The week concluded on a positive note for U.S. stocks, marking all-time highs as speculation surrounding a potential Federal Reserve interest rate cut boosted confidence in Corporate America.

Technology Sector Drives Rally

The technology sector spearheaded the rally, fueled by optimism regarding the ongoing growth of artificial intelligence.

Record Highs Despite Concentration Concerns

Despite concerns about concentrated gains in specific stocks, the S&P 500 reached a record high, erasing losses from the week.

Supportive Factors For Bulls

A drop in Treasury volatility, signaling a favorable environment for risk-taking, coupled with a positive report on consumer confidence and lower inflation expectations, provided a green light for bullish sentiment.

Rate-Cut Pushback From Fed Officials

Amidst the rate-cut speculation, several U.S. central bank officials pushed back. Fed Bank of Atlanta President Raphael Bostic advocated for a cautious approach to easing, while Fed Governor Christopher Waller questioned the need for aggressive rate cuts, at least for the time being.

Changing Rate-Cut Expectations

Traders, initially anticipating six rate cuts in 2024, have scaled back their expectations to five. There is also a reduced certainty about a rate cut in March compared to year-end projections.

Market Momentum

For the week, the Dow Jones gained 0.7%, the S&P added 1.2%, and the Nasdaq Composite climbed 2.3%, propelling all three major stock market averages into positive territory for the year.

Here are the closing levels on Friday, January 19^th, 2024: 

The S&P 500 has surged approximately 35% since October 2022, with potential for further gains. The dominance of the “Magnificent Seven” tech companies persists in leading the market in 2024.

Concerns Amidst Optimism

Despite investor favoritism towards growth, technology, and the AI sector, warnings persist about potential increased volatility due to narrow market leadership. Better-than-expected growth and lower inflation provide the Fed with flexibility to cut interest rates.

Market Predictions

UBS’s Chief Investment Officer predicts an economic soft landing, setting S&P 500 price targets of 4,900 and 5,000 in June and December, respectively. Traders closely monitor central bank officials’ remarks, suggesting that markets may be overpricing the expected pace and amount of Fed rate cuts.

Tech Equity Inflows And Market Sentiment

Tech equity funds experienced the largest two-week inflow since August at $4 billion, according to Bank of America Corp., citing EPFR Global data. However, this surge leaves the Nasdaq 100 priced above 30 times profits, among the higher readings on record.

Market Skepticism and Continued Rally

While there are echoes of a potential bubble or irrational exuberance, the markets continue their upward trajectory. Until the last bear is convinced, signaling a shift from skepticism to optimism, the rally is likely to persist.

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.