Weekly | S&P: 5,000 and beyond?
Your weekly summary with the most important news for your investments.
Your weekly summary with the most important news for your investments, in this edition:
Performance of the U.S. stock market.
Impact of artificial intelligence and technology on the market.
Macroeconomic and financial factors to consider.
Last Friday, the main U.S. stock index, the S&P 500, surpassed the 5,000-point threshold in its history, accumulating a return of +5.4% so far in 2024. Meanwhile, its peers the Dow and Nasdaq added gains of +2.6% and 6.5%, respectively, led by:
An economy that has been growing more robustly than expected despite the monetary policy rate at 5.5%.
Inflation is gradually easing towards 3%, which will give the Federal Reserve (FED) degrees of freedom to adopt pro-cyclical measures in the second half of the year.
Earnings of S&P 500 companies are outperforming market expectations.
All this in the midst of a change brought about by the arrival of artificial intelligence that has been generating a structural change in processes with the adoption of cutting-edge technology, a sector that has been generating another stock market rally that adds up to an average return of +7.7% in the year.
Obviously, we must continue to monitor the volatility in medium and long-term sovereign rates, where the 10-year rate has climbed to 4.16% (+15 basis points during the week), given that expectations of lower inflationary pressures are increasing and therefore lower future interest rates.
Let's start by briefly analyzing the expected economic growth for the current quarter, which according to the Atlanta FED's estimate, for this first quarter stands at 3.4%, adding to the 3.3% recorded in the previous quarter. This marks economic growth during the entire cycle of interest rate hikes without apparently having a substantial impact on domestic consumption. Some would argue that the possible slowdown in consumption, as a result of higher interest rates, was counteracted by the wealth effect that emanated from the stock market rally last year and which continues unabated today. As long as we do not see a jump in the unemployment rate, it is difficult to foresee wage inflation easing (currently at 4.6%).
On the inflationary side, official data for the previous month will be published tomorrow, where headline inflation is estimated to have eased to 3.1% (from 3.4%) while core inflation, which excludes food and energy prices, is expected to close at 3.7% (from 3.9%). Any general data that falls below 4% will allow the FED to project potential interest rate cuts, providing the necessary "inflationary confidence" of which it spoke at its last meeting. This is because today with an interest rate at 5.5% and inflation hovering around 3.5% (depending on the measure used), the real rate is at 2% giving it degrees of freedom to take the latter towards zero and leave it neutral by the end of the year. This is one of the main reasons why the stock market continues to propagate a bullish path where liquidity is rotating from fixed income to equities, explaining the recent rise in interest rates. The lower the price of fixed income, the higher the rate hike.
Additionally, sales and earnings of S&P 500 companies during the fourth quarter of the year have been exceeding market expectations and thus boosting the price-earnings ratio. According to Factset, sales expanded +3.9% while earnings expanded +2.9%, whereas the previous month's earnings figure was in negative territory. This has led to the S&P 500's price-to-earnings ratio soaring above 20x (20.3x) when trend levels are 18x. This rally has been vertical since, according to Factset, the December 31, 2023 closing level was 19.5 times, giving us the understanding that the stock market rally is going faster than what is supported by earnings growth. However, according to the same research department, sales will expand by almost 6% and profits by 11% during 2024. If we add to this the degrees of freedom of the FED to lower the instance rate towards 4% quickly, it would seem that the valuation would be justified.
Evidently, the stock market boomerang could emanate from the price of oil, which during the week returned +5.8% to close to US$76 per barrel. This is because the conflict in the Middle East with the increasingly pronounced incursion of the United States could generate an unexpected event. In this same context, today the consolidation of the US energy sector became more present after Diamondback Energy announced the purchase of Endeavor Energy Resources for US$26 billion. Under a scenario where candidate Donald Trump has been arguing that if he wins the presidential elections in November, he will open the oil and gas production capacity to the maximum in order to lead the country towards oil self-sustainability and impact the price of crude oil, the same strategy he adopted in his previous term. For now, candidate Trump continues to lead the electoral polls, after President Biden had to come out to defend his age and memory after the Justice Department issued a report where they would not proceed with a trial against him arguing his age and lack of memory. Over the weekend, The New York Times was clear that the president should consider dropping out of the presidential race.
Finally, we cannot fail to mention the possible collapse of the financial institution NYCB (New York Community Bancorp), which a year ago managed the purchase of the bankrupt Signature Bank. The company seems to have a structural problem with commercial real estate loans that are generating a hole in its balance sheet and it has had to announce the sale of strategic assets or capital raising. For now, there is no indication that the U.S. financial system has become congested, but we should monitor the evolution of this potential crisis in the coming weeks.
In conclusion, there are those who believe that the S&P 500 will be unsustainable simply because the price-to-earnings ratio would appear to be overextended. However, as we get closer to a potential drop in interest rates the rotation into equities could intensify.
This Week
Monday (February 12)
Quarterly Reports
Arista Networks, Inc.
Cadence Design Systems, Inc.
Waste Management, Inc.
Principal Financial Group Inc.
James Hardie Industries plc.
Economic Reports
Speech by Fed Governor Michelle Bowman
Tuesday (February 13)
Quarterly Reports
Coca-Cola Company (The)
Shopify Inc.
Airbnb, Inc.
Zoetis Inc.
Marriott International
Economic Reports
Monthly Change in Inflation Report
Annual Change in Inflation Report
Monthly Change in Core Inflation Report
Core Inflation Annual Change Report
Wednesday (February 14)
Quarterly Reports
Sony Group Corporation
Cisco Systems, Inc.
Equinix, Inc.
CME Group Inc.
Occidental Petroleum Corporation
The Kraft Heinz Company
Economic Reports
Speech by Fed Board Oversight Vice Chairman Michael Barr
Speech by Atlanta Fed President Raphael Bostic
Thursday (February 15)
Quarterly Reports
Applied Materials, Inc.
Deere & Company
RELX PLC
Stellantis N.V.
Southern Company (The)
DoorDash, Inc.
Economic Reports
Retail Sector Monthly Sales Change Report
NY Empire State Manufacturing Index Report
Philadelphia Fed Manufacturing Index Report
Friday (February 16)
Quarterly Reports
TC Energy Corporation
Vulcan Materials Company
NatWest Group plc
PPL Corporation
Liberty Broadband Corporation
Economic Reports
Producer Price Index Monthly Change Report
Preliminary Michigan Consumer Sentiment Report
Now you have more information about your investments. See you next week with more news.
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