February 2024 Market Lookback

Powered by positive earnings surprises and solid economic data, the S&P 500 closed above 5,000 for the first time ever on February 9, and was on its way to another strong month of gains. Meanwhile, inflation data surprised to the upside, and Federal Reserve officials noted that they were not yet confident enough in the progress made to begin cutting rates. As a result, investors were forced to lower their 2024 rate cut expectations from six at the start of the month to three by the end of it.

Macro

•   353k nonfarm jobs were added in January, while the prior two months were revised up by 126k.

•   Owing to extreme weather around the country, the average work week fell from 34.3 to 34.1 hours, the lowest level since March 2020.

•   The Supercore PCE Price Index, a measure of inflation the Fed has called attention to, ticked up to 3.5% y/y in January, the first acceleration since July 2023.

•   The Conference Board’s Consumer Confidence Index fell from 110.9 in December to 106.7 in January, as sentiment surrounding job availability soured.

•   Manufacturing surveys conducted by regional Fed banks showed that activity levels were at their best levels since July 2022, buoyed by an improvement in new orders.

Equities

•   The S&P 500 surpassed its previous all-time high and closed the month at 5,096.

•   Bottom-up 2024 EPS estimates for the S&P 500 moved up from $242 to $243 in February, while top-down strategist estimates rose from $240 to $241.

•   With 97% of S&P 500 stocks having reported results, the earnings surprise rate was 6.3%.

•   Growth stocks outperformed value stocks by 3.2 percentage points, which is the fourth out of the last five months of outperformance.

•   Emerging market stocks beat developed market stocks for the first time since October 2023 and by the most since November 2022.

Fixed Income

•   Treasury yields rose 30-40bps across the curve, as robust economic data pushed investors to lower their 2024 rate cut expectations from six to three.

•   U.S. investment grade corporations issued $195 billion in bonds in February, surpassing last month’s record for the highest issuance month ever.

•   High yield bond spreads finished the month at 361bps, the narrowest level since January 2022, before the Fed began its rate hiking cycle.

Earnings Euphoria

With earnings season just about over, saying that results were positive would be an understatement. Earnings grew ~10% y/y, beating consensus estimates by more than 6 percentage points. The dominant theme is still artificial intelligence, both from the perspective of semiconductor companies that are benefiting from robust chip demand for large language models, and the expectation of productivity enhancements from generative AI. The theme carried the torch for much of last year and that hasn’t changed so far. The confluence of these factors culminated in the S&P 500 surpassing 5,000 points, a key psychological level.

Given the importance of AI for the rally, all eyes were on Nvidia’s February 21 earnings report as a bellwether for the theme’s strength and staying power. Investors got that and then some, as Nvidia posted strong results and delivered strong guidance. That helped AI stocks rally over 10% the day after, while major stock indexes more broadly had their best day in over a year. But what might be even more important is that an obvious catalyst for a significant selloff moved further out of sight. And so, even though stocks were mostly flat the last week of February, the month as a whole was strong and sentiment remains bullish.

Rally Catching Its Breadth

After rising a little over 5% through the first three weeks of February, the S&P 500 and Nasdaq 100 rose just 0.2% the rest of the month. The recent consolidation isn’t necessarily a sign that the rally has lost steam and we’re set for a pullback. Instead, it could just be that after a busy month of earnings and Fedspeak, markets are simply catching their brea(d)th.

There are many ways to measure breadth, with one being analyzing how many stocks in an index are trading at 52-week highs. While it’s true that AI stocks and the Magnificent Seven have been at the forefront of the rally year to date, more than 8% of Russell 3000 stocks are also at 52-week highs, representing over 240 companies. Moreover, these companies are spread out through a variety of sectors, including Industrials, Financials, and Health Care. That might not match the breadth seen in early 2021 but is still solid, nevertheless.

While solid breadth metrics on their own aren’t sufficient for stocks to rally, they can help ensure the durability of a rally. Over-reliance on a handful of stocks exposes investors to more idiosyncratic risk, as we saw when almost the entire investing world zeroed in on Nvidia’s earnings report. The AI theme passed that test so far, and further reinforced investor risk appetite while contradicting the bearish idea that many of these stocks are due for a sharp pullback. Time will tell, but the bull thesis is still in the lead.

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