This morning, trading on the U.S. equity market will commence with the major equity averages in rarefied air. The broader S&P 500 Index now stands on the doorstep of the 5,000 mark. The Dow Jones Industrial Average and the tech-heavy NASDAQ also are powering high, with the index of 30 bellwether companies, like the S&P 500 Index, ending yesterday’s session at an all-time high.
The move to the upside during the current earnings season has been fueled by the strength of the technology stocks, particularly most of the mega-cap names. Within the technology group, those companies beating results and, maybe more importantly, highlighting the incorporation of the use of artificial intelligence (AI) into their business models, are witnessing the biggest gains. On point, the stock of semiconductor giant NVIDIA (NVDA), which is at the forefront of the AI infrastructure boom, continues to produce a string of record-high closings.
It will be another light day of economic news, which has been par for the course this week. At 8:30 A.M., the Labor Department reported that initial unemployment claims for the week ending February 3rd totaled 218,000, which was down 6,000 from the prior week’s revised figure and still indicative of a tight labor market. We did learn this morning that the first-quarter survey of confidence among leading chief executive officers (CEOs) rose to 53, compared to 46 in the fourth quarter. A reading above 50 indicates more optimism than pessimism among the nation’s business leaders. The equity futures are suggesting a mixed opening to today’s trading session, but with none of the major averages too far removed from the neutral line.
In addition to the euphoria on Wall Street about the burgeoning AI space, the market has rewarded those companies that have posted better-than-expected fourth-quarter earnings results. At a little past the midway point of the reporting season, the vast majority of S&P 500 companies have delivered positive revenue and earnings surprises and, for the most part, the stocks of those entities have responded in kind. Conversely, those companies that have failed to impress with their results in the latest quarter have felt the wrath of investors. That group includes shares of Snap (SNAP), a visual messaging application provider, which fell sharply during yesterday’s session.
Since the closing of trading yesterday afternoon, we received another round of earnings news. The headline report came from entertainment giant Walt Disney Co. (DIS), which fell short of revenue expectations, but surpassed earnings estimates on its cost-cutting efforts. The company also issued improved near-term guidance, reported subscriber gains in its video streaming app, increased its share-buyback initiative, and announced that it has taken a $1.5 billion equity stake in Epic Games, the producer of the Fortnight video game franchise. Shares of Disney are pointing to a nicely higher opening today.
Meanwhile, the stock of Arm Holdings (ARM) is up sharply in pre-market action after the semiconductor company posted strong results and significantly raised its guidance. Wynn Resorts (WYNN) also was a winner in the latest quarter, with the casino and hotels operator beating the consensus revenue and earnings-per-share forecasts. Conversely, shares of PayPal (PYPL) are looking at a weaker opening after the electronic payments company reported full-year 2023 results, but lowered its prognostications for the current year.
The sharp move higher in the equity market, particularly on the strength of artificial intelligence talk, has some market pundits thinking another trading bubble could possibly be developing, much like what occurred during the dot.com era of the early 2000’s. What may be a signal that the market is too exuberant and thus overbought is that we are seeing stocks run-up sharply into an earnings report and then take another similar move higher on the release of the results. Historically, such behavior usually is not indicative of an equity market that is acting in a balanced manner. This has many stocks trading at extended price-to-earnings multiples, leaving them susceptible to selling on any disappointing news. Given this backdrop, we continue to recommend that investors hold the stocks of high-quality companies with strong balance sheets and have demonstrated a history of delivering steady earnings and cash flow growth. – William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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