Market Update

Global markets ended the week mixed. In the United States, the Dow Jones gained 0.76%, the S&P 500 rose 1.19%, and the NASDAQ rallied 2.26%. Information Technology (4.32%), Communication Services (1.95%) and Financials (0.95%) were the strongest performing sectors. Utilities (-3.70%), Energy (-3.04%) and Real Estate (-2.13%) were the weakest sectors. US bond yields rose. The Eurozone indices fell 0.69%. Japan’s Nikkei rose 1.09% while the Chinese Hang Seng fell 5.76%.

Central Banks Caution Against Rate Expectations

Federal Reserve voting members continued to signal caution against a perceived overly optimistic rate cut schedule in 2024. This pushback against market expectations has been consistent over the last year, as officials seem to be hesitant to cut and have a repeat of the 1970s runaway inflation. The month-over-month inflation figures suggest we should see another step down in inflation over the next two months. We are still 1.4% over the 2% inflation target.

Earnings Season

Fourth quarter earnings season is currently underway, with about 10% of the S&P 500 constituents reporting. Earnings have largely been in financials, with some consumer staples and technology companies beginning to report. Top line revenues continue to beat estimates by 0.63% and bottom-line earnings outperform estimates by 8.22%, a positive sign for the broader economy. This comes on the backdrop of earnings estimates trending flat to down over the last two years. Forward P/E has risen to 22.48, a slight premium over the historical P/E 19.18 for the last 10 years. Rather than this being a measure of relative expensiveness, it could reflect the prevalence of technology companies in the index.

Macroeconomics

The United States continued to show strong economic data as initial jobless claims came in lower than expected. Retail sales, housing starts, and sentiment paint a picture of a more confident consumer. CPI figures out of the UK, Japan, Canada, and Germany reinforced the picture of sticky December inflation.

Artificial Intelligence Continues to Fuel Tech Stocks

Super Micro Computer rallied 24.68% following significant upwards revisions of it’s earnings guidance. The growth reflects the reflects the real-world demand for the servers and liquid cooling solutions that are used in artificial intelligence models. Chip makers NVIDIA (+8.74%) and AMD (+18.88%) continued to rally on sustained optimism over the sector.

While the real-world impact of these models becomes increasingly evident, markets are showing increases in the P/Es of the companies. While we are generally optimistic about the prospects of this sector, we would caution against becoming too consolidated in specific positions.

Republican Political Field Narrows

Ron DeSantis withdrew his candidacy for the Republican presidential race, citing no clear path to victory. This leaves only former President Donald Trump and Nikki Haley remaining ahead of the New Hampshire primaries. Data journalism website 528 shows Mr. Trump as the probable winner with 50.7% of the expected vote vs Haley’s 36.7%. If Haley fails to win the moderate state, it would be hard to see a pathway to her securing the Republican Party nomination.

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