Stocks look to post gains at the start of today’s trading session. This morning, the U.S. Bureau of Labor Statistics is due to release its annual seasonally-adjusted revisions for the Consumer Price Index (CPI), covering the five-year period from 2019 through 2023. This release comes before next Tuesday’s report on the January, 2024 CPI. Producer Price Index numbers for last month will also be unveiled on Friday. Investors are hoping for additional evidence that inflation is easing, which would back the Federal Reserve’s inclination to cut short-term interest rates later this year.
The major domestic stock market indexes appear poised to end this week in positive territory. Notably, the Standard & Poor’s 500 (S&P 500) is on the verge of closing at or above the 5,000 mark, a new milestone. The tech-heavy NASDAQ continues to lead stocks higher, followed by the broader S&P 500 and the blue-chip Dow Jones Industrial Average. Overall, the Magnificent 7 tech issues have turned in solid sales and earnings results for the recently concluded quarter; NVIDIA (NVDA) and Meta Platforms (META), up nearly 41% and 33%, respectively, so far this year, have been outsized share-price drivers. The other five of this group include Alphabet (GOOG), Amazon.com (AMZN), Apple (AAPL), Microsoft (MSFT), and Tesla (TSLA). Apple is a relative underperformer, given soft iPhone sales in China. Too, Tesla has been a drag, considering market pressures in the electric vehicle category.
Much optimism continues to surround companies involved in artificial intelligence (AI). One other noteworthy beneficiary is Arm Holdings (ARM), jumping almost 48% in value yesterday on news of AI-fueled chip demand. Notwithstanding this AI craze, which holds out the potential for widespread gains in company productivity and efficiency, there are signs that the stock market’s advance is broadening. Examples of this include the stocks of heavy equipment maker Caterpillar (CAT), up about 9%, year to date, equipment rental business United Rentals Inc. (URI), having risen more than 12%, and automaker General Motors (GM), improving over 7% in share price. Additionally, in the past few days the Russell 2000 (RUT) index of small cap issues has narrowed its performance gap with the three major indexes.
Investors appear to be shrugging off the likelihood that the Federal Reserve will not cut short-term interest rates, in one-quarter increments, as many as six times this year, beginning in March. The central bank is suggesting only three such cuts in the second half. Stock and bond pricing implies more than three cuts, starting in May. We note that a decent, in-progress, earnings season is supporting overall investor sentiment. It’s important to note that among Wall Street pundits talk has surfaced that, given solid economic growth and a healthy job market, there is the potential for inflation to reaccelerate. That would prevent favorable rate action on the part of the Fed. We do not expect such a scenario, but it is a possibility. Unfolding economic and employment data in the coming weeks and months bear close attention. Also, there is risk that the conflict in the Middle East will broaden, threatening, among other things, global shipping.
For now, we continue to advise investors to sustain holdings in sector leading companies, with strong cash flow generation, in their individual portfolios. It may be prudent to trim some exposure to the richly valued best performers, inclusive of the Magnificent 7, and reallocate some cash toward industrial, healthcare, consumer, and financial stocks. – David M. Reimer
At the time of this article’s writing, the author held positions in none of the companies mentioned.
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