The Standard & Poor’s 500 Index finished this past week with a big flourish, closing above 5,000 for the first time.
Bulls are ecstatic, seeing an economy coping with high interest rates that the Federal Reserve seems likely to cut some time this year. (When is the mother of all questions.)
Skeptics are, well, skeptical.
Related: Stock Market Today: S&P 500 tops 5,000 point level on inflation data boost
The S&P 500 is up 5.4% this year, slightly behind its performance at this time last year. And it is showing signs of getting overbought in part because many forces could derail markets generally and the economy.
But the Fed, including Chairman Jerome Powell, does not want to derail the economy. The central bank, the world’s most important, will probably cut its key interest rate this year, now 5.25% to 5.5% this year.
But here is the catch: The cuts won’t come until the Fed is convinced inflation really will fall to 2% and stay there. Look for June or July for the first cut, no matter what you hear.
If inflation holds and rates fall and the artificial intelligence tsunami continues, then stocks could keep rising.
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Ed Yardeni of Yardeni Research has been among the most bullish of the bulls, calling for the S&P 500 to reach 5,400 this year and 6,000 in 2025.
He has been a bit concerned lately that the most recent up trend may be too much too fast.
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Reports this week should not be bearish
The U.S. economy defied arguments throughout 2023 that a recession was likely as the Fed fought inflation.
The week ahead features some economic and earnings reports that will continue to cheer investors, including:
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The monthly report on the consumer prices, due Tuesday from the Labor Department. The consensus is a 0.2% gain for the Consumer Price Index in January and a 2.9% gain over the last 12 months. Better, an annual revision of the index didn’t change current levels.
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The first estimate of retail sales due Thursday from the Commerce Department. Expect a small gain as consumers continue to be fairly confident.
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January housing starts, due Friday from the Commerce Department. The estimate is an annualized rate of 1.47 million units, up slightly from December. A gain will mean builders see more business as the Fed cuts interest rates.
The week also features at least 432 earnings reports. Earnings so far have been fairly strong, especially for giant companies.
Among reports due this week are:
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Arista Networks (ANET) , up 20% this year after a 94% gain in 2023.
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Coca-Cola (KO) , due Tuesday. Down slightly in 2023, it’s up a bit this year with a 3% dividend. The estimate is 48 cents a share, up from 45 cents last year.
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Oil company Occidental Petroleum (OXY) , expected to report 74 cents, down from $1.61 as oil prices have been static.
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Online gambling company DraftKings (DKNG) , expected to report a profit of 6 cents, up from a loss of 53 cents a year ago.
Unspoken in this discussion is chip giant Nvidia (NVDA) . The dominant player in chips used in artificial intelligence applications, the company now sports a market capitalization of $1.7 trillion.
That’s roughly the same as Amazon and Google-parent Alphabet (GOOG) .
Nvidia soared 239% in 2023 amid the frenzy about all-things AI. It’s already up 45.7% in 2024. It reports after the Feb. 21 close, with the consensus estimate at $4.17 a share, up from “only” 65 cents a year ago.
The bears will sniff for trouble that always lurks
A few issues may start to get louder in the week ahead and the week after, which will affect the path to 6,000 on the S&P 500.
Stocks have had a good start to 2024. The S&P 500 rose 1.4% this past week and has risen for 14 of the last 15 weeks, something that hasn’t happened since 1972.
The Dow Jones industrials rose very slightly. The Nasdaq Composite was up 2.3%. They, too, have risen for 14 of the last 15 weeks for the first since the 1990s.
Friday’s market was strong with 17 stocks with big market caps hitting 52-week highs, including three of the key tech giants — Nvidia, Microsoft and Amazon (AMZN) , plus cyber-security company Palantir (PLTR) , automotive giant Stellantis (STLA) , and pharma giant Eli Lilly (LLY) .
Another stock hitting a 52-week high was railroad company Norfolk Southern (NSC) , but it’s apparently the subject of a proxy fight.
Here are the biggest issues to keep in mind:
Narrow breath. Tech stocks have ruled since the worst of the pandemic. Adam Turnquist, chief technical strategist at LPL Financial told theStreet that Amazon, Meta Platforms (META) , Microsoft and Nvidia have contributed 75% of the S&P 500’s total return this year. That’s stock appreciation plus dividends.
Some industries really need the Fed’s help. Two pieces of real estate comes to the fore. Residential real estate has been stuck for more than two years because of the Fed’s crusade to beat down inflation. It’s important because a house or apartment purchase results in substantial additional spending on appliances, furniture and flooring. The commercial real estate is a parallel issue, especially office real estate, gutted as workers fled the pandemic by working at home. If you’re thinking about buying a house, Barrons recommended this week to suck it up and buy.
Exuberance turns into wildly irrational exuberance. Markets get overbought and then are derailed by the unexpected. This is the worry for Yardeni and others. Stocks are pricey with relative strength indexes for the S&P 500 and Nasdaq Composite topping 70, the first signal of frothiness. The post-pandemic rally peaked in late 2021 when the Fed acted to curb inflation. Wild speculation in real estate was the core issue that brought on the 2007-2009 financial crisis and nearly toppled the global banking system.
Real estate may yet prove a big problem, especially commercial real estate. That’s a big reason for the woes that shares of New York Community Bancorp (NYCB) has suffered recently, with worries it could fail. The shares fell 38% after surprising Wall Street with a fourth-quarter loss.
In addition, there are stresses to watch even in industries like technology. Geekwire, the Seattle news site that focuses on technology, estimates companies with Seattle presences have laid off about 67,000 employees in and around the Pacific Northwest since 2022. Microsoft bought Activision last year and laid off 10,000 employees alone in its gaming business.
A recession could emerge. That’s the view of investors and analysts including David Rosenberg, Jeremy Grantham, Gary Shilling and bond king Jeffrey Gundlach. The group are often bearish, but they command attention.
Oil prices could explode again. Crude oil is already up 7.2% this year, but it typically rises in the first half with a peak in early-to-mid summer. But members of the Organization of Petroleum Exporting Countries and the OPEC-plus group that includes Russia are unable to meet their commitments to hold back production. So far, oil price increases have been benign. Retail gas-price increases are modest: up 2.3%, according to the Oil Price Information Service’s Tom Kloza. By this time in 2023, they were already up 7.4%.
Politics, geopolitics and worse. This is an election year, which is clearly going to be especially brutal. Neither the Ukraine-Russia war nor the Hamas-Israel conflict shows any signs of ending. North Korea keeps sabre-rattling.
Maybe we’ll get lucky.
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