Why the Stock Market Could Rally in Early April

As Tax Day approaches, Wall Street may quietly be optimistic about the market’s trajectory. Historical data suggests that the S&P 500 tends to perform well in the weeks leading up to April 15, driven by seasonal liquidity trends and increased investment activity.

Historical Trends Support a Pre-Tax Day Rally

Analysis of market performance since 1975—the year Individual Retirement Accounts (IRAs) were introduced—shows that the S&P 500's average return in the two weeks before April 15 is significantly higher than its historical two-week average. The trend holds for the four-week period leading up to Tax Day as well.

Several factors could explain this phenomenon:

1. Increased Liquidity from the Federal Reserve

One hypothesis suggests that the Federal Reserve boosts liquidity ahead of Tax Day to support economic activity as individuals and businesses prepare their tax payments.

• M2 money supply data, which tracks cash, checking, savings accounts, and CDs, indicates that April has the highest ratio of money supply relative to its trailing-year average.

• March follows closely behind as the third-highest month in terms of money supply expansion.

2. IRA Contributions Drive Equity Inflows

Another factor influencing stock market gains before Tax Day is the influx of cash into retirement accounts.

• Taxpayers looking to reduce their tax burden often contribute to IRAs, leading to increased mutual fund and ETF inflows.

• EPFR Liquidity Offerings data shows that net fund inflows into equity markets peak in April, supporting stock prices.

Additionally, money-market funds typically see net outflows in March and April, suggesting that investors move cash into equities during this period.

What This Means for Investors

While this seasonal rally isn’t a guarantee, historical trends suggest that investors with available cash may benefit from entering the market sooner rather than later. Conversely, those planning to withdraw funds might consider delaying their transactions for a few weeks.

However, given the modest size of the rally, this strategy should be one part of a broader investment approach, rather than a reason for an all-or-nothing market bet.

Big Banks Cut Stock Market Outlook Amid Economic Uncertainty

Despite potential seasonal gains, concerns about economic weakness and geopolitical uncertainty have led major banks to downgrade their outlook on U.S. equities for 2025.

HSBC and Citi Shift to Neutral on U.S. Stocks

HSBC Lowers U.S. Equity Rating

In a recent note to clients, HSBC Securities announced a downgrade of U.S. stocks from "overweight" to "neutral", citing:

• Recession risks stemming from weak economic indicators.

• Uncertainty surrounding tariffs and trade policies under the Trump administration.

Despite the downgrade, HSBC strategists clarified: “We are not turning negative on U.S. equities— but tactically, we see better opportunities elsewhere for now.”

Citi’s Downgrade Reflects Growth Concerns

Earlier this month, Citi also shifted its U.S. stock market outlook to neutral, emphasizing concerns over slowing economic growth.

Max Kettner, HSBC’s Chief Multi-Asset Strategist, told Bloomberg Television that the economy is experiencing a “confidence and sentiment shock,” increasing the likelihood of a downturn.

Market Outlook: Uncertainty Remains the Key Risk

While historical trends suggest a short-term seasonal rally, broader economic concerns may limit upside potential for stocks in the coming months. Investors should remain cautious and closely monitor economic data and Fed policy signals for further market direction.

Key Takeaway

The pre-Tax Day rally remains a noteworthy seasonal trend, but longer-term economic uncertainty is leading major banks to take a more cautious stance on U.S. equities. Investors should balance short-term opportunities with macroeconomic risks when making portfolio decisions.

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