By Jack Kraft, CFA, Investment Strategist
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U.S. equities pushed forward last week with the S&P 500’s best weekly advance year-to-date amid dovish commentary from the Federal Reserve (Fed). The benchmark index was up 2.3%, while the technology-heavy Nasdaq Composite Index jumped 2.9%. Elsewhere, the Dow underperformed its peers rising 2.0% last week. In fixed income, U.S. Treasuries rallied as the yield curve steepened.
Ten of the 11 S&P 500 sectors ended the week in positive territory, with communication services and technology pacing the gains. The lone sector to buck the uptrend was real estate, falling 0.4%. Meanwhile, momentum stocks outperformed last week, outpacing their value counterpart by nearly 200 basis points. Semiconductors contributed to this momentum outperformance amid a positive takeaway from Nvidia’s (NVDA) corporate event and an earnings beat by chipmaker Micron (MU), which sent the stock higher by more than 15% for the week. Elsewhere, Google (GOOGL) rallied on reports that Apple (AAPL) was considering the search engine provider’s generative artificial intelligence, Gemini, for the iPhone. Despite this news, Apple finished the week lower as investors couldn’t overlook an antitrust lawsuit filed by the Department of Justice.
The main focus last week was the Fed meeting as investors looked for clues about future rate cuts. Fed Chairman Jerome Powell offered commentary that was perceived as dovish as he downplayed multiple hotter-than-expected inflation reports and referred to them as “bumps in the road.” Additionally, Powell indicated that the central bank is looking to cut rates in June, barring any more large upward surprises in inflation data. Meanwhile, the dot plot indicated that the 19 Fed officials have a consensus view of three 25-basis-point cuts in 2024.
This year’s stock rally puts the S&P 500 already up nearly 10% and has some of us wondering if we have pulled forward this year’s equity returns already or if there is more left in the tank. In fact, Goldman Sachs set a year-end target for the S&P 500 at the start of the year of 5,200, which has already been breached. As earnings-per-share estimates remain little changed from the start of the year, this means the market is only applying a higher multiple to stocks. Currently, the forward price-to-earnings ratio on the S&P 500 sits at 21.1x and ranks in the 90th percentile of expensiveness since 1990 relative to history. Part of this higher-than-average multiple can be explained by the mega-cap stocks, commonly referred to as the Magnificent Seven. These stocks have demanded a premium valuation due to their above-average sales and profit growth at over a trillion-dollar market capitalization. To account for the top heaviness of the index we can look at the equal-weighted S&P 500, which looks just as expensive as its counterpart. The equal-weighted S&P 500 is trading at 17 times forward price to earnings, ranking in the 93% percentile of expensiveness.
Despite stocks being pricey, the path of least resistance for equities seems to be upward in the short-term with space for multiples to continue to expand amid lower rates on the horizon and economists pulling back calls for a recession. As this euphoria surrounding a soft landing, lower inflation and artificial intelligence continues to take place, we caution to not get caught “leaning over your skis” too much into risky assets.
In the upcoming holiday-shortened trading week, investors will have a jam-packed slate of economic data and Fed speakers. Headlining the economic calendar will be a double-dose update on inflation, with 5- to 10-year (long-term) inflation expectations data and core PCE inflation data. Other notable releases will include the durable goods report and two real estate data releases, including the Case-Shiller home price index and pending home sales data. Also garnering attention will be the Atlanta and Chicago Fed presidents speaking on Monday. Additionally, Fed Governor Waller is set to speak at the Economic Club of New York on Wednesday. Earnings releases will be relatively light this coming week, with notable S&P 500 companies reporting corporate profit reports, including: McCormick’s (MKC), Carnival (CCL), Cintas (CTAS), Paychex (PAYX), Progressive (PGR), Walgreens (WBA).
| Monday, March 25 | ||||
| Time | Economic Release |
Time Period |
Consensus |
Prior |
| 10:00 | New Home Sales |
Feb |
+680K |
+661K |
| Tuesday, March 26 | ||||
| Time | Economic Release |
Time Period |
Consensus |
Prior |
| 8:30 | Core Durable Orders |
Feb |
0.50% |
0.00% |
| 8:30 | Durable Orders |
Feb |
0.80% |
-6.20% |
| 9:00 | FHFA House Price Index |
Jan |
n/a |
|
| 10:00 | Consumer Confidence |
Mar |
107 |
106.7 |
| Wednesday, March 27 | ||||
| Time | Economic Release |
Time Period |
Consensus |
Prior |
| 7:00 | MBA Mortgage Purchase Applications |
22-Mar |
||
| Thursday, March 28 | ||||
| Time | Economic Release |
Time Period |
Consensus |
Prior |
| 8:30 | Initial Jobless Claims |
23-Mar |
+215K |
+210K |
| 8:30 | GDP (second revision) |
Q4 |
3.30% |
3.20% |
| 8:30 | GDP m/m |
Jan |
0.40% |
-0.02% |
| 9:45 | Chicago PMI |
Mar |
45.7 |
44 |
| 10:00 | Michigan Consumer Sentiment (Final) |
Mar |
76.9 |
76.5 |
| 10:00 | Pending Home Sales |
Feb |
-1.50% |
-4.90% |
| Friday, March 29 | ||||
| Time | Economic Release |
Time Period |
Consensus |
Prior |
| 8:30 | Core PCE |
Feb |
0.30% |
0.40% |
| 8:30 | Personal Spending |
Feb |
n/a |
|
| 8:30 | Personal Income |
Feb |
0.40% |
1% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market