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
- NVIDIA earnings spark market rally: Stock markets returned to rally mode on Thursday as NVIDIA's blow-out fourth-quarter earnings report underscored the rapid adoption and growth of generative AI (artificial intelligence). The technology-heavy Nasdaq led the gains higher, with the index climbing by nearly 3.0%*. In addition, both the S&P 500 and Dow Jones were up over 1.0% on the day. NVIDIA itself was up over 15% on Thursday, driving gains in the technology and semiconductor sectors. Meanwhile, Treasury yields across the curve were modestly higher, with the 2-year yield up about 0.04% to 4.71%*. Yields have been climbing this year as market expectations for Fed rate cuts have tempered, with markets now expecting around four rate cuts starting in the June timeframe.
- NVIDIA's strong quarter highlights the long-term generative-AI opportunity: NVIDIA has been considered the bellwether stock of the "Magnificent 7" mega-cap technology names and an emblem of the rise of generative AI. After a nearly 220% gain over the past year, many investors were wondering if NVIDIA earnings would meet growing expectations, and the company delivered. Revenue was up 265% year-over-year, while earnings were up over 760%, exceeding analyst expectations*. The company's data-center division, which drives its AI business, saw revenues up over 400% from year ago*. Nvidia's performance may help support the case that broader AI revenues and investments are ramping up currently, and that AI is a fundamentally driven trend. While the AI infrastructure and semiconductor companies have benefited the most thus far, over time we believe that productivity gains will be felt across sectors, including manufacturing, health care and financial services.
- Fed minutes highlight some uncertainty around cutting rates too soon: The FOMC minutes released on Wednesday indicated that the Fed is somewhat more concerned about the risk of inflation remaining persistent (and potentially reemerging) versus the risk of it waiting too long to cut rates. After the release of the minutes, market expectations of a pause in the May and June Fed meetings moved higher**. The CME FedWatch tool still indicates June as the base-case scenario for a first cut, however (although this is now moving closer to a 50/50 toss-up)**. Overall, while the last mile toward 2.0% inflation may be bumpy, we believe the broader story for 2024 remains intact: The Fed will likely cut rates in the back half of the year, inflation will moderate (perhaps driven by a catch-up in shelter/rent and some cooling in services inflation), and the economy and consumer will not fall into any major slump. While we may get volatility after a 20%+ move higher in the S&P since last October, these pullbacks can be considered opportunities for investors, especially for those who hadn't fully participated in the rapid rally. Long-term investors can feel comfortable in that we are likely heading to the start of a multiyear rate-cutting cycle, and some broadening in market leadership should occur.
- Equities flat amid tech weakness: After trading lower through much of the day, the S&P 500 and Dow closed just above the flat line on Wednesday, as some giveback in the skyrocketing mega-cap tech gains has impacted the broader averages this week, particularly the Nasdaq, which closed lower on the day. It was a very light day for economic data, and while the broader investment outlook will continue to be driven by monetary-policy decisions ahead, Wednesday's action looks to have largely been influenced by a pause in the technology rally. The technology and communication services sectors were the worst performers on the day, while the energy and utility sectors led the gainers. Bonds edged lower, driving a slight uptick in the 10-year Treasury yield, which closed near 4.3% after starting February well below 4%. Elsewhere, European and Asian markets were down modestly on the day, while oil prices gained more than 1%.*
- Earnings in focus, with all eyes on NVIDIA: More than three quarters of S&P 500 companies have now reported fourth-quarter earnings, with results overall coming in ahead of expectations. While we don't assign the fate of the market to a single name, it's clear that the markets have been keyed in on NVIDIA's results, which were released after the bell today. NVIDIA has been the leader among the "Magnificent 7," and those seven mega-cap technology stocks have been the clear leader for the broader stock market for the past several months. NVIDIA shares are up more than 40% so far in 2024, accompanied by double-digit year-to-date gains from Amazon and Meta (Facebook).* Heading into this earnings announcement, markets have been more cautious, which is reasonable given the exceptionally high bar of expectations. As we progress through 2024, we expect market leadership to broaden out beyond just the large tech space, with lagging sectors and asset classes playing some catch-up, as the economy and market sentiment gets support from expected Fed rate cuts.
- More detail on the Fed's plans: The minutes from the Fed's January meeting were released this afternoon, and while they didn't unveil any surprises, the intense focus on monetary-policy decisions meant markets looked for any additional clues from the meeting discussions that could add further color to the Fed's timeline for rate cuts. The minutes showed that policymakers were attentive to the risks of a disruption to the falling inflation trend and expressed some worry around cutting rates too soon. We agree with this assessment, which looks particularly relevant given that since the Fed's January rate announcement, consumer and producer inflation reports have come in hotter than expected. The minutes also showed that policymakers considered a plan to begin discussing adjustments to quantitative tightening (reducing the balance sheet) as soon as their March meeting. We continue to believe the Fed will hold off on rate cuts until the summer, a view that the broader markets have recently come around to, with a March rate cut now largely priced out and the probability of a May cut having been reduced. The minutes didn't provide certainty on the timing front, as we expect the Fed to take a data-dependent approach. In any event, we think policy settings will get more accommodative in the back half of the year.
Craig Fehr, CFA
- Stocks finish lower to start the week: Equity markets closed lower on Monday, with the S&P 500 declining by roughly 0.6% and the technology heavy NASDAQ shedding about 0.9%.* Markets struck a defensive posture today, with defensive sectors, such as utilities and consumer staples, the best-performing sectors of the S&P 500, while information technology and consumer discretionary lagged.* On the corporate front, shares of Walmart finished higher by roughly 3% after the retailer reported earnings and sales that exceeded consensus expectations.* Treasury yields ticked lower, with the 2-year yield finishing around 4.58% and the 10-year yield closing around 4.27%.* North of the border, Canadian inflation data surprised to the downside, providing support to the global disinflation narrative. Canadian headline CPI rose by 2.9% year-over-year in January, below December's 3.4% gain, while CPI excluding food and energy rose by 3.1%, also down from a 3.4% gain in December.*
- Higher-than-expected inflation drove volatility in markets last week: Hotter-than-expected inflation readings led to modest declines in U.S. equity markets last week, with the S&P 500 declining by roughly 0.4%, while the technology-heavy Nasdaq declined by about 1.3%.* U.S. headline consumer price index (CPI) inflation rose by 3.1% year-over-year in January, above consensus estimates for a 2.9% rise, while core CPI (which excludes food and energy) rose by 3.9% year-over-year, unchanged from the December reading and above consensus expectations for a 3.7% rise.* U.S. producer price index inflation (PPI) was also above expectations, with headline PPI rising by 0.9% year-over-year in January, above expectations for a 0.7% gain.* As we mentioned in last week's Weekly Market Wrap, we expect inflation to continue to moderate in 2024, although perhaps not in a straight line lower. We believe the fundamental backdrop in markets is favorable, and we recommend investors use periods of volatility as an opportunity to add to quality investments in line with their financial goals.
- Earnings check-up: On a fairly quiet week from a macroeconomic-release perspective, corporate earnings will be center stage for markets. Perhaps the most widely anticipated event for this week will be earnings results from semiconductor company NVIDIA, which will report after the market close tomorrow. Shares of NVIDIA surged over 200% in 2023 and are up roughly 40% year-to-date, making it now the third-largest company by market cap in the S&P 500.* Fourth-quarter earnings in the S&P 500 could be described as better than expected thus far. With about 80% of the companies in the index having reported, earnings are expected to grow 3% year-over-year in the fourth quarter, above estimates at the end of December for less than 1% growth.* Fourth-quarter earnings growth has been fueled by the information technology, communication services, and consumer discretionary sectors, with each sector expected to grow earnings by over 20%.* Looking ahead, market expectations are for S&P 500 earnings to grow by nearly 11% in 2024.* Our view is that 11% growth could prove to be overly optimistic and that earnings growth in the 5% - 10% range could be more likely. Nonetheless, rising corporate profits could provide support to equity markets over the remainder of 2024.
Brock Weimer, CFA
- Market rally pauses as yields rise - Equities lost some ground after the producer price index came in hotter than expected, driving bond yields and the dollar higher. The monthly reacceleration in inflation for consumers and producers for January is tempering expectations for rate cuts, with markets now pricing in three by the end of the year from six that were expected two months ago*. This recalibration in expectations is driving the 2- and 10-year Treasury yields to the highest since December*. All U.S. indexes finished lower, while international markets had a positive session on encouraging spending data from U.K. and China. Among the notable market moves, natural gas prices rose today after falling to the lowest in more than three years yesterday*.
- Producer prices rise more than expected in January -The producer price index (PPI), a measure of prices received by producers of domestic goods and services, rose 0.3% for the month and 0.9% from a year earlier, both coming in ahead of expectations. The core PPI, which excludes the volatile food and energy categories, climbed 0.5% from the prior month, and 2% from a year ago, also topping expectations*. Like Tuesday's CPI reading, the message from this morning's PPI is that the last mile of inflation, where inflation falls to the 2% target, might take longer to navigate. Therefore, the Fed will not be in a rush to cut rates as the Atlanta Fed President Bostic said late Thursday. Nevertheless, we don't think that the January data alter the view that inflation will continue to moderate in the months ahead which should allow the Fed to implement its first rate cut possibly in June. Wage growth is softening, productivity is on the rise, and consumer inflation expectations are slowing. Additionally, we think there is more disinflation in the pipeline for housing as suggested by real-time data for rents and housing prices.
- Signs of broadening in market leadership - The mega-cap technology stocks led the market gains in 2023 and so far, have led the gains this year as well. However, there are some encouraging signs that more stocks are starting to participate in the rally. Despite the volatility associated with Tuesday's hotter U.S. CPI reading and today's PPI, small-cap stocks posted solid gains for the week, outperforming the S&P 500. Similarly, the S&P 500 equal weight index which is a proxy for the "average" stock outpaced its market-cap peer as the energy, materials and financials sectors led the weekly gains. Also, the growth-sensitive industrials sector is trading at new highs. We think that a rotation from mega-cap tech into cyclical and value-style investments will take place as the year progresses, especially if the Fed cuts rates for the right reasons (improvement in inflation rather than a slump in growth), as we expect.
Angelo Kourkafas, CFA
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