Investors turn cautious: After a strong start to the year, investors are approaching the second quarter with caution, closely monitoring the Federal Reserve's potential interest rate cut by June and focusing on upcoming earnings reports.

The S&P 500 ended the first quarter with a gain of over 10 per cent, its largest first-quarter advance since 2019. While top-performing stocks like Nvidia and Meta Platforms led the gains, sectors such as energy and industrials have also seen a rally in recent weeks.

The continuation of this rally hinges largely on the Federal Reserve's stance, with markets initially pricing in 6 to 7 rate cuts in 2024 but now expecting only 3, following signs of resilience in the US economy.

Joe Kalish, Chief Global Macro Strategist at Ned Davis Research, noted the pressure on economic reports, stating, "We are expecting more volatility if we don't see more progress on the inflation front."

Futures markets are indicating a 61 per cent chance of a 25 basis point rate cut at the Fed's June 12 policy meeting, potentially bringing benchmark rates to 5 to 5.25 per cent, according to CME's FedWatch Tool.

Market sentiment remains optimistic for continued growth in the US economy, leading to a broadening of the market rally into cyclical sectors and small-cap stocks as investors seek attractive valuations.

Sam Stovall, chief investment strategist at CFRA Research, cautioned that the market rally may slow as the Fed nears a potential rate cut. However, historical data suggests that strong first-quarter momentum often carries over into the second quarter.

The focus now shifts to corporate earnings, which have been surprisingly robust, pushing the S&P 500 to record highs. Analysts expect 5.1 per cent earnings growth over the first quarter, with companies set to report results starting the second week of April.

(with Reuters inputs)