Weekly Market Commentary — Jan 26, 2024

Upbeat U.S. GDP numbers and stabilizing inflation enabled markets to shake off risks and kept the party going for risk assets. Investors are embracing equities despite high valuations, with the S&P 500 notching a 5th straight all-time high.

• S&P 500 hits record highs as investors embrace stocks amid risks
• U.S. GDP beats estimates, grows 3.3% in Q4, and eases recession worries
• Inflation slows again, giving the Fed leeway to pause aggressive hikes
• Indexes overcome weak tech earnings and global tensions
• Conservative managers can buy mega-cap tech and dividend payers on dips
• Growth managers should build AI, cloud computing, and cybersecurity positions
• Opportunistic managers can deploy cash if markets fall without credit cratering

The technology sector saw diverging results last week. Tesla (TSLA) extended its breathtaking run, gaining 2.13% without any news catalysts. Investors are increasingly embracing Tesla’s leadership in electric vehicles and future growth narrative.

Nvidia (NVDA) rose 1.11%, recovering ground after inventory issues pressured shares. Its integral role in powering innovations in AI, data centers, metaverse platforms, and gaming suggests the earlier selloff was overdone, given strong long-term demand drivers.

Apple (AAPL) declined 0.71%, likely consolidating given its huge trillion-dollar market capitalization. With new products potentially slated for launch this year, the tech bellwether seems poised for renewed growth ahead.

Amazon (AMZN) barely budged, ticking up 0.06%. Its dominant positioning in retail and cloud computing makes it a safe haven when markets turn more volatile.

Disney (DIS) dropped 0.32% on competitive streaming concerns. However, with its vast intellectual property trove and diversified business mix across media and entertainment, Disney still offers an upside for long-term investors.

The S&P 500 rallied for its 5th straight record close, affirming sustained optimism around stocks despite high valuations that leave them vulnerable to negative surprises.

U.S. GDP grew an estimated 3.3% in Q4 2022, handily exceeding estimates for 2% growth. Consumers still spending steadily despite inflationary headwinds, which is a positive signal that recession may be avoided in the near term, although energy supply shocks present a key risk.

Stable inflation prints accompanied by steady interest rates give the Fed leeway to pause its aggressive rate hike campaign for now. However, any upside surprises in prices or hawkish policy shifts could quickly rattle markets.Geopolitical flashpoints involving Russia, China, North Korea, Iran, and more continue simmering beneath the surface even as they fade from market-moving headlines. Any major military activity in Eastern Europe, Taiwan, or the Middle East could ignite market turmoil.

Information Technology stock performance was mixed despite mostly solid earnings results. While software and services firms generally beat estimates, hardware and semiconductor companies faced increased macro uncertainty. 

Powerful secular trends in cloud computing, artificial intelligence, and cybersecurity should continue driving outperformance in technology over the long term.

Healthcare stocks initially dropped on legislative fears around drug pricing before recovering as robust M&A activity and positive trial data overcame the regulatory overhang. Demographic trends still favor the healthcare sector overall despite policy proposals.

Energy stocks declined but remain buoyed by geopolitical tensions keeping oil prices at elevated levels. Natural gas prices spiked higher on cold weather-driven demand. Government initiatives and private investment in clean energy should continue increasing, even if legislative packages stall.

Industrials face slowing manufacturing activity, but infrastructure spending helps cushion demand issues. The aerospace industry continues its multi-year recovery from pandemic lows. Transportation companies benefit from inventory restocking and ongoing growth in e-commerce.

Consumer Staples holdings remained relatively firm last week, benefitting from their steady demand and defensive nature. Household essentials prove relatively immune to inflation and higher interest rates. Discretionary faces headwinds from potential consumer belt-tightening if household budgets shrink.

Conservative managers should consider selectively buying the dip in mega-cap technology leaders and dividend payers. Cash levels can remain elevated to deploy on further market pullbacks. Corporate and municipal bonds may offer shelter from rising rates relative to Treasuries.

Growth managers need to continue building positions in secular winners like cloud computing, artificial intelligence, genomics, and cybersecurity. Stay adequately exposed to technology and healthcare innovation. Emerging themes like Big Data, the Internet of Things, and digital payments also warrant attention.

Opportunistic managers should monitor stretched valuations but be ready to deploy excess cash if markets pull back significantly without credit conditions cratering. Be prepared to tactically increase exposure to risk assets during periods of market dislocation and disconnects between fundamentals and prices.

The weight of evidence suggests room for further equity market gains in the near term as corporate profits exhibit resilience and pessimistic economic scenarios get priced in. However, risks around recurring inflation, oil supply shocks, and conflict zones can’t be ignored.

The Fed’s policy path, along with earnings results, will remain crucial market movers week-to-week. For now, cautious optimism rules while volatility simmers underneath.

 

Sources

Investopedia

NASDAQ
AP News