX) yield hovered near 4.3% for parts of Q1 after sinking as low as 3.8% late in 2023, and the more rate-sensitive 2-year Treasury yield rose sharply to trade above 4.6%. The inversion between the 10-year and 2-year yields widened during the quarter, which can be a sign of economic weakness ahead. That said, the inversion’s been in place for more than a year and economic growth has improved.

Also, keep an eye on Treasury auctions in April as the U.S. government continues to create debt at a record pace. Lean demand for newly issued debt could cause yields to spike, putting pressure on the credit market. So far this year, corporate credit has been relatively easy to obtain, but we’re approaching the early May Fed Senior Loan Officer Opinion Survey on Bank Lending, which could provide a more up-to-date view.

Inflation worries aside, strong U.S. economic growth in Q3 and Q4, followed by what analysts expect to be decent but not overwhelming Q1 growth, could bode well for stocks. A growing economy and a low jobless rate tend to create conditions where companies can thrive, and that’s arguably seen in the broadening of the market’s recent rally beyond mega-cap tech and communications services stocks.

As of late March, investors continued rotating into value stocks and other sectors beyond technology. Materials, energy, financials, industrials, and utilities all featured 80% or more of their members’ shares trading at or above their 50-day moving averages. Generally, a wider market breadth is a healthy sign for Wall Street, even if it’s combined with historically high valuations. Consider monitoring breadth in April and beyond for signals of the market’s health.

Q1 earnings may dip, but improvement seen as year advances

As Q1 earnings season looms, the S&P 500 index’s (SPX) price-to-earnings (P/E) ratio stands near historically high levels at 21. The question is whether 2024 earnings growth can begin living up to those lofty expectations.

Q4 S&P 500 earnings growth of 4.1% was far better than analysts had expected entering reporting season. It was the second-straight quarter of growth and led to a total of 1% S&P 500 earnings growth for the full year of 2023. The last two quarters of growth ultimately balanced out the first two quarters of earnings losses.

The 2024 earnings outlook is also backloaded. Analysts expect just 3.4% year-over-year earnings per share (EPS) growth in Q1, according to FactSet. Health care, materials, and energy all could weigh on overall EPS, even with strong contributions from utilities, info tech, and communication services. For the full year, analysts expect 10.9% EPS growth from S&P 500 companies, but any failure by major companies to live up to Q1 expectations could start to bring full-year estimates down, making the current P/E look unsustainable.

Though the market’s improved breadth lately speaks to investor hopes of better performance from value and cyclical stocks, analysts still expect tech and communication services stocks to lead earnings growth in 2024. That means the same group of mega caps needs to continue the heavy lifting, or else the smaller and less tech-oriented companies need to find their own version of exuberance to share the load and keep the market from looking top-heavy as midyear approaches. Hopes for lower rates could help, but that depends on the data.


Key Takeaways

  • CPI, PCE, and PPI all could set tone for April and quarter beyond

  • March jobs report follows mixed signals from previous labor data

  • Q1 earnings season begins with analysts expecting backloaded 2024 results

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