Following a nine-week losing run at the beginning of 2024, equities resumed their upward trajectory last week.
The first full trading week of the year saw gains in all three main indexes, with the Nasdaq Composite (^IXIC) leading the way with a 3% gain. Meanwhile, the S&P 500 (\GSPC) ended the week’s trading less than 13 points, or around 0.3%, shy of a new high. As the week came to an end, Microsoft (MSFT) surpassed Apple (AAPL) to become the most valuable firm in the world.
Investors will try to maintain the trend in the next week despite the abbreviated week due to holidays.
The primary calendar triggers should be the financial sector’s performance and Wednesday’s retail sales data, as US markets will be closed on Monday in observance of Martin Luther King Jr. Day.
December’s retail sales growth is predicted to be 0.4%, up from November’s 0.3% gain, as US consumers continue to fuel an unexpectedly robust economic recovery.
According to Bank of America analyst Michael Gapen, the company anticipates that seasonal adjustments made by the government to December’s statistics would result in a “robust” retail sales figure.
“Stepping back,” Gapen stated, “we think spending is healthy but not surging.” According to the company, the fourth quarter GDP is now expected to expand at an annualised pace of 1.2%.
Investors should pay special attention to Friday’s consumer confidence report from the University of Michigan and Thursday’s preliminary unemployment claims data, among other events on the economic calendar.
The formal US presidential election of 2024 will begin with Monday’s Iowa caucuses, regardless of the financial and economic schedule. From a geopolitical perspective, investors are paying more attention to the escalating tensions in the Red Sea as a result of the US and its allies attacking Yemen last week on two separate days.
The major earnings reports for the upcoming week are anticipated Tuesday morning. Investment banks Morgan Stanley (MS) and Goldman Sachs (GS) will present their results following a difficult year for the dealmaking division, which is included in their results.
The research director at CFRA, Ken Leon, stated on Friday on Yahoo Finance Live, “I think the investment banking story [next week] will be, again, that we hit the trough of the cycle last year.”
Major money centre banks JPMorgan (JPM), Wells Fargo (WFC), Bank of America (BAC), and Citi (C) released their quarterly and annual results on Friday. Notable highlights included JPMorgan’s nearly $50 billion record annual profit and Citi’s plans to cut $2.5 billion in costs in addition to 20,000 job cuts.
This past week’s data provided a little boost in confidence that the Federal Reserve will start cutting interest rates in March, as investors remain fixated on how every new piece of inflation data will affect the organization’s plans to do so this year.
According to CME Group data, investors are pricing in a 77% possibility that the Fed would lower rates by 0.25% in March, up from a 65% chance that was represented last week in the wake of a positive employment report for December.
The Barclays analysts under Jonathan Millar stated on Friday, “We have adjusted our baseline assumptions to assume that the FOMC will initiate every-other-meeting incremental cuts starting in March, two meetings earlier than before.”
The speaker went on, “This is mostly due to our negative revisions to core PCE price inflation, which greatly increase the chances that the FOMC will continue to observe very modest monthly readings from this measure through February. However, we believe that March’s result was considerably closer than the ~80% probability that the markets were pricing in.”
Barclays also believes that rates would drop at a “much more gradual” rate than what the markets are pricing in. Millar and colleagues predict that rates will drop by 1% by the end of 2024, whereas the market is more likely to anticipate rate reductions of 1.5%. The range of the fed funds rate at the moment is 5.25% to 5.50%.
As earnings season gets underway, the banking industry is under the limelight.
However, tech stocks—and specifically, the “Magnificent Seven” megacap leaders—were the main focus of the 2023 market narrative, propelling the Nasdaq to gains above 40%.
Results from these and other IT heavyweights will begin to come in later this month.
Additionally, investors will be especially interested in this sector’s performance because the Technology (XLK) sector’s value has increased in expectation of an AI-driven profit cycle.
Data from Bank of America at the end of 2023 revealed that the Technology sector had the second-highest forward P/E ratio of any S&P 500 sector at 27, with only Real Estate (XLRE) trading at a higher value (39), as the industry’s profits declined substantially. The whole S&P 500 traded at 19.8 times projected profits for the upcoming year.
Technology makes up about 28% of the market capitalization of the S&P 500, therefore the entire direction of the index will be significantly impacted by these findings.
John Butters of FactSet emphasised in a report released on Friday that the S&P 500 firms’ negative outlook for fourth-quarter results was somewhat higher than the prior five- and 10-year averages, with 111 index members alerting the Street to impending outcomes. Technology stands prominently when these warnings are broken down by industry.
According to FactSet data, 25 members of the tech sector issued a warning that fourth-quarter results will fall short of expectations, which is greater than the 10-year average of 19 members who issued a similar warning. In the sector, there are 64 S&P 500 members overall.
Sector-level nuance now becomes difficult when it comes to the Magnificent Seven names in particular. Amazon (AMZN) and Tesla (TSLA) are categorised as Consumer Discretionary (XLY) names, while Meta Platforms (META) and Alphabet (GOOG, GOOGL) are components in the Communication Services (XLC) sector.
However, the Nasdaq, the market’s barometer of investor mood, includes each of these stocks.
Furthermore, until reports from these names start coming in, the fourth quarter earnings season won’t truly get underway, as many investors still view the “tech trade” as a monolithic entity.