Thu, 02/29/2024 - 09:42
After the wild ride that was the coronavirus lockdowns and post-pandemic inflationary recovery period, 2023 brought some welcome stability and growth for US stocks. Unlike the rapid boom-bust cycles of 2020–2022, last year provided a steady bull market environment that saw the S&P 500 gain almost 27% in the space of around twelve months, with the Nasdaq 100 more than doubling these gains to record a 55% increase in 2023. And, while China’s equities market has struggled to maintain any kind of bullish trend long term, US stocks have managed to retain their positive momentum well into this new year.
In fact, just this past Thursday (22/02), the S&P 500 closed at a fresh record above $5100 after a rally in AI giant NVIDIA drove this premier US index up to new heights. Despite minor corrections later in the week, price quotes remain in and around this new ATH. The tech-heavy Nasdaq 100 also managed to rise above a key psychological level of $18,000, which is also very encouraging considering the lack of a firm rate cut timeline from the Fed. As we await more crucial economic data and news in the coming days, many traders and investors will be wondering how long the equities party will continue. With this in mind, we’ll be looking at a few of the major factors that will determine stocks’ performance through to the end of this year.
Don’t discount the Fed
The power of the US Federal Reserve to move markets is well known by now. Indeed, the rollercoaster ride of ups and downs since 2020 should be more than enough proof of it. In fact, many of the gains made in stocks since the start of 2023 have been at one time or another attributed to expectations of rate cuts to come. Well, fast forward one year, and we’re still to see any hard announcements of rate reductions on the horizon from Powell and his band. It’s been made clear that the Fed is taking a “wait-and-see approach”, and we might just have to wait for something big before they start slashing. It appears that the market understands this, since the CME Group’s FedWatch tool is showing that only 63% of traders currently expect the Fed to start cutting rates by June (compared to 98% at the end of January). Meanwhile, 83.6% predict the first cut will come in July. As is to be expected, much of the US regulator’s decision-making process will be tied to how close it is to bringing inflation down in line with the 2% target. This Thursday (29/02) will see the release of the January numbers for the Fed’s preferred inflation gauge, the PCE (Personal Consumption Expenditures) report, which is expected to show sticky inflation above 3%. Reports on gross domestic product (GDP), jobless claims, and manufacturing activity – also due this week – will help analysts envisage a time frame for rate cuts. With cuts thus not yet priced into US stocks, this would suggest further rallies to come in 2024.
Earn your keep
Beyond the wide-reaching general effect of interest rates, the fortunes of individual stocks are largely driven by the performance of the underlying companies – and there’s no better metric of corporate strength than earnings reports. This first quarterly earnings season has already seen strong reports by several tech firms, but the most impressive of all has had to be NVIDIA whose revenue is up 265% as demand for its state-of-the-art GPUs has skyrocketed on the wider adoption of large AI models across a range of industries. Even more impressive, the company’s quarterly net income was reported at $12.29 billion (or $4.93 per share), up 769% on last year’s $1.41 billion for the same period. Zoom is another IT-based company that has released some very exciting earnings data of late, with the video conferencing giant reporting net income of $298.8 million (or 98 cents per share) for the quarter that ended 31 January and bagging gains of more than 13% in extended trading this Monday following the news. This was particularly encouraging since the same period last year generated a modest loss for Zoom. Meanwhile, software-as-a-service firm Salesforce (CRM) will be announcing its Q4 2023 results today (28/02) and Oppenheimer analyst Brian Schwartz predicts earnings per share (EPS) of $2.09 (up 24.4% YoY) on revenue of $8.5 billion. In fact, Schwartz sees CRM remaining well-positioned for double-digit revenue growth in this fiscal year. While in isolation this kind of data may not mean much, taken together we see a clear trend towards stronger economic performance for competitive and otherwise healthy companies, which is a strong long-term bullish indicator for stocks.
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