March Market Outlook: Fed on Deck as Investors Await Powell Testimony, Updated FOMC Rate Projections

Federal Reserve news can dominate any month, but that’s especially true in March.

After weeks of resilient U.S. economic data that pushed rate cut expectations from spring to summer and possibly beyond, fresh Fed rate projections and testimony just ahead from Fed Chairman Jerome Powell could make March a pivotal month.

Even though no changes to rate policy seem likely, the Federal Open Market Committee’s (FOMC) fresh rate and economic projections due March 20 now stand well above most other anticipated market news in March. Before that, Powell delivers his biannual testimony to the House Financial Services Committee on March 6 and to the Senate Banking Committee on March 7. Investors tend to watch these Humphrey-Hawkins sessions closely for clues about Fed thinking, and Powell’s words can move markets.

Another government shutdown could loom

The Fed isn’t alone for potential March highlights. One show that might return after a short hiatus is government shutdown drama in Washington, D.C. as Congress is still wrangling over expenditures for various departments. Repeated shutdown warnings in the recent past could mean these fears are more bark than bite, but investors should be prepared for potential volatility if talks once again come down to the wire.

“The real concern is the House, where Republicans have a razor-thin majority and have been plagued by internal dysfunction that has made it nearly impossible to pass even basic legislation,” said Michael Townsend, managing director, Legislative and Regulatory Affairs at Schwab. “An early-March shutdown is not out of the question, but we won’t be surprised if Congress pushes through another short-term extension of funding for a few weeks.”

Earnings go into slumber next month after an eventful January and February that generally saw better-than-expected U.S. corporate results. Still, investors should remain on watch for analyst adjustments of Q1 and 2024 estimates ahead of April’s first quarter.

The market hit record highs in February, but big rallies often demand big numbers to back them up. Double-digit earnings growth now anticipated by Wall Street over the coming year faces a real-world test. If estimates start to fall, it could reinforce ideas that the market got ahead of itself as the S&P 500 price-to-earnings (P/E) ratio topped a historically lofty level of 20 in mid-February.

Before touching on more March highlights ahead, keep in mind that the record S&P 500^® index (SPX) peaks above 5,000 in mid-February were mainly a function of the two biggest sectors—info tech and communication services. By late February, both of those began looking a little tired, putting pressure on the market-capitalization-weighted SPX.

The question in March is whether sectors like industrials, financials, small caps, and others can pick up some slack as tech slogs through what’s traditionally a weak seasonal period. If so, it’s possible the equal-weighted SPX and the small-cap Russell 2000^® index (RUT) could outperform the SPX.

Yields pack a wallop

None of this is guaranteed, of course, and depends to some extent on interest rates. Treasury yields surged in mid-February on surprisingly sharp January U.S. inflation growth and thinking the Fed might wait longer to cut borrowing costs.

Traditionally, higher yields hurt cyclical sectors like consumer discretionary, financials, and industrials that often do well in a growing economy. So far in 2024, these sectors have stayed resilient despite a rally in yields from lows posted late last year.

Where yields head in March depends a lot on how the Fed considers data between now and its March 19 – 20 meeting. The February 29 Personal Consumption Expenditures (PCE) price report remains the Fed’s preferred inflation tracker. It’s less housing-focused than the Consumer Price Index (CPI) where shelter costs have remained very sticky though, even non-shelter costs including food helped lift CPI in January. The February CPI report due March 12 will offer a one-two inflation punch with PCE as the Fed meeting approaches.

When the FOMC last offered rate projections in December, it lifted spirits by forecasting around three rate cuts in 2024, the first since it cut rates to zero back in 2020 during the pandemic. The FOMC raised its benchmark rate by 525 basis points between March 2022 and last July in an aggressive effort to curb post-pandemic inflation. But as inflation dropped steadily through 2023, optimism grew that the Fed might be finished. The January 2024 CPI and PPI data called into question how fast rate cuts might come.

“The market has largely adjusted to the idea of the Fed delaying rate cuts to midyear, but the magnitude of rate cuts still exceeds what was indicated in the last dot-plot,” said Kathy Jones, chief fixed income strategist at Schwab, referring to the Fed’s quarterly rate projections. “We continue to look for Treasury yields to move lower over the course of the year with the yield curve ‘bull steepening’ as short-term rates fall more than long-term rates,” Jones said. “We look for the Fed to cut rates starting in May or June and cut by 75 basis points in 2024.”

Growth surge hurts rate cut odds

It’s not just simmering inflation pushing back rate cut probabilities. U.S. jobs growth surged far above expected levels in December and January, and Q4 gross domestic product (GDP) growth remained strong. Though demand for goods leveled off, services demand stayed resilient. Manufacturing hasn’t been strong, but even that sector shows signs of waking up. Overseas, European manufacturing seems to be in better shape, though China’s economy remains slow.

“The global economy doesn’t appear to need rate cuts at this point,” said Michelle Gibley, director of international research at the Schwab Center for Financial Research. “While that could change in the coming months, growth has been better than expected in the United States and could be bottoming out in Europe. If the trend continues, it could give central banks a reason to wait to make sure inflation is durably on the path to 2%.”

Investors have already trimmed expectations for U.S. rate cuts this year to around four starting in June. That may sound like a lot, but it’s down from expectations of six that the futures market had penciled in as recently as January. As investors pulled back their rate-easing hopes, the benchmark 10-year Treasury note yield (TNX) climbed from under 3.85% at one point in January to above 4.3% by late February. However, it remains well below last fall’s 16-year peaks near 5%.

Rising yields typically slow the U.S. economy, but this isn’t a typical economy. One reason could be leftover fiscal stimulus from the pandemic, but that’s rapidly dwindling. Also, there’s growing signs of slipping consumer credit quality, and regional banks face possible danger in their commercial real estate loans from the impact of high rates and the work-at-home economy.

Mega-cap malaise

High rates, commercial real estate struggles, and credit issues were all building materials in the wall of worry the market climbed to record SPX highs earlier this year. However, the so-called “Magnificent Seven” mega-cap stocks that led the rally showed signs of losing their zip in later February after a roaring start to 2024, hurt by imperfect earnings and outlooks from Apple (AAPL), Tesla (TSLA), and Alphabet (GOOGL). Their path in March could help determine the direction of markets too.

Nvidia (NVDA) earnings in late February provided new energy for mega-caps and the market in general as investors appeared impressed by the company’s outlook for continued strength in AI demand. Nvidia is back in the news the week of March 18 when Nvidia founder and CEO Jensen Huang delivers the keynote address at the Nvidia GTC AI conference in San Jose. Nvidia promises the speech will be “powerful” and “inspiring,” and it could potentially have a market impact if Huang provides more color into his vision of AI demand growth, for instance, or discusses the outlook for sales in China.

Also, keep an eye out in March for any additional merger announcements after a relatively busy first two months of the year on that front. Increased merger activity could suggest companies are struggling for market share, or, on a more positive note, that companies believe growth opportunities might be improving. More mergers tend to be positive for shares of smaller companies that come into discussion as possible targets. 

Finally, there’s data

With earnings relatively slow in March, the March 1 U.S. ISM Manufacturing Index and March 8 U.S. Nonfarm Payrolls report could be more influential than any individual stocks in terms of determining the market’s path. December and January U.S. jobs growth set a sizzling pace with a total of nearly 800,000 jobs created in those two months. Average hourly earnings also climbed sharply, but hours worked fell in January. That raised questions about how fast wages are really growing, because fewer hours worked can cause average wages to rise more than salaries actually increase.

February’s report could possibly answer that question, but it doesn’t appear that investors can count on earlier downward revisions to lessen the sting of still-healthy job growth. The government increased payrolls by a combined 126,000 in revised November and December figures, a turnaround from a series of downward revisions earlier in 2023.

If the Fed’s scheduled March 20 rate projections show a pullback from the roughly three cuts projected in December, stocks could be hit hard, especially in interest rate-sensitive sectors like utilities and staples. As of late February, odds of a June rate cut were nearly 80%. But the market has a long track record of getting ahead of the Fed and then moving toward the Fed’s projections. The way things look now, it appears the Fed might be back to calling the shots.