What we're watching
📈 S&P 500 goes into the week with momentum: The S&P 500 closed Friday at another record high as results from Amazon and Meta boosted investor morale after their Big Tech colleagues failed to wow. With little economic data on tap, it's all about quarterly results and outlooks this week.
🍔 Back to the 493: With only Nvidia remaining to report in late February, investors will turn their focus towards some of the "smaller" companies making up the other 10 sectors of the S&P 500. And by smaller we're talking about giants McDonald's ($215 billion market cap) and Palantir (one of our most searched stocks), which lead Monday's lineup, along with Allegiant, Caterpillar, Chegg, and Estee Lauder.
🌳 How to say ESG without saying ESG: No one wants to utter those three letters right now, and there has only been nine direct mentions so far in earnings calls this season. Two years ago, there were 156 mentions. Now, we're hearing terms like "green economy" and "energy transition."
What we're reading
📊 10 charts that show the economic forces staving off recession: An excerpt from our latest Chartbook, these charts help explain why the US economy surprised economists by adding 353,000 jobs in January — far more than the 185,000 they expected. To name a few: mapping the low 3-month moving average of the unemployment rate compared to the past 12 months, disinflation putting money back into our pockets, and immigration easing a labor shortage.
🏷️ People working less per week could be a risk: That January blockbuster jobs report may have been strong, but average hours worked had declined. Some economists see this trend as worrisome, pointing out that often occurs around a recession. But other factors are afoot — like a changing retail landscape.
📏 Viewing the market through relatives and absolutes: The S&P 500 is at record highs. The economy is growing. The economy is cooling. It can all get somewhat confusing, and this column highlights some of the trends that can seem mutually exclusive — but aren't.
Big Tech doesn't feel very 'magnificent'
Old habits die hard, in investing and in life.
Take for example an employee who has been doing the same thing for a decade, then gets a promotion in large part because of what they were doing the last decade. It's evolve or die in this new role — risk clinging to the past and its myriad of practices, or embrace the future and crush it.
The same could be applied to investors at this very moment in time.
Evolve your thinking around the Magnificent Seven trade that has brought you immense paper profits the past year, or get your portfolio blown up in the not-too-distant future.
Am I being too harsh? Maybe, but I need to be because I truly feel that investors have forgotten there are more ways to make money than hitting the buy button on seven tech stocks. And with their blinders on, they are overlooking new trends/news/info that warrant a short-term pause on the explosive Mag Seven trade.
First thing that is fresh to the scene is an updated market narrative.
If late 2023 was all about interest rate cuts in an election year, then the first half of 2024 is shaping up to be about the potential for next to no rate cuts this year.
Headline job creation of 353,000 for January and big upward revisions for job gains in November and December signal an economy doing pretty darn well. It's an economy that in no way needs a rate cut this spring. An economy so strong as to justify a more hawkish Fed.
"Forget the anecdotal signs of tech layoffs and companies going for efficiency this year, the economy is producing hundreds of thousands of new jobs," FWDBONDS chief economist Chris Rupkey wrote in a client note.
"Fed officials are going to have to sharpen their pencils on the timing of any interest rate cuts this year because higher rates are sure not slowing the economy down."
In short, the incoming data from the last two weeks suggests no rate cuts are imminent — and that removes a key tailwind that powered market psychology (and inflated trading multiples) around Mag Seven stocks.
Then, secondarily, there are the fundamentals of these tech behemoths as seen on their recent earnings days.
I'm not sure about you, but I haven't been blown away by results out of Mag Seven stalwarts Apple, Alphabet, Microsoft, and Tesla. All of these reports had warts that should call into question trading multiples on them. Apple's performance in China was weak. March quarter guidance was weak. iPhone sales didn't wow.
As for Alphabet, it missed on cloud sales. Tesla's quarter and Elon Musk-led earnings call was littered with red flags.
Microsoft's quarter poked a hole in the narrative — for now — that all its new AI is going to lead to a massive reappraisal of its earnings estimates by the Street in 2024.
On the other hand, Amazon was a rockstar this quarter through and through. Accelerating sales out of AWS, impressive operating margin expansion, and a killer guidance. And despite jacking up its 2024 capex, Meta also also stunned investors with a booming quarter, completely with its first-ever dividend.
Take all of this new info together and the message should be clear to investors... evolve your thinking on the Mag Seven, or else.
Chart of the Day: Why wage growth might not be so bad
The blowout January jobs report had many eye-popping numbers that surprised investors, including a significant uptick in wage growth.
Wages increased 0.6% on a monthly basis and 4.5% over last year; economists had expected wages to rise 0.3% over last month and 4.1% over last year. Typically, this has been viewed as a bad sign in the fight against inflation, as rising wages could push consumers to accept higher prices.
But Renaissance Macro's head of economic research Neil Dutta points out that wage bump came alongside a decrease in hours worked, which fell to 34.1 from 34.3 in the month prior.
"If I take the data at face value, I see total hours worked down, the economy expanding, which implies growth in labor productivity and low unit labor costs," Dutta wrote in a note to clients on Friday. "It’s a good backdrop for corporate earnings."
Carson Group chief market strategist Ryan Detrick pointed out a similar theory on wage growth and productivity recently in volume two of the Yahoo Finance Chartboook.
Detrick points out that productivity picked up pace in the second and third quarters of 2023 and that could offset inflationary pressures from wage growth.
"This matters because the Fed hates to see higher wages, but when productivity is strong, this can allow for higher wages but inflation remains checked," Detrick told Yahoo Finance. "It also opens the door for the Fed to cut rates as inflation is no longer a major issue."
He added: "We saw a similar scenario take place in the mid-'90s. ... Take note, the mid to late '90s was a great time for our economy and for investors."
— Josh Schafer, Markets Reporter
Earnings and economic calendar
Monday
Earnings: Allegiant (ALGT), Caterpillar (CAT), Chegg (CHGG), Estee Lauder (EL), McDonald's (MCD), Palantir (PLTR), Tyson (TSN)
Economic news: S&P Global US services PMI, January final (52.9 expected, 52.9 prior), S&P Global composite PMI, January final (52.3 expected), ISM services index, January (52 expected, 50.5 prior)
Tuesday
Earnings: Amgen (AMGN), Chipotle (CMG), e.l.f. Beauty (ELF ), Eli Lilly (LLY), Spotify (SPOT), Fiserv (FI), Ford (F), Hertz (HTZ), BP (BP), Snap (SNAP), Toyota (TM)
No notable economic news.
