Overview
U.S. stocks powered to fresh records last week, extending their rebound from 2022 lows on the back of upbeat corporate results and optimism around an impending Federal Reserve policy shift.
The S&P 500 climbed to new peaks, propelled by better-than-expected earnings across most sectors, not just technology. Markets seem poised to add to gains, but staying nimble as the Fed’s decisions loom and economic signals evolve is prudent.
Key Takeaways
- Stocks hit new highs, with S&P 500 up 24% since October 2022
- Earnings routinely surpassing estimates back market momentum
- Fed rate cut hopes fuel rally, but timing and impact remain uncertain
- AI, cloud, cybersecurity trends propel tech shares higher
- Risks around concentration and Fed policy moves linger
- Conservative managers: hold bonds to buffer volatility
- Growth managers: focus on secular tech winners
- Opportunistic managers: capitalize on disconnects in prices
Strong Earnings Validate Rally After Recession Fears
The S&P 500’s continued climb to record peaks comes as corporate earnings routinely surpass estimates across most sectors. Giants like Nvidia, Meta Platforms, and Apple posted big upside surprises last week.
This upside follows ominous recession predictions back in 2022.
Markets are forward-looking, and better corporate prospects are getting priced in. Sustained upside earnings surprises support bullish conviction.
However, mega-cap tech leaders account for a hefty proportion of index profits, raising concentration risk questions. Still, their sizable earnings provide a buffer against dot-com bubble comparisons.
Consumer discretionary firms like Amazon and Tesla also posted forecast-beating results, evidencing resilience even as households pare back discretionary purchases amid inflation and rising rates.
Industrials and materials companies likewise exceeded projections, as infrastructure spending and global development drive demand. Supply chain improvements enabled margin expansion.
Fed Policy Moves Remain Highly Consequential
Despite upbeat earnings, the market remains keenly focused on the Federal Reserve’s monetary policy trajectory.
Expectations for rate cuts later this year are buoying sentiment as markets anticipate a more accommodative Fed stance to boost growth. But timing and magnitude are still uncertain.
Navigating the tightrope between controlling inflation and fostering economic gains remains the Fed’s challenge. The wrong policy calibration risks recession or further price spikes.
Investor Perspectives
For conservative managers, caution remains warranted despite the new highs. Maintain adequate exposure to short and intermediate-term high quality bonds to buffer volatility as rates potentially peak.
Emphasize dividend-paying mega-cap stocks displaying earnings power and pricing leverage to weather policy shifts. Stay overweight defensive sectors and underweight rate-sensitive assets. Prepare to pare back risk if volatility escalates.
For growth managers, secular innovation trends in AI, cloud computing, cybersecurity, genomics and healthcare tech warrant ongoing allocation despite risks.
The recent semiconductor and biotech equity sell-offs enable rebuilding positions at attractive valuations. Stay adequately invested for the long-term in companies driving future growth and productivity enhancements. Monitor speculative names closely.
For opportunistic managers, be ready to tactically capitalize on disconnects between market prices, corporate fundamentals and investor sentiment.
Maintain dry powder to take profits on extended holdings if indicators suggest euphoria, rotating into unloved sectors and small-caps with upside potential. Move decisively but selectively to exploit temporary dislocations without taking outsized risks.
Our Thoughts
Concentration Risks Lurk Amid Megacap Dominance
The past week’s rally, driven overwhelmingly by mega-cap technology stocks, evokes dot-com bubble comparisons. However, substantial earnings growth provides fundamentals today that were largely lacked in the speculative frenzy of the 1990s.
Still, concentration risks persist, given the outsized influence of fewer and fewer stocks on index
returns. This puts a premium on the ability of giants like Apple, Microsoft, Amazon and Alphabet to sustain profits in coming quarters.
With uncertainty simmering around inflation and Fed actions, we believe a correction is increasingly likely this year as concentration-driven rallies prove fragile. Taking selective profits on stretched large-caps and reallocating to value stocks makes sense.
Views expressed here should not be considered personal investment advice
Sources:
Investopedia
NASDAQ
Edward Jones
