Weekly Market Commentary

U.S. indexes tread water last week, with investors awaiting crucial inflation data after the S&P 500 broke through 5,000 for the first time ever earlier in the week.

The milestone reflects growing economic optimism, but concerns around consumer prices and Fed policy keep markets on edge.

Key Takeaways

• S&P 500 surpasses 5,000 for the first time amid earnings strength
• But inflation data remains pivotal to the Fed’s path after the jobs shakeup
• Tech sector charges higher on semiconductor demand and AI trends
• Energy declines despite oil’s rise, underscoring complex dynamics
• Growth managers should maintain exposure to innovators like semiconductors and software
• Income investors can redeploy into bonds at higher yields if inflation peaks
• Opportunistic managers should monitor earnings and economic signals closely

The S&P 500 breaching 5,000 points manifest broad investor optimism amid strong corporate earnings. Over 60% of index members beat Q4 estimates, evidencing resilience.

However, upcoming inflation data remains pivotal. Will price increases continue moderating? Consumer prices could steer the Fed’s policy path and sway market sentiment.

Treasury yields climbed again, reflecting expectations for less aggressive rate cuts after January’s robust jobs gains. Sustained economic vigor may compel the Fed to stay the course.

Information technology charged higher with outsized 3.2% gains last week, led by semiconductor and software stocks. Chip demand is ramping globally while AI adoption accelerates.

However, the energy sector declined despite a rise in crude oil prices. This disconnect highlights the complex interplay of supply and demand dynamics along with global uncertainty around top producer Russia.

Healthcare and consumer discretionary results varied, with upside surprises from insurers but brick-and-mortar retail weakness. Rising rates and sticky inflation still pressure households.

The S&P 500, surmounting 5,000, merits a closer look at the drivers and risks behind this milestone moment.

Corporate earnings have exceeded expectations, with around 60% of S&P 500 components beating Q4 estimates thus far. This resilience, against a backdrop of inflation and higher interest rates, instills confidence. However, just a handful of bellwether giants like Apple and Microsoft account for a sizable chunk of index profits. Broader weakness in consumer discretionary and small caps presents a counterpoint.

Semiconductors charged over 3% higher last week, fueled by robust demand in tandem with breakthroughs in cutting-edge chip technology that enable advanced computing capabilities. 

Nvidia, Qualcomm, and other leaders in graphics processing and AI solutions should sustain leadership. However, lower-tier players face inventory/capacity challenges that threaten oversupply.

Energy stock performance diverged from fundamentals last week, declining slightly despite crude oil pushing higher. While geopolitical uncertainties support fossil fuel prices in the near future, heavy investment in renewables across the private and public sectors poses a long-term headwind. Yet, the full transition will take time, lending valuation support.

Treasury yields resumed their upward March, reflecting expectations for a less dovish Fed reaction function after January’s blockbuster jobs data. Markets are repricing rate-cut hopes for March. The Federal Reserve looks apt to stay the course until clear disinflationary progress materializes. How this dynamic plays out has profound implications for risk asset valuations.

While markets celebrated the S&P’s milestone, upcoming inflation data and Fed policy remain pivotal unknowns. Earnings strength grants fundamental support, but risks linger under the surface. Adaptability and prudent diversification will be key to navigating the terrain ahead.

Conservative Managers

With a potentially less accommodative Fed on tap, conservative managers should underweight equities and favor high-quality fixed income. Corporate and municipal bonds with shorter durations can limit rate sensitivity. Raise cash to deploy if markets are correct. Focus on dividend mega-caps resilient to volatility.

Growth Managers

Growth managers should maintain exposure to software, semiconductors, cloud computing, and other tech innovators benefitting from unstoppable digitization trends. Potential inventory build-up risks warrant selectivity. Stay invested in biotech and medtech, making breakthroughs against disease. Trim speculative names in favor of future leaders.

Opportunistic Managers

Opportunistic managers should closely track upcoming inflation updates, and the Treasury should move to time reentry into rate-sensitive holdings like utilities and real estate if peaks materialize. Be ready to realize profits if investor sentiment shows euphoria. Monitor inventory/production signals to capitalize on mean reversion and restocking demand.

Markets applauded the S&P 500’s surpassing 5,000 but faced a key test with inflation data that will help steer Fed policy. While earnings and services signal economic durability, risks around prices and rates remain. Staying nimble and informed is essential amidst crosscurrents.

Sources:

Investopedia
LPL Financial
Barron’s