S&P 500 continued higher Friday, with only two decent selling attempts – first following the revised CPI spike, then in the first half of the regular session. Positioning continues being bullish, no matter the heavily challenged breadth – I‘m though not looking for this steady pace of gains to continue through Tuesday‘s CPI as the revision in effect raises the disinflationary bar a little, but it would be overcome nonetheless. Still, it‘s the strong earnings, sales and job market fueling sentiment that fundamentally drives this rally as much as recessionists throwing in the towel.
For all the P/E ratios that get thrown around often with respect to the tech space, I would say that this was worse last year when NVDA was objectively more expensive relative to earnings or sales, hence I called already early Nov for it to overcome $500 mark later on. True, market breadth was much better in the Nov-Dec period than now, but these divergencies notoriously take long to get resolved – and we‘re not at a top yet. The narrower the advance, the more danger it brings.
Yields aren‘t yet squeezing the economic growth, and there is plenty apart from the strongest two (MSFT and NVDA) that‘s going well – I had been bullishly covering discretionaries lately, bringing up AMZN already last year as an outperformer within the sector, and the higher the disposable income you go, the better those retailers are doing (and I don‘t mean just LULU that‘s relatively lagging if you examine specialty retailers).
Look also at financials and industrials that I was also talking favorably in the past months – and add in materials waking up, which corresponds to the manufacturing sector (PMI) finely recovering too, and you get easily what that means for risk taking and asset prices in general, medium-term.
At one point, rising yields and acknowledgement that the Fed doesn‘t want to cut too much too soon, would though force a serious decline in stocks (valuations that are a function of liquidity – if in doubt, look at Bitcoin and miners to see we‘re still in risk-on) – most likely around Mar FOMC, and that would be rhyming with USD upswing keeping gold, silver and commodities still in check by then. Copper for now is projecting the image of low inflation, continuing disinflation – and Tuesday‘s CPI whether core or headline, wouldn‘t diverge from that.
Reminding of key Friday‘s points, you‘ll come to the conclusion that this is no mania yet:
(…) But I had been clear throughout all of 2024 that the top isn‘t in, and that the grind higher in equities is to continue no matter what rate cuts expectations and actual yield path would do. Monetary policy normalization in Japan is some two months away, more China stimulus would hit before that, and Treasury is all too happy to put the foot off the pedal when it comes to long-term debt issuance – these are all bullish factors behind the stock market advance as much as earnings, good earnings… making the participants set aside the soft landing vs. no landing conundrum, and keep driving stock prices higher.
I‘ve served clients plenty of opportunities and ideas how to make the most of the advance by selecting sectors or stocks that are bound to outperform, and have proved so as well – quoting yesterday‘s article (how did you like the ARM move? Just yesterday I brought this stock up as AI results in various beneficiaries, with NVDA momemtarily struggling at $700 after I called for it in the autumn to break $500 with ease…
Big Picture Recap
Time to remember the big picture and latest successes – following the S&P 500 slide on somewhat self-contradictory FOMC, we got a daily takedown of MSFT on earnings, then continued confirmation of strong consumer via solid XLY still getting outperformed by AMZN, apart from XLF and XLI doing well, you have healthcare turning (I prefered LLY over JNJ last year – I talked LLY late 2022 already thanks to their rich pipeline of products coming).
Non-farm payrolls gave you another stellar success both swing and intraday, and the Russell 2000 strength is great if you consider (select) regional bank woes (even Janet was talking these, and I called for this point being the key candidate to force Powell‘s hand into cutting soon, if need be) and XLRE kind of on the edge, smallcaps are doing still great. This is not the environment where reversals are born, this is not the 1999 style mania either – this is still an orderly medium-term advance higher, and that‘s against the backdrop of still to be slowly rising yields. You can take advantage as clients did and do, both in ES and DAX intraday…
Let‘s move right into the charts – today‘s full scale article contains 5 of them, featuring S&P 500, yields, precious metals and oil.
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S&P 500 and Nasdaq
Graphical warning sign, which is likely to force a correction than a top that wouldn‘t be surpassed. That top would be surpassed, but the air is getting progressively thinner.
Credit markets
Yields haven‘t yet topped, and the rate cutting enthusiasm isn‘t yet in my view sufficiently dialed back. The path higher would start to raise doubts over soft landing, but we aren‘t there yet.