Welcome to this week’s edition of Market Movers Weekly. This week in the stock market, the S&P 500 achieved a new high, driven by strong performances in sectors like Netflix and chip stocks. The overall market trend was positive, with both the Dow Jones and the Nasdaq Composite trading higher, reflecting a broader upward momentum influenced by various factors, including Intel's impact on the tech sector.
The Core Personal Consumption Expenditures (PCE) index indicated a moderation in inflation, marking a slow growth rate since March 2021.
The preliminary estimate of the US GDP for the fourth quarter suggests a potential "soft landing" for the US economy. The upcoming Federal Reserve meeting is highly anticipated, with the market expecting a steady approach to interest rates and discussions about potential rate cuts later in the year.
This meeting is particularly significant as investors are eager to understand the Fed's perspective on recent inflation data and the risks associated with early rate cuts.
Also drawing attention are the impending earnings reports from major tech companies like Alphabet, Microsoft, Meta, Amazon, and Apple, given their significant impact on global economic trends and investor portfolios.
The U.S. economy's robust growth in the fourth quarter of 2023 has positively influenced market sentiment. However, challenges remain, including the effects of the Federal Reserve's interest rate hikes and geopolitical uncertainties in a presidential election year.
The coming week is critical for Wall Street, with major tech earnings, the Fed's monetary policy decision, and the January jobs report being key events. These will provide insights into the labor market's condition and are pivotal in shaping market dynamics in a period of economic uncertainty.
While the S&P 500's streak of record highs came to an end, the overall stock market still achieved a weekly gain.
On Friday, the stock market exhibited mixed results as investors contemplated the latest inflation data in light of the forthcoming Federal Reserve meeting focused on interest rate policies. The S&P 500 (^GSPC) ended slightly lower, interrupting its recent record-setting trend, yet it still managed a positive outcome for the week.
Meanwhile, the Dow Jones Industrial Average (^DJI) saw a modest rise of about 0.2% or 60 points. Contrarily, the Nasdaq Composite (^IXIC) declined by approximately 0.4%, influenced by the underperformance of the tech sector.
The tech sector's lag was particularly marked by Intel's (INTC) disappointing first-quarter outlook, which fell short of Wall Street's expectations. This adversely impacted the AI-boosted enthusiasm that had previously propelled the market to new heights.
Intel's shares plummeted by nearly 12%, and this downturn also affected its industry counterparts, AMD (AMD) and Nvidia (NVDA), albeit to a lesser extent. Inflation data released in the form of the December Core Personal Consumption Expenditures (PCE) index, the Federal Reserve's favored inflation measure, showed a slowdown, dipping below 3% on an annual basis for the first time since March 2021.
This decline, in conjunction with a higher-than-anticipated preliminary estimate of the US GDP growth for the fourth quarter at 3.3%, hints at the potential for a "soft landing" of the US economy.
The Federal Reserve's initial policy meeting of the year is drawing close, with widespread expectations for the maintenance of steady interest rates. However, the recent sequence of positive economic indicators might lead to a shift in policy, possibly initiating rate reductions later in the year, potentially starting in March. This scenario presents a delicate balance for Fed officials, as an early start to the easing cycle could inadvertently rekindle inflation.
Additionally, investors analyzed Friday's batch of corporate earnings for deeper insights into the condition of corporate America and broader economic trends. Notably, Colgate-Palmolive (CL) reported robust fourth-quarter results, especially from its Latin American markets. Conversely, Visa (V) projected a cautious revenue growth outlook, with some analysts pointing to a declining trend in US payments volume growth towards the end of the year, signaling a possible economic deceleration.
Tech Earnings: A Look At The Week Ahead
The first Federal Reserve (Fed) meeting of the year is imminent. Chair Jerome Powell is poised to shed light on the Fed's perspective, focusing on recent inflation data that suggests a continuing easing of pricing pressures.
Investors are keenly interested in how the Fed will handle the timing of potential interest rate cuts, especially considering recent hints from officials that such cuts may be deferred until later in the year. Powell is expected to address queries about the 2024 easing cycle's schedule.
The forthcoming week is also pivotal for the tech industry, with major companies reporting their quarterly earnings.
Alphabet (GOOG, GOOGL) and Microsoft (MSFT) are due to report first on Tuesday, with Meta (META), Amazon (AMZN), and Apple (AAPL) following on Thursday. These companies are integral to the global economy and investor portfolios, with their performance significantly influencing stock market returns.
Their combined market value is in the trillions. The tech sector's recent layoffs have been a major topic this year, and the advancements in artificial intelligence (AI) tools by these companies are anticipated to be a focal point in their earnings discussions.
The U.S. economy experienced a significant upturn in the fourth quarter of 2023, surpassing analysts' forecasts
The U.S. economy indeed showed robust growth in the final quarter of 2023, aligning with your description. The Commerce Department reported a 3.3% annualized increase in GDP for Q4, which did exceed Wall Street's expectations. This growth was driven primarily by an increase in Americans earning and spending more.
Additionally, the economy added 2.7 million jobs in 2023, and consumer confidence remained strong. The year-over-year GDP growth from Q4 2022 to Q4 2023 was 3.1%, compared to a 0.7% increase from Q4 2021 to Q4 2022. These figures indicate a significant acceleration in economic growth for 2023.
Tesla's Share Value Dips Due to Slow Sales Growth and Increasing Competition
Tesla shares saw a sharp 12% decline on Thursday, wiping out $80 billion in market value. This significant drop contributed to a total loss of about $210 billion in market capitalization since the beginning of 2024. The decline was attributed to warnings of slower electric vehicle sales growth for 2023 and increased competition, particularly from Chinese automakers like BYD.
In its recent earnings call, Tesla projected that its sales growth in 2023 might lag behind the previous year's 38% increase. This is partly due to the company's focus on developing a new, potentially lower-priced model. The latest quarterly financials showed a 3% increase in revenue to $25.17 billion, below the $25.87 billion expected, and a 40% decrease in adjusted earnings per share. This marked the end of a period of strong performance since early 2021 and a deviation from Tesla's long-term 50% annual growth target.
Operational challenges, including production cost increases and ongoing supply chain issues, have pressured Tesla's profitability, with the company's operating margin halving to 8.2% in the fourth quarter compared to the previous year. Analysts expressed concern over Tesla's strategies to address these challenges.
Despite these setbacks, some analysts remain optimistic about Tesla's future, particularly with the anticipated launch of the lower-cost vehicle and possible favorable economic conditions, such as potential interest rate reductions.
JPMorgan Warns Geopolitical Risks May Hinder Fed Rate Cuts
JPMorgan Chase strategists warn that geopolitical tensions and political uncertainties might influence investors' expectations for Federal Reserve interest rate cuts in 2023. While there was initial market optimism about the Fed reducing its benchmark short-term borrowing rate, perhaps as early as March or by May, this outlook is now tempered by risks that may prompt a more cautious stance from the Fed and other global central banks.
Markets have recently adjusted their expectations, now anticipating less aggressive rate cuts, around 140 basis points, compared to the previously anticipated 170 basis points for 2024. JPMorgan's team emphasizes the importance of these factors for investors as they assess the trajectory of stocks and other assets.
Chief equity strategist Marko Kolanovic points out potential disruptors such as Red Sea tensions and the U.S. presidential election, which could influence the disinflationary trend aiding the Fed's inflation targets. The recent equity rally, driven by expectations of early rate cuts in a disinflationary environment, now faces new challenges.
Disruptions in shipping and supply chains, along with potential energy price increases, might slow the anticipated disinflation. Despite some Fed officials, like Atlanta Fed President Raphael Bostic, indicating no haste to cut rates before the third quarter, futures traders have revised their expectations, predicting a rate cut around May or June.
Kolanovic underlines the importance of the timing of these rate cuts, as they reflect the underlying economic reasons for such policy decisions. Upcoming economic indicators, including the fourth-quarter GDP growth and personal consumption expenditures price index, will be crucial in shaping the economic landscape and influencing the Fed's policy path.
Wall Street faces a crucial week with pivotal earnings reports and key economic data set to shape market trends
The upcoming week is shaping up to be a pivotal period for Wall Street in 2024, as it coincides with the heart of the earnings season. Investors are keenly awaiting results from major tech companies, often referred to as the "Magnificent Seven," including Alphabet, Apple, Amazon, Meta Platforms, and Microsoft.
The performance of these companies is particularly crucial as they have been key drivers of recent market rallies and now face the challenge of validating their high market valuations amidst various economic conditions. Additionally, the Federal Reserve's upcoming monetary policy decision is garnering significant attention. Markets have been fluctuating between optimism for potential rate cuts and uncertainty about the central bank's stance.
Factors like Tesla's recent weaker-than-expected results have prompted analysts to reevaluate concerns over the tech sector's valuation. Moreover, the release of the January jobs report is imminent, offering vital insights into the labor market's status during a time of economic ambiguity.
Economists expect a slight uptick in unemployment, which could provide indications about upcoming economic trends and influence the Federal Reserve's policy direction.
As the S&P 500, Dow Jones, and Nasdaq Composite approach what could be their 12th winning week in 13, investors find themselves balancing the prospect of sustained growth against the potential for market corrections.
The outcomes of both the tech earnings and the Federal Reserve's decision are expected to significantly shape the market dynamics, rendering the forthcoming week one of the most consequential of the year.