Tech stocks led gains on Wall Street, with the most-influential segment of the US equity market about to kick off earnings in a test of the S&P 500’s 12% surge from its October low.
Giants like Microsoft Corp. and Texas Instruments Inc. are set to report results that will help shape the fate of a sector that last year faced a reckoning amid higher rates. While some traders are bracing for the group’s worst earnings slump since 2016, pessimism has recently faded as tech firms cut costs and inflation showed signs of easing. The Nasdaq 100 saw its best two-day run since November.
The latest notable company to announce layoffs to lower expenses was Spotify Technology SA, which climbed on plans to slash about 6% of its employees. Interestingly enough, despite the positive reaction to the industry’s cost-saving measures, not everyone is convinced that’s a good sign. Bank of America Corp. strategists including Savita Subramanian note that could herald waning demand.
It’s also worth noting that among all tech groups, chipmakers were by far the best performers Monday thanks to a call from Barclays Plc upgrading Advanced Micro Devices Inc. and Qualcomm Inc., which spurred a 5% jump in the Philadelphia Semiconductor Index. The S&P 500 crossed its key 4,000 mark – seen by several technical analysts as a make-or-break level that could define the gauge’s direction.
“We’re likely to find out soon whether this latest run is just another one of many false alarms or if it’s really ‘the one’,” according to strategists at Bespoke Investment Group. “One thing bulls have to work in their favor is that following the last unsuccessful test in mid-December, the market didn’t go on to make new lows.”
Now another aspect to keep in mind is that stocks aren’t necessarily cheap at this stage. In fact, the S&P 500 may look expensive compared with historical levels given that earnings estimates have been falling for a while.
If the US equity benchmark in fact bottomed on Oct. 12, that would be one of the highest valuation troughs ever, noted David Bahnsen, a chief investment officer of his namesake wealth-management firm. Back then, the S&P 500 was trading around 17 times relative to earnings – and bear-market bottom multiples are historically much lower than that, he added.
“Investors should not assume that the easy times in the market are coming back,” Bahnsen said. “We expect enhanced volatility and a focus on cash flow and quality for the foreseeable future.”
Read S&P 500’s Earnings Growth This Year Is Turning Into a Mirage
To Matt Maley at Miller Tabak + Co., the S&P 500’s current valuations don’t leave “a lot of leeway for disappointments.” And with higher rates, it’s going to be tough for the markets to keep rallying should earnings projections for 2023 come down further, he added.
Early fourth-quarter results show that the companies in the US equity benchmark are on track to miss expectations by 1% after analysts lowered their estimates, BofA’s Subramanian wrote.
The recent weakening of economic data alongside the anticipated decline in earnings expectations and weak 2023 guidance are pointing to markets that are likely to move lower, according to JPMorgan Chase & Co. strategists led by Marko Kolanovic.
“A recession is currently not priced into equity markets,” they added.
Optimism around a less hawkish Federal Reserve, China reopening, and a weaker dollar is already priced in, according to Morgan Stanley’s strategist Michael Wilson. Nevertheless, he does expect a stock rally in 2024 following a challenging 2023 as the US economy suffers through an earnings recession.
“Markets have leaped ahead this year, driven by China’s reopening, falling energy prices, and slowing inflation,” strategists at BlackRock Investment Institute wrote. “This has spurred hopes of a soft economic landing, plummeting inflation, and interest rate cuts. We see markets vulnerable to negative surprises – and unprepared for a recession.”
As the Fed enters the blackout period ahead of its Jan. 31-Feb. 1 meeting, markets have priced in a smaller 25-basis-point hike. Even as several officials say rates must stay higher for longer, traders remain skeptical. They still don’t believe policymakers will go above 5%, and see the Fed cutting rates by the end of the year, according to Anna Wong at Bloomberg Economics.
“Investors should be careful to temper their expectations for premature rate cuts, as the Fed will likely need to keep a restrictive footing on monetary policy throughout the year to fight inflation,” said Jason Pride, a chief investment officer of private wealth at Glenmede.
Meantime, Treasury Secretary Janet Yellen said she’s encouraged by progress on inflation, with energy prices and supply-chain issues easing across the globe even as the US labor market remains strong.
Treasury yields climbed and the dollar was little changed.
Read: State Street CEO Says Treasuries at Risk in US Downgrade on Debt
Elsewhere, oil prices fell slightly Monday as rising stockpiles in the US outweighed optimism that Lunar New Year festivities in China boosted demand.
Key events this week:
- PMIs for the US, euro area, UK, Japan, Tuesday
- Richmond Fed Manufacturing, Tuesday
- ECB President Christine Lagarde delivers a video message on “the euro as a guarantee of resilience,” Tuesday
- US MBA mortgage applications, Philadelphia Fed non-manufacturing activity, Wednesday
- US fourth-quarter GDP, new home sales, initial jobless claims, Thursday
- US personal income/spending, PCE deflator, University of Michigan consumer sentiment, pending home sales, Friday
Some of the main moves in markets:
- The S&P 500 rose 1.2% as of 4 p.m. New York time
- The Nasdaq 100 rose 2.2%
- The Dow Jones Industrial Average rose 0.8%
- The MSCI World index rose 1%
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.1% to $1.0867
- The British pound fell 0.2% to $1.2372
- The Japanese yen fell 0.8% to 130.69 per dollar
- Bitcoin rose 1.9% to $23,030.2
- Ether rose 0.4% to $1,635.31
- The yield on 10-year Treasuries advanced five basis points to 3.52%
- Germany’s 10-year yield advanced three basis points to 2.21%
- Britain’s 10-year yield declined two basis points to 3.36%
- West Texas Intermediate crude was little changed
- Gold futures rose 0.2% to $1,948.60 an ounce