By The stock market’s recent gains stand on three pillars, and the weakening of two of them is raising concerns about the rally’s sustainability.
Surface Strength
On the surface, the market appears to be doing well. The S&P 500 is set to gain 1.5% this week, with the Dow Jones Industrial Average and the Nasdaq Composite also showing gains of 1.5% and 1.2%, respectively. In fact, the S&P 500 is poised to reach an all-time high.
Surprising Resilience
Given the flood of news that markets had to contend with this week, it is surprising that the indexes have remained strong. Federal Reserve Chairman Jerome Powell delivered a more hawkish statement than expected, stating that investors should not anticipate a rate cut in March. This unexpected news caused the S&P 500 to drop 1.6% on Wednesday.
Fed’s Caution
The Federal Reserve’s caution can be understood in light of Friday’s red hot report on payrolls. In January, the U.S. economy added 353,000 jobs, surpassing FactSet’s forecast of 176,500. This strong data raises concerns that the economy may be overheating, making it less likely that the Fed will take action. The Atlanta Fed’s GDPNow tracker even predicted U.S. economic growth at 4.2% prior to the release of this report, indicating no signs of a recession but also not providing a reason for the Fed to intervene.
Chris Harvey, Chief U.S. Equity Strategist at Wells Fargo Securities, believes there will be a repricing of equities in the short-term, with rate cuts being implemented at a more moderate pace and in a later timeframe.
Big Tech Concerns
While strong economic growth may offset the Federal Reserve’s decisions, it cannot compensate for the weakness in Big Tech, which has been a major driver of the market’s upward movement this year. However, recent earnings reports from Big Tech companies have been mixed.
Overall, the stock market rally is showing signs of fragility, with the weakening pillars of the Federal Reserve’s caution and the uncertain performance of Big Tech raising concerns about the sustainability of the current upward trend.
Stock Market Faces Disappointing Earnings Reports
Alphabet, Microsoft, and Apple all fell short of expectations in their recent earnings reports, causing their stock prices to decline. Alphabet’s earnings beat estimates by a mere 3%, resulting in an 8.8% drop in the stock. Microsoft and Apple also experienced lower stock prices following their earnings announcements. However, Amazon.com saw a 7.2% increase in its stock price after reporting better-than-expected results on Thursday evening. Meta Platforms stood out as a top performer, with a 21% surge that contributed significantly to the overall gain of the S&P 500.
While some tech companies were able to deliver positive results, the rest of the market had a lackluster week. Out of the 502 stocks in the S&P 500, 271 ended the week higher while 231 finished lower. The Invesco S&P 500 Equal Weight exchange-traded fund remained unchanged, indicating a lack of market strength. This trend is consistent with the performance of stocks throughout the year, as slightly over half of the companies in the S&P 500 have seen declines.
The inability of tech stocks to sustain their upward momentum poses potential risks for the overall stock market, even though the S&P 500 is currently trading near record levels. Market analyst Craig Johnson warns against placing too much confidence in breakout trends without strong participation from other sectors. The market’s performance in early 2022 serves as a lesson, as stocks reached new highs only to plummet due to underestimated economic factors and Federal Reserve actions. While a decline this time might not be as severe as two years ago, the market could still encounter a challenging period in the coming weeks.
Amidst all the uncertainty, it is difficult to determine the decisive factors that will shape the market’s future. Will interest rate cuts be necessary? Can rapid growth counterbalance restrictive policies? Is there another industry that can take the lead, or will Amazon and Meta Platforms continue to dominate? These questions reveal the underlying fragility of the market, even though it may appear robust at first glance.
Ultimately, the stock market’s performance can continue to thrive, but there is also the possibility of a downturn. It is important to stay vigilant and prepared for any changes that may come.
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