(Bloomberg) — Tech stocks led gains on Monday, with earnings for the most-influential segment of the US equity market about to get underway in a test of the 12% surge in the S&P 500 from its October low.
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Marquee names like Microsoft Corp. and Tesla Inc. are set to report results in the next few days, helping shape the fate of a sector that last year faced a reckoning on Wall Street amid higher rates. Such pessimism has faded in recent weeks as tech firms shift their focus to cost cuts and inflation shows signs of easing, with the Nasdaq 100 set for its best back-to-back rally since November.
The latest notable company to announce job cuts to lower expenses was Spotify Technology SA, which climbed on plans to slash about 6% of its employees. Also emboldening traders was a call from Barclays Plc upgrading Advanced Micro Devices Inc. and Qualcomm Inc., which spurred an almost 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 working in their favor is that following the last unsuccessful test in mid-December, the market didn’t go on to make new lows.”
Now one aspect to keep in mind — especially when it comes to corporate profits — is that stocks aren’t necessarily cheap at this stage. In fact, the S&P 500 may look expensive compared to historical levels given that earnings estimates have been falling for a while.
Another thing to consider is that if the US equity benchmark in fact bottomed on Oct. 12, that would be one of the highest valuation troughs ever, noted David Bahnsen, chief investment officer of his namesake wealth management firm. The S&P 500 was trading around 17 times relative to earnings at that time — 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 interest 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 projections, Bank of America Corp. strategists including Savita 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, in our view,” they added.
Investors are failing to price in a backdrop of weakening economic data and earnings, according to Morgan Stanley’s strategist Michael Wilson. Recent optimism around a less hawkish Federal Reserve, China reopening and a weaker dollar is already priced in, he wrote. Nevertheless, he does expect a stock rally in 2024 following a challenging 2023 as the US economy suffers through an earnings recession.
“Markets have leapt 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 recession.”
As the Fed enters the blackout period ahead of its Jan. 31-Feb. 1 meeting, markets have priced in a smaller — and more traditional — 25-basis-point hike. Even as several officials say rates must peak above 5% and stay higher for longer, markets remain skeptical. They still don’t believe policymakers will go above 5%, and they see the Fed cutting rates aggressively by the end of the year, according to Anna Wong at Bloomberg Economics.
Meanwhile, 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.
“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, chief investment officer of private wealth at Glenmede.
Treasury yields rose and the dollar was little changed.
Read: State Street CEO Says Treasuries at Risk in US Downgrade on Debt
Key events this week:
PMIs for 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 1.1% as of 2:39 pm New York time
The Nasdaq 100 rose 1.9%
The Dow Jones Industrial Average rose 0.7%
The MSCI World index rose 0.9%
The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0861
The British pound fell 0.2% to $1.2369
The Japanese yen fell 0.8% to 130.63 per dollar
Bitcoin rose 0.9% to $22,789.65
Ether fell 0.6% to $1,618.5
The yield on 10-year Treasuries advanced four 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%
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Vildana Hajric, Isabelle Lee and Peyton Forte.
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