U.S. Stocks Have Barely Budged Since Last Summer. Where Will They Go Next?

The S&P 500 index has been stuck, like a dog circling its tail since September last year

Where are stocks headed next? It might take months for investors to find out.

U.S. stocks have shrugged off a number of threats since the start of the year, powering through the worst U.S. bank failures since the 2008 financial crisis, while resisting the pull of rising short-term Treasury yields.

This helped all three main U.S. equity benchmarks finish the first quarter in the green on Friday, but that doesn't change the fact that the S&P 500 index, the main U.S. equity benchmark, has barely budged since last summer.

"The market has handled a lot of gut punches recently and it's still standing in this range," said JJ Kinahan, CEO of IG North America, owner of brokerage firm Tastytrade. "I think that's a sign that the market is very healthy."

The S&P 500 index traded at 4,110.41 on Sept. 12, 2022, according to FactSet data, just before aggressive Federal Reserve commentary on interest rates and worrisome inflation data triggered a sharp selloff. By comparison, the index finished Friday's session at 4,109.31.

Some equity analysts expect it to take months, or perhaps even longer, for U.S. stocks to break out of this range. Where they might go next also is anyone's guess.

Investors likely won't know until some of the uncertainty that has been plaguing the market over the past year clears up.

At the top of the market's wish list is more information about how the Fed's interest rate hikes are impacting the economy. This will be crucial in determining whether the central bank might need to keep raising interest rates in 2024, several analysts told MarketWatch.

Stocks are volatile, but stuck in a circle

The S&P 500 has vacillated in a roughly 600-point range since September, but at the same time, the number of outsize swings from day-to-day has become even more pronounced, making it more difficult to ascertain the health of the market, analysts said.

The S&P 500 rose or fell by 1% or more in 29 trading sessions in the first quarter, including Friday, when the S&P 500 closed 1.4% higher on the last session of the month and quarter, according to Dow Jones Market Data.

That's nearly double the quarterly average of just 14.9 days going back to 1928, according to Dow Jones Market Data. The S&P 500 was created in 1957, and performance data taken from before then is based on a historical reconstruction of the index's performance.

Stocks also look almost placid in comparison with other assets. For example, Treasurys saw an explosion of volatility in the wake of the collapse of Silicon Valley Bank in March. The 2-year Treasury yield logged its largest monthly decline in 15 years in March as a result.

"You can't find any clues about where we're going by watching the S&P 500," said John Kosar, chief market strategist at Asbury Research, in a phone interview with MarketWatch. "Ten years ago, you could look at the movement of the S&P 500 and a simple indicator like volume and get a back-of-the-envelope idea of how healthy the market is. But you can't do that anymore because of all this intraday volatility."

The S&P 500's 7% advance in the first quarter of this year has helped to mask weakness underneath the surface. Specifically, only 33% of S&P 500 companies' shares have managed to outperform the index since the start of the quarter, well below the long-term average, according to figures provided to MarketWatch by analysts at UBS Group UBS.

Mega stocks, Fed to the rescue?

If it weren't for a flight-to-safety rally in large capitalization technology names like Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Nvidia Corp. (NVDA), the S&P 500 and Nasdaq would likely be in much worse shape.

Advancing megacap tech stocks have helped the Invesco QQQ (QQQ) Trust exchange-traded fund, which tracks the Nasdaq 100, enter a fresh bull market in the past week, as the closely watched market gauge closed more than 20% above its 52-week closing low from late December, according to FactSet data. That's helped to offset weakness in cyclical sectors like financials and real estate.

Tech behemoths have also benefited from the hype around artificial intelligence platforms like OpenAI's ChatGPT.

Confusion about the Fed's quantitative tightening efforts to reduce the size of its balance sheet also helped muddle the outlook for markets.

For example, the size of the Fed's balance sheet has increased again in recent weeks as banks have tapped the central bank's emergency lending programs in the wake of the failure of two regional banks, undoing some of the central bank's efforts to shrink its balance sheet by allowing some of its Treasury and mortgage-backed bond holdings to mature without reinvesting the proceeds.

Some analysts said this is akin to sending the market mixed signals.

"It seems to be both tightening and loosening right now," said Andrew Adams, an analyst with Saut Strategy, in a recent note to clients.

What it takes for a break out

U.S. stocks have remained rangebound for long stretches in the past.

Beginning in late 2014, the S&P 500 traded in a tight range for roughly two years. Between Jan. 1, 2015 and Nov. 9, 2016, the day after former President Donald Trump defeated Hillary Clinton to become president of the U.S., the S&P 500 gained less than 100 points, according to FactSet data.

At the time, equity analysts blamed signs of softening economic activity in China and weakness in the U.S. energy industry for the market's lackluster performance.

But after once it became clear that Trump would win the White House, stocks embarked on a steady ascent as investors bet that the Republican economic agenda, which included corporate tax cuts and deregulation, would likely bolster corporate profits.

It wasn't until the fourth quarter of 2018 that stocks turned volatile once again as the S&P 500 wiped out its gains from earlier in the year, before ultimately finishing 2018 with a 6.2% drop for the year, according to FactSet.

As investors brace for a flood of first-quarter corporate earnings in the coming weeks, Kinahan said he expects stocks could remain range bound for at least a few more months.

"There's going to be a very cautious outlook still, which should keep us in this range," he said.