Stock market sings a more positive tune
ANTHONY SAGLIMBENE – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL
WEEKLY MARKET PERSPECTIVES — February 12, 2024
Last week, the S&P 500 Index closed above the 5,000 level for the first time in history. According to Dow Jones Market Data, 719 days have passed since the Index first breached the 4,000 level on April 1, 2021. That's the second-longest 1,000-point milestone stretch since the S&P 500 took 1,227 days between August 2014 and July 2019 to move from 2,000 to 3,000. And while the Dow Jones Industrials Average usually gets most of the press when moving through 1,000-point milestones, its significance around informing overall market trends is far less meaningful, in our view. For instance, a move in the Dow from 38,000 to 39,000 would mark just a +2.6% rise in the U.S. stock barometer. Conversely, the 1000-point move from 4,000 to 5,000 in the S&P 500 marked a +25% increase in the Index since the spring of 2021. What's even more incredible is that the S&P 500 stood at 4,117 on October 27 and has gained more than +21% on its way to 5,000 in a little over three months. This means most of the 1,000-point move has come very recently.
For some perspective on how significant a +21% gain is over a roughly three-month period, at a 5.00% money market rate today, on a $10,000 investment, it would take approximately four years to accumulate the $2,100 gain the S&P 500 has returned on the same investment in the last three plus months.1 And that’s assuming a money market rate will yield 5.00% over the next four years — which seems a pretty big leap of faith, given the Fed is likely cutting interest rates at some point this year. More on that below.
Bottom line: There has been a sea change in the overall tone of the stock market over recent months and one that is far more positive than just six months ago. Admittedly, gains in the S&P 500 this year have been driven by an even narrower group of stocks compared to last year (thank you, NVIDIA, Microsoft, Meta, and Amazon). Yet, it's hard to ignore the continued strength and resiliency of the U.S. economy, continued outsized profit growth from Big-Tech, falling inflation, and the growing likelihood the Federal Reserve will cut interest rates this year. Certainly, investors can argue the degree and magnitude of these conditions and even the timing around how long they may last. But current conditions (and possibly conditions over the next six to twelve months) look a lot like a Goldilocks scenario for the U.S. economy, which is becoming harder for investors to ignore. Hence, expectations for positive growth in economic activity and corporate profits in 2024 are helping inform higher stock prices today.
“There has been a sea change in the overall tone of the stock market over recent months and one that is far more positive than just six months ago.”
Anthony Saglimbene - Chief Market Strategist, Ameriprise Financial
S&P 500 and NASDAQ extend winning streak
On the week, the S&P 500 and NASDAQ Composite posted their 14th week of gains out of the last 15 weeks. Such a feat in the S&P 500 has been achieved only twelve other times going back to 1957, according to Dow Jones Market Data. The last time the S&P 500 went on such an extended winning streak, Richard Nixon was the U.S. President, and Al Green's "Let’s Stay Together” was a Billboard Top 100 hit. The year? 1972. And for the NASDAQ, the current winning streak is just its sixth, with the last extended weekly winning streak being a 15-week stretch that ended on August 8, 1997.
Technology and Communication Services led markets higher last week, with Healthcare also a sector topper. Utilities and Consumer Staples trailed the broader S&P 500. U.S. Treasury yields rose on the week as prices slipped lower across the curve. The U.S. Dollar Index eked out a small gain, while Gold declined fractionally. In a continued pattern of volatility, driven by evolving tensions out of the Middle East and global growth prospects, West Texas Intermediate (WTI) crude rose +5.6%.
Fed: Don’t expect a rate cut in March
Federal Reserve officials, across a batch of speeches last week, continued to point toward “higher-for-longer” messaging, with Fed Chair Powell’s 60 Minutes interview reiterating that rate cuts are very unlikely to come over the near term. Translation: Don’t expect a rate cut at the March meeting. However, the market appears unbothered at the moment by the current stance from monetary officials, and for good reason.
The logic comes in the form of three probable paths for interest rate policy this year. If rates continue to trace multi-decade highs and possibly longer than market expectations suggest, it’s likely because economic growth is coming in stronger than expected, and inflation is declining more slowly. Such an environment could still help support corporate profit growth this year. Hence, stocks could continue to move higher, with market participation possibly broadening at some point as growth remains above trend.
Conversely, the scenario that the market is pricing in with the highest probability at the moment is one where the Fed is cutting rates at some point this year because inflation is moving in a clear and certain path toward the Fed’s +2.0% inflation target. In this scenario, economic and corporate profit growth should remain positive. Net-net, that’s likely supportive of higher equity prices, and could be a catalyst for the stock rally to broaden to areas outside of Big Tech.
And outside of inflation remaining sticky, if neither of those scenarios comes to pass, and the Fed has to cut interest rates more aggressively because growth is slowing more than expected, then eventually, easier monetary policy conditions could lead to higher stock prices. Granted, this scenario comes with some degree of near-term pain for stocks, which would depress sentiment and weigh on the corporate profit picture over the short term. But easier policy, historically, generally leads to more favorable economic and profit conditions with time. Given that in most likely scenarios today, the Fed is eventually cutting interest rates this year, stocks are moving higher in anticipation of those future cuts, regardless of the scenario that ultimately drives rates lower.
Fourth quarter results hold steady
As it pertains to the corporate profit picture, aggregate fourth quarter results continued to hold steady last week. S&P 500 blended Q4’23 earnings per share (EPS) growth stands at +2.8% year-over-year. Notably, full-year 2024 EPS growth estimates have remained rather stable through the fourth quarter reporting season, showing that profit expectations haven’t changed too much with recent corporate updates. Some of the key themes coming out of the current earnings season, in aggregate, appear to be focused on cost-cutting, restructuring, and layoff announcements. While these profit drivers aren’t exciting growth catalysts, they do offer positives for helping support profit margins, which are generally running flat for the S&P 500 year-over-year. Of course, a resilient consumer, benign credit conditions, strong holiday shopping/travel trends, and easing inflationary pressures across materials and input costs have been other notable themes of the current earnings season. And outside of company-specific layoff and restructuring announcements, the proliferation of AI is another key theme that has been ever-present across company Q4 earnings calls, particularly within Technology.
Finally, services activity accelerated in January, with new orders and the prices paid index jumping higher. Notably, the prices paid component of the services index hit its highest level since February 2023 last month and posted its largest month-over-month jump since August 2012. Although the prices paid component of the ISM services report is just a small part of the overall inflation mosaic, such data is likely one reason behind the Fed’s caution on cutting rates too soon.
The week ahead
The release of the January Consumer Price Index on Tuesday will be the key economic report of the week. FactSet estimates point to headline and core CPI holding steady month-over-month versus December levels. However, on a year-over-year basis, consumer prices are expected to fall versus the prior month as annual comparisons ease. For example, headline January CPI is expected to come in at +2.9% year-over-year versus +3.4% in December. January retail sales on Thursday will also receive some attention as investors look for further insight into consumer trends at the start of the year. During the week, 62 S&P 500 companies will report fourth quarter earnings results.
These figures are shown for illustrative purposes only and are not guaranteed. They do not reflect taxes or investment/product fees or expenses, which would reduce the figures shown here. An index is a statistical composite that is not managed. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
1This example is shown for illustrative purposes only and is not guaranteed.
Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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