This morning is very light on earnings and economic news, with no reports of note scheduled for release on either front. The lack of headline news will likely keep the eyes of Wall Street on the Federal Reserve and the inflation situation ahead of next week’s much-anticipated two-day Federal Open Market Committee (FOMC) meeting and some key price reports for the month of May. Those reports on consumer and producer prices are due next Tuesday and Wednesday, respectively.
The likelihood of the central bank pausing on the interest-rate front next Wednesday currently stand at around 65%. The increasing possibility of a pause and Wall Street’s continued focus on the artificial intelligence (AI) movement has powered the equity market averages, particularly the technology heavy NASDAQ Composite, considerably higher. It should be noted that the broader S&P 500 Index finished yesterday’s session 20% above where it traded at its 12-month nadir in October of 2022, which suggests that we are in a bull market. Yesterday’s close marked the end of the longest bear market for the S&P 500 Index since 1948. The equity futures are indicating a mixed opening to the trading day stateside, with the Dow Jones Industrial futures moving modestly lower, while the NASDAQ is looking at a slightly higher start. The S&P 500 futures are relatively flat.
The strong upward market action yesterday was powered by some AI-driven commentary from mega-cap companies Tesla (TSLA) and Amazon.com (AMZN). Investors reacted favorably to a report from a major investment bank saying that Amazon’s AI efforts could materially increase Amazon Web Services (AWS) revenue by the fourth quarter of this year. This gave a boost to Amazon’s stock and much of its technology brethren. The NASDAQ 100 was a big winner during yesterday’s bullish session. The AI commentary has proven to be a major tailwind for the technology stocks, with chipmaker NVIDIA’s (NVDA) quarterly results and commentary last month bringing the AI talk to the forefront. That report put the spotlight on artificial intelligence, and the stocks of the tech companies investing heavily in building out their AI platforms and services are on a remarkable bull run.
The market also got a boost from yesterday’s report from the Labor Department showing that initial jobless claims for the week ending June 3rd totaled 261,000, which far exceeded the consensus forecast calling for 235,000 and the previous week’s tally of 233,000. Although this weekly release is not considered a major economic report, it does add to the narrative that the Fed’s goal of trying to slow down the labor market in an attempt to cool wage growth and tame inflation is working. This raised the hopes that the Fed will pause on the interest-rate front next week. Not surprisingly, the higher-growth sectors, particularly the technology stocks, performed very well. We think that next week’s Federal Reserve monetary policy decision-due Wednesday June 14th at 2:00 P.M. (EDT)—will play a huge role in whether the current bull market has some more room to run or if it takes a breather.
The recent run-up in the price of the S&P 500 Index now has it trading above 18 times 12-month forward-looking earnings. This price-to-earnings (PE) multiple is above its 10-year average of 17.3, which suggests that the market may be getting a bit pricey and at the current valuation it is more susceptible to some profit taking on disappointing news. The worries about the debt ceiling are out of the way, but there is still uncertainty about the Federal Reserve’s thinking on interest-rate policy, and many market pundits think at least a mild recession is likely later this year. The market appears to be ignoring the weakening economic indicators and the continued inversion of the Treasury market yield curve (two strong indicators of a recession) and focusing on some lagging indicators, including the employment data. Given this backdrop, we still recommend that investors look at the stocks of high-quality companies that have a history of generating steady earnings and cash flows even during the less-than-ideal stretches for the U.S. economy. In general, we would be less focused on what industry the company is in and more cognizant of how financially sound the company is. Value Line’s stock-screening capabilities allow investors to easily target top-ranking equities for Safety and/or Timeliness. To learn more please visit valueline.com. – William G. Ferguson
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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