The next two days will bring a number of important reports on the U.S. economy, including tomorrow’s data on personal income and spending from the Labor Department (more below). This morning, the headline report came from the Commerce Department at 8:30 A.M. (EST) when we learned that the nation’s gross domestic product (GDP) expanded at an estimated annualized rate of 3.3% in the final quarter of 2023. It also included a drop in the Personal Consumption Expenditures (PCE) Price Index, which had to please the Federal Reserve in its battle to tame inflation. That performance capped off a solid year for the U.S. economy even with the Fed attempting to lower inflation by reducing demand for goods and services. The fourth-quarter GDP data also add more credence to the thesis that the economy can produce a “soft landing” in 2024 as the central bank winds down its most restrictive monetary policy course in 40 years.
We also learned today that durable goods orders were unchanged in December, but revised higher in the prior month to +5.5%, and initial jobless claims for the week ending January 20th totaled 214,000. Both readings suggest that the economy is still performing solidly and that will continue to keep talk of a “soft landing” in place. Later this morning, at 10:00 A.M. (EST), we will get the latest reading on new home sales from the Commerce Department. The positive economic data of late and some encouraging quarterly reports from Corporate America have powered the major equity averages this week, with the broader S&P 500 Index now trading at an all-time high. Looking overseas, we learned earlier today that the European Central Bank left interest rates unchanged and continued its hawkish view on monetary policy. Following the release of all the aforementioned data, the U.S. equity futures are presaging a modestly higher opening for the U.S. stock market when trading resumes stateside.
The week’s biggest economic report will come tomorrow morning when, as noted, the Labor Department releases the December data on personal income and spending. What investors will be closely monitoring is the latest PCE Price Index. That data, which is the assessment of inflation most closely tracked by the Federal Reserve, has the potential to move the market. If the reading comes in cooler than expected, Wall Street may take it as a sign that the central bank may cut interest rates earlier than expected and that could prompt some more buying in the higher-growth sectors like technology. Conversely a bigger-than-expected increase in the PCE could result in some profit taking to end this overall bullish week for equities. The consensus is that the core PCE Price Index, which excludes the more-volatile food and energy components, rose 0.2% and 3.0% on a month-to-month and one-year basis, respectively.
Meantime, the fourth-quarter earnings news, which is starting to heat up, has had its share of hits and misses so far this cycle. That was on display yesterday and will likely be the case once again today. Yesterday, shares of Netflix (NFLX) jumped after the streaming service and original content creator posted strong quarterly results, including impressive subscriber growth. The report gave a boost to the technology sector and the tech-dominated NASDAQ Composite. Conversely AT&T (T) shares fell after the telecommunications company reported disappointing financial results.
Since the close of trading yesterday, we have received a few more important reports from Corporate America. Electric vehicle maker Tesla (TSLA) reported fourth-quarter results that missed analyst expectations and issued a dour full-year production outlook for 2024. Specifically, the company posted adjusted earnings per share of $0.71, which fell a few cents short of the consensus forecast, on a 3% top-line advance, to $25.17 billion. Shares of the mega-cap company are down sharply in pre-market action. On the other hand, technology giant International Business Machines (IBM), telecommunications company Comcast (CMCSA), and air transportation companies Southwest Airlines (LUV) and American Airlines Group (AAL) all beat expectations and their shares are pointing to higher openings today.
From an investment perspective, with valuations looking quite extended coming into earnings season, we continue to recommend that investors look at the stocks of high-quality companies that have demonstrated a history of generating solid earnings and cash flow growth. As is the case with Tesla, stocks with elevated price-to-earnings multiples that fail to impress with either their financial results and/or prognostications are going to feel the ire of Wall Street. On point, the stock of Humana (HUM) is down notably in pre-market action after warning that 2024 earnings will be only about half of the Wall Street consensus due to higher Medicare Advantage costs. This news also is weighing on shares of the other health insurers. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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