Last week was another good week for US stocks. Both the S&P 500 and Dow Jones Industrials hit new all-time highs, the first time they’ve done so in two years. 

There was indeed a lot of supportive economic data last week. Unemployment initial claims dropped to their lowest levels in over 2 years. Retail Sales surprised to the upside.   Consumer sentiment (according to the University of Michigan survey) showed its largest increase on a 2-month basis since 1991, in turn reaching its highest levels since July 2021. Inflation expectations dropped to 3-year lows. Bottom line, the consumer and labor markets remain strong and inflation expectations remain well-behaved.

Last week, however, longer-term interest rates had their biggest one-week jump higher in three months. The 10-year Treasury yield, for example, moved to 4.15%.  Expectations for the Federal Reserve to start sharply cutting short-term interest rates cuts were also notably reduced.  This is interesting. In recent months this would have suggested price weakness in the stock market, especially in larger cap growth names. That was not the case last week.

A few additional reasons for the gains last week were (1) the renewed enthusiasm regarding artificial intelligence propelling some of the larger growth names, and (2) the money that continues to flow into passive/index funds. Regarding the latter, these passive flows, for the most part, don’t care about fundamentals, valuations, interest rates, policy decisions, or behavioral/technical factors.  In fact, the total AUM in passive assets just surpassed actively-managed assets despite some of the richest valuations in history.

Lasty, while it’s still early, we are getting more numbers regarding 4Q23 earnings.  So far, the earnings season has been surprisingly underwhelming. With 10% of S&P 500 companies reporting actual results, the blended (year-over-year) earnings decline for the S&P 500 is just under -2%.  On December 31, the estimated (year-over-year) earnings growth rate for the S&P 500 for Q4 2023 was just under +2%.  At this point though, year-over-year earnings growth is still expected to be nearly 12% in 2024 and +13% in 2025. Though do note that forecasted earnings per share (EPS) progression typically fall over the course of the year so these numbers will also surely decline in the quarters ahead.

In addition to more earnings report, this week has a few key economic reports, including 4Q GDP and more importantly the Fed’s favorite inflation indicator (PCE) released this Friday.  Regarding the former, which is released Thursday, the expectation is for 1.7%.  If that’s the case, that would be the lowest quarter of growth since 2Q22.  Interestingly, the Atlanta Fed's GDPNow is predicting Q4 2023 GDP at 2.4% (as of January 17th). As for the latter, the current estimate for PCE is for 3.0% year-over-year.  That’s still well above the Fed’s preferred target of 2%.


Add it all up...


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The views expressed herein are exclusively those of Orion Portfolio Solutions, LLC d/b/a Brinker Capital Investments a registered investment advisor, and are not meant as investment advice and are subject to change.

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