Friday, 2/23/2024 p.m.

  • Stocks hit fresh highs to end a strong week – Equity markets added to their recent gains following the best day in more than a year for U.S. large-cap stocks yesterday, though the Nasdaq took a breather today, posting a small decline*. There were no major economic data today, and sentiment remained broadly positive, supported by better-than-expected corporate earnings and excitement around AI. Among the notable movers, shares of Block rose more than 15%, and shares of Carvana surged 30%, after results exceeded estimates*. European markets are also higher after the Stoxx 600, like the S&P 500, closed at an all-time high, while Japan's Nikkei surged past its prior peak that was reached in 1989*. Elsewhere, Treasury yields finished lower, and oil prices were down about 2.5% at $76.5*.
  • Solid corporate profits provide a tailwind for stocks - About 90% of the S&P 500 companies have now reported results, and earnings growth for the quarter is tracking a solid 7.5%, an acceleration from the prior quarter*. Led by NVIDIA, which yesterday became the third-largest company in the S&P 500 by market capitalization, growth-style investments have propelled stocks to new highs. The communication services, consumer discretionary and technology sectors are the largest contributors to earnings growth, but results from the rest of the market are also encouraging, as companies are taking steps to protect profitability even as revenue growth slows. Last year's stock-market return was driven exclusively by valuation expansion, and this year we think that earnings growth will be the one to carry the torch. So far, the outlook for a reacceleration in earnings growth in 2024 suggests that the uptrend in stocks will continue, though with possibly more volatility after the uninterrupted rally over the past three months.  
  • Focus will shift back to inflation and the March Fed meeting - As the earnings season winds down, the spotlight will turn once again to inflation and the upcoming Fed meeting in March, which will include updated economic and interest-rate projections. Several Fed officials have indicated recently that the Fed will not be in a rush to cut rates given the strong economy and some uncertainty around the pace of disinflation. This has triggered a recalibration in market-implied odds for when the first rate cut will occur, which is now expected in June instead of March previously*. The Fed's preferred measure of inflation, the core PCE, is coming out next week and will be closely watched as it follows a hotter-than-expected CPI reading released last week. While the path to 2% will not be linear, we expect that housing costs will slow further; wage growth will continue to cool, helping other services inflation moderate; and the rise in productivity along with normalized supply chains will keep goods inflation low. All of this should help push inflation close to the Fed's target and open the window for rate cuts in the back half of the year. Beyond the markets and the economy, investors will also be keeping an eye on the looming government-funding deadlines, which are set for March 1 for some agencies and March 8 for the rest.

Angelo Kourkafas, CFA
Investment Strategist

*Bloomberg


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