It was an interesting first quarter for investors as stocks climbed a wall of worry, carving out record highs along the way. Indeed, the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite gained between 5% and 10% over the three months.

This impressive price action once again came at the hands of several mega-cap tech and communication services stocks. Among the biggest gainers were artificial intelligence (AI) chipmaker Nvidia ( NVDA ) and Facebook parent Meta Platforms ( META ) – two of the Magnificent 7 stocks – that have surged roughly 80% and 40%, respectively, so far this year. 

New S&P 500 stock SuperMicro Computer (SMCI) created its fair share of tailwinds, too, with shares of the AI infrastructure firm quadrupling since the start of the year – and gaining $41 billion in market value along the way. (Although, this is peanuts compared to the $1 trillion in market cap Nvidia ( NVDA ) added in Q1.)

Are we in a bubble?

The fast and furious rise in these stocks has led to lofty valuations across the equities market and has several folks questioning if what we're seeing is similar to the dot-com bubble from the early 2000s. There are many ways to spot a bubble, and experts see distinct differences between the two time periods. 

"As was the case in the rally leading up to the March 2000 S&P 500 high, the recent market rally has featured a relatively small number of technology-oriented stocks pushing the S&P 500 higher," says Scott Wren, senior global market strategist for Wells Fargo Investment Institute. 

Wren points to a key difference between then and now: The quality of the companies leading markets higher.

"Today, the companies driving the rally are showing strong revenue and earnings growth to go along with robust balance sheets and acceptable debt levels," the strategist says. "Back in 2000, many of the companies carried the SPX to record levels based on high hopes of one day producing strong revenues and earnings." 

That's good news for bullish investors hoping to ride the wave higher – but there's a lot at stake over the next three months that could quickly shift sentiment. 

With this in mind, we'll take a look at the Q2 investing outlook and how the key themes experts are watching could impact portfolio returns.

Earnings

First-quarter earnings season kicks off in two weeks when big banks such as JPMorgan Chase ( JPM ) and Bank of America ( BAC ) report. Q1 saw turbulence in the regional banking industry after New York Community Bank (NYCB) crashed on commercial real estate concerns.

Rodrigo Sermeño, associate editor for The Kiplinger Letter, believes declining values in office buildings will continue to pressure some banks. But large banks "should avoid the stock sell-off because they are more diversified and have set aside greater reserves to cover potential loan losses than smaller banks."  

As a group, analysts have been less pessimistic about the upcoming earnings season, says FactSet Senior Earnings Analyst John Butters. Companies, however, have been more pessimistic. This has resulted in earnings estimates that are lower today vs where they were at the start of the year, he adds.

Still, S&P 500 earnings are expected to be up 3.4% year-over-year in Q1, which would mark a third straight quarter of growth.

For investors, the fact that stock prices and valuations are high heading into earnings season "leaves little room for disappointment if companies fail to deliver strong earnings," says Clark Bellin, president and chief investment officer at Bellwether Wealth. 

However, negative earnings reactions can create opportunities for tactical investors.

"On pullbacks, we will be buying the dips of high-quality earnings names, just as we did in October 2022 and November of 2023," says Nancy Tengler, chief executive officer and chief investment officer of Laffer Tengler Investments.

Inflation and rate cuts

The first quarter reminded Wall Street that the final stretch to bring inflation down to the Fed's 2% target will be the hardest. Consumer Price Index (CPI) reports for both January and February came in higher than economists were expecting, due mostly to stubbornly high shelter inflation. 

"CPI ex-shelter has been below 2% since June – where a lack of supply has met structural demand, pushing prices ever higher," says Ross Mayfield, investment strategy analyst at Baird Private Wealth Management. However, recent data, such as Redfin's report that new listings hit a two-year high of 3.8% in February and a fourth straight monthly increase in homebuilder confidence, according to the National Association of Home Builders (NAHB), are encouraging, Mayfield notes. 

"Whatever the root cause, multiple forces are working in favor of more inventory – that's good for buyers and the Fed, alike," Mayfield adds.

Still, sticky inflation has pushed back expectations for the Fed to start lowering the federal funds rate from its current 23-year high. 

"The current expectation is that the first Fed cut will take place at the June 12 meeting," says David Payne, an economist at Kiplinger, in his interest rate outlook. Typically, the first rate cut would be followed by additional rate cuts at every other meeting. However, to avoid being "a lightning rod during the presidential campaign season," the Fed may cut on June 20, July 31 and again on November 7, immediately after the election."

If the Fed does cut rates in June, stocks could potentially see a short-term tailwind. According to Charles Schwab ( SCHW ), since 1929, the S&P 500 has averaged a 9.9% gain in the six months following an initial rate cut. This improves to 13.4% at 12 months out.

Rate cuts could be good for the bond market too. "We have shown on multiple occasions how bonds have always rallied in the three months before the first rate cut going back to 1970, says Joseph Kalish, chief global macro strategist at Ned Davis Research.

IPOs

The first quarter saw thawing in what has been an ice-cold initial public offering (IPO) market in recent years. According to Renaissance Capital, there were 30 public offerings through March 28, up 20% year-over-year. And the $7.8 billion raised from these offerings triples what was raised in Q1 2023.

Enthusiasm around generative artificial intelligence resulted in an exciting debut for Astera Labs ( ALAB ) , a company that makes data center connectivity chips for cloud and AI companies. This was followed by strong demand for the Reddit IPO, with both events sparking hope that more offerings will soon hit the market.

The list of upcoming IPOs looks exciting, with names such as Kim Kardashian's shapewear brand Skims and online sports retailer Fanatics among those rumored to be going public soon.

One potential offering that Sophie Lund Yates, lead equity analyst at Hargreaves Lansdown ( HRGLF ), is upbeat about is Databricks, a cloud-based storage and software firm. 

"The AI boom would definitely be a tailwind and should offer a structural growth opportunity," Lund Yates wrote in a note. "Databricks itself isn't ignoring the hype, having acquired generative AI company MosaicML for $1.3 billion in June. The company is hoping it can integrate this tech into its own products."

A rebounding IPO market indicates "an uptick in enthusiasm from both IPO issuers and investors, hinting at shifting market dynamics and a more welcoming landscape for public listings," writes George Chan, global IPO leader at EY.

However, investors should be cautious before buying IPO stocks. While some companies have strong first-day showings, returns over the next year tend to be weak, says the team of analysts at Trivariate Research, a market research firm based in New York. And since 2020, "the average IPO has lagged its industry average by 30% over the subsequent three years following its first closing price."

Bitcoin

Bitcoin went on a monster run in Q1, spiking nearly 70%. Helping the cryptocurrency was the late-January regulatory approval of the first spot bitcoin ETF (exchange-traded fund), which gives "investors direct exposure to the price of bitcoin without the complexities of managing bitcoin ownership directly," says Mason Mendez, investment strategy analyst at Wells Fargo Investment Institute. 

Between January 11 and March 28, assets under management (AUM) of the 11 spot bitcoin ETFs on the market reached a jaw-dropping $58 billion, according to Mendez.

More upside could be in store for the digital currency considering the upcoming bitcoin halving event, expected to occur in mid-April.

"Historically, bitcoin halvings have been associated with significant price increases in the cryptocurrency," writes Kiplinger contributor Randy Ginsburg in his feature on bitcoin halvings. "The theory behind this is simple: As the supply of new bitcoins entering the market decreases, the demand for them could surpass the supply.

Before buying bitcoin in hopes it will continue to rise, though, let's remember that the cryptocurrency market remains highly speculative and should be approached with extreme caution. For those interested in dipping their toes into the crypto space, it is crucial that they do their research and only use money they can afford to lose.