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Market Momentum: Balancing Caution with Opportunity

Climbing the market momentum with caution.

The stock market has consistently reached new highs over recent months, leading to expectations of a brief consolidation period to establish a more stable foundation. As the earnings season continues, with a majority of companies meeting expectations, the frequency of surprises has been somewhat lower than historical averages. Factors poised to influence market trends include upcoming economic data, earnings announcements, and geopolitical developments.

Inflation concerns persist, although at reduced levels from their peak, prompting expectations for continued higher interest rate by the Federal Reserve to curb inflation, potentially slowing stock momentum. Despite high consumer confidence, the delayed effects of interest rates are having a tempering effect on the economy.  We have seen robust job growth, resilient consumer spending, and the possibility of future rate reductions. The employment report was exceptionally positive, yet recent weeks have seen an uptick in technology sector layoffs.

Monday, the S&P 500 had a slight dip, retreating from its peak levels following comments from Federal Reserve Chair Jerome Powell that downplayed the likelihood of a rate cut in the upcoming March meeting.  The market is in need of a consolidation period and will probably take a pause at some point to regroup pending new economic data.  The market is going to be dependent on earnings growth and business expansion.

Companies such as Palantir Technologies and NXP Semiconductors exceeded earnings forecasts, while Eli Lilly also saw a significant share price increase due to strong earnings propelled by its weight loss medications, rapidly becoming a favored company on Wall Street and achieving high valuation rankings within the S&P 500.

The market is riding a wave of momentum, yet concerns over valuations loom, though the situation appears more manageable when excluding the “Mag 7.” Despite this, the market is anticipated to undergo some consolidation, the “Mag 7” continues to dominate market dynamics. Excluding these companies, the S&P 500’s valuation stands around 15.3% according to FactSet, contrasting around 23.3% when they are included, against a historical average of 17.2% since 1928.

Looking ahead to Tuesday, investors will focus on the Federal Reserve’s report on household debt and credit for the fourth quarter, along with speeches from several central bank officials.  The household debt and credit will be an indication on the direction of consumer spending and inflation related issues.  Consumers struggling with debt will slow spending.  Higher interest rates are lagging, and the effects should be hitting the economy in the next 6 months with such a steep rise in 2023.

As the earnings season reaches its midpoint, key reports from companies like Amgen, Chipotle Mexican Grill, and Ford are expected post-market close.

While the U.S. economy demonstrates resilience, the market’s recent optimism underscores the importance of risk management, discipline, and patience for long-term investment strategies. The market is likely to favor companies showing tangible quality in earnings and product offerings. Although the risk of a recession seems low, the market’s rapid ascent in 2023 is expected to become more discerning, favoring firms with strong fundamental growth attributes. Investors are encouraged to closely monitor such entities as they navigate through an economy that, despite its strength, faces ongoing inflationary pressures.

Key Points:

  • Recent stock market highs suggest a need for consolidation to establish a stable foundation.
  • Earnings season shows many companies meeting expectations, with fewer surprises than usual.
  • Inflation concerns remain, prompting expectations of higher interest rate for longer to slow economic momentum.
  • Consumer confidence is high, but rising interest rates are starting to temper economic growth.  Investors will be looking at the Federal Reserve’s report on household debt and credit will offer insights into consumer spending and inflation.
  • High P/E ratios raise concerns, especially including the dominant “Mag 7” tech stocks.  However, removing the Mag 7 the market seems fairly priced.  Market rebalancing is anticipated eventually, with the S&P 500’s valuation at 15.3% excluding “Mag 7” compared to 23.3% including them.  This has been elusive, and the Mag 7 has consistently leading the market.
  • Investors should continue to focus on growth companies demonstrating strong earnings and product.

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