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This content was published on January 22, 2024 - 21:30
(Bloomberg) -- Stocks saw small gains while still closing at fresh records, with traders weighing strong economic signals and prospects for corporate profits amid warnings that the market has run too far, too fast.
Equities are shaking off a rocky start to the year on bets the Federal Reserve will cut rates and the artificial-intelligence boom will keep fueling profit growth. Earnings season kicks into high gear this week, with companies including Netflix Inc., Tesla Inc. and Intel Corp. due to report their numbers.
“The record-high breakout we saw on Friday is attracting momentum,” said Mark Hackett at Nationwide. “Though we may not be shooting straight to the moon, the current environment is encouraging and a good reminder for investors that cash isn’t always king.”
The S&P 500 hovered near 4,850. Treasury 10-year yields declined two basis points to 4.10%. The dollar barely budged. After the closing bell, United Airlines Holdings Inc. said profit this year will likely top analyst estimates despite a first-quarter loss.
“The story is changing for bulls,” said David Donabedian at CIBC Private Wealth US. “Investor optimism had been driven by the belief there would be aggressive rate cuts by the Fed. Now investor belief has pivoted to view the economy as bullet-proof. No matter how high interest rates go, the economy will continue to glide right through.”
Last week’s record close for US stocks has pulled valuations back to the highs seen last July. But a closer look shows that the market isn’t as expensive as it appears, according to Citigroup Inc.’s Scott Chronert.
Gains in Apple Inc., Microsoft Corp., Nvidia Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Tesla have powered the resurgence on Wall Street. The equally weighted version of the S&P 500 strips out some of their outsized influence and results in a ratio of around 16 times forward earnings, a discount of 17% to the benchmark’s standard valuation.
“With AI set to remain the key theme driving global tech stocks again this year and the rest of the decade, we maintain our preference for the semiconductor and software sectors and see opportunities in those involved in memory and AI edge-computing,” said Solita Marcelli at UBS Global Wealth Management.
The Ned Davis Research Leading Indicator Model — based on 10 indicators that typically lead the S&P 500 — has already been flashing bullish for most of the past year. The majority of the components are price-based and include one on sentiment with two others on macroeconomics.
Although the model is just off its highs, with four of the seven bullish indicators starting to weaken including financials, volume demand and weekly new highs on the New York Stock Exchange, the key gauge still points to equity strength.
To Lisa Shalett at Morgan Stanley Wealth Management, with forward multiples already at historic peaks and earnings forecasts for 12 months forward ambitious, stock gains may stall in 2024 — as better earnings are met with lower valuation multiples, characteristic of a midcycle or soft-landing environment.
Even as the S&P 500 closed Friday at an all-time high, money managers and analysts are contending with data that signals US economic resilience and Fed officials who’ve pushed back against reducing interest rates too soon.
The latest warning for investors unleashing dovish monetary wagers across the board: Two thirds of Bloomberg Markets Live Pulse respondents said that betting on early monetary easing is the “most foolish” among popular trades heading into 2024.
“The push and pull between interest rates and the markets have been discussed ad nauseam, but looking back over the past two years, it has been the Fed’s actions that have led the markets, said Paul Nolte at Murphy & Sylvest Wealth Management. “Will the economy catch a chill if the Fed keeps rate cuts on ice? It will depend largely on the earnings season that gets into full swing this week.”
Strategists at Wall Street’s two top-tier banks are split on the outlook for profit margins: Goldman Sachs Group Inc. sees falling inflation boosting the key metric, while JPMorgan Chase & Co. warned companies are quickly losing pricing power.
Yung-Yu Ma at BMO Wealth Management is betting the stock market outlook will brighten by the second half of the year as the Fed’s rate cuts are likely to begin and companies and consumers look ahead to a better spending environment.
“We believe the Fed will cut rates just three or four times in 2024,” he noted. “Ultimately, the short-term interest rate trajectory continuing to point downward is more important than how many cuts take place in 2024 versus what gets pushed out into 2025. If the end of 2024 sees both growth acceleration and continued low inflation, that will set up an especially favorable backdrop for stocks.”
- Archer-Daniels-Midland Co. plunged after the US agricultural trading giant suspended its chief financial officer and cut its earnings outlook pending an investigation into its accounting practices.
- Sunoco LP, a US gas station owner, agreed to acquire pipeline and fuel storage company NuStar Energy LP for about $7.3 billion in a move to diversify its business and buy up a key part of its supply chain.
- Digital World Acquisition Corp., the blank-check firm seeking to take Donald Trump’s media company public, surged after Ron DeSantis dropped out of the 2024 US presidential race and endorsed Trump.
- Arkhouse Management Co. has asked Macy’s Inc. for access to more financial information after the US department store operator rejected a $5.8 billion takeover offer from the investment firm and Brigade Capital Management.
- US authorities are investigating B. Riley Financial Inc.’s deals with a key client who was linked to a securities fraud, and the use of his assets to help the investment bank obtain a loan from Nomura Holdings Inc., according to people familiar with the matter.
- Gilead Sciences Inc. slid after its drug Trodelvy failed to meet a key goal in a study of patients with advanced lung cancer.
- Scrutiny of Boeing Co.’s manufacturing quality expanded after federal regulators told airlines to check the door plugs on a second 737 model, where operators have also found issues with fasteners.
- Amer Sports Inc., the maker of Wilson tennis rackets and Salomon ski boots, is seeking to raise as much as $1.8 billion in what would be one of the year’s first major initial public offerings.
Key events this week:
- Japan BOJ rate decision, Tuesday.
- Eurozone consumer confidence, Tuesday.
- New Hampshire holds first-in-the-nation presidential primary, Tuesday.
- European Central Bank issues bank lending survey, Tuesday.
- Canada rate decision, Wednesday.
- Eurozone S&P Global Services & Manufacturing PMI, Wednesday.
- US S&P Global Services & Manufacturing PMI, Wednesday.
- Eurozone ECB rate decision, Thursday.
- Germany IFO business climate, Thursday.
- US GDP, initial jobless claims, durable goods, wholesale inventories, new home sales, Thursday.
- Japan Tokyo CPI, Friday.
- US personal income & spending, Friday.
- Bank of Japan issues minutes of policy meeting, Friday.
Some of the main moves in markets:
- The S&P 500 rose 0.2% as of 4 p.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average rose 0.4%
- The MSCI World index rose 0.3%
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro fell 0.1% to $1.0885
- The British pound was little changed at $1.2709
- The Japanese yen was little changed at 148.05 per dollar
- Bitcoin fell 3.9% to $40,127.03
- Ether fell 5.5% to $2,337.08
- The yield on 10-year Treasuries declined two basis points to 4.10%
- Germany’s 10-year yield declined five basis points to 2.29%
- Britain’s 10-year yield declined two basis points to 3.90%
- West Texas Intermediate crude rose 2.4% to $75.19 a barrel
- Spot gold fell 0.4% to $2,020.87 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Denitsa Tsekova, Kasia Klimasinska, Michael Msika, Sujata Rao, John Viljoen, Jessica Menton, Elena Popina and Matt Turner.
©2024 Bloomberg L.P.
As an expert with a deep understanding of financial markets, let me delve into the key concepts and themes discussed in the provided article published on January 22, 2024, by Bloomberg. This analysis covers various aspects of the stock market, economic indicators, and expert opinions.
Market Performance and Records:
- The article mentions that stocks experienced small gains, closing at fresh records. The S&P 500 was near 4,850.
- Last week saw a record close for US stocks, bringing valuations back to the highs seen in July of the previous year.
Economic Signals and Corporate Profits:
- Traders are weighing strong economic signals and prospects for corporate profits.
- Earnings season is highlighted, with major companies like Netflix Inc., Tesla Inc., and Intel Corp. set to report their numbers.
Factors Influencing Market Sentiment:
- The Federal Reserve's potential rate cuts are considered a factor in the positive market sentiment.
- The article suggests that the artificial intelligence (AI) boom is expected to continue fueling profit growth.
Analysis of Stock Valuations:
- Citigroup Inc.’s Scott Chronert notes that while last week's record close pulled valuations back to highs, the market may not be as expensive as it appears.
- Gains in prominent tech stocks like Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla have powered the market resurgence.
Key Themes for Tech Stocks:
- Solita Marcelli at UBS Global Wealth Management emphasizes that AI will remain a key theme driving global tech stocks. The preference is for semiconductor and software sectors with opportunities in memory and AI edge-computing.
Indicators and Models:
- The Ned Davis Research Leading Indicator Model, based on 10 indicators, suggests bullish signals for equity strength, despite some components showing signs of weakening.
- Analysts are split on profit margin outlook, with Goldman Sachs seeing falling inflation as beneficial, while JPMorgan Chase warns of companies losing pricing power.
Concerns and Warnings:
- Lisa Shalett at Morgan Stanley Wealth Management expresses concerns that stock gains may stall in 2024, particularly if better earnings are met with lower valuation multiples.
- Investors are warned against premature monetary easing, with the majority of Bloomberg Markets Live Pulse respondents considering it the "most foolish" trade for 2024.
Global Economic Outlook:
- Yung-Yu Ma at BMO Wealth Management anticipates a brighter stock market outlook in the second half of the year, expecting the Fed to cut rates and a more favorable spending environment.
- Various corporate events are highlighted, including Archer-Daniels-Midland Co.'s accounting practices investigation, Sunoco LP's acquisition of NuStar Energy LP, and the surge in Digital World Acquisition Corp. after Ron DeSantis's withdrawal from the 2024 US presidential race.
Upcoming Key Events:
- The article outlines significant upcoming events, including central bank rate decisions, PMI releases, and economic indicators from various regions, providing insights into potential market-moving events.
In conclusion, the provided article comprehensively covers the current state of the stock market, economic factors influencing it, and expert opinions on various aspects. This information is crucial for investors and market participants looking to make informed decisions in a dynamic financial landscape.