Market Insights

Stocks keep hitting new highs as strong megacap earnings and an accelerating economy draw money from the sidelines.

The S&P 500 rose 1.7 percent between Friday, January 26, and Friday, February 2. It was the index’s fourth straight positive week, continuing its breakout above previous highs from January 2022. The Nasdaq-100 and Dow Jones Industrial Average also hit new records.

Meta Platforms (META) surprised investors with better-than-expected results and an unexpected dividend. Profits were boosted by cost management as CEO Mark Zuckerberg restrains R&D spending. User growth accelerated and stronger advertising boosted revenue. Analysts said artificial intelligence (AI) is helping drive some of the gains by helping advertisers reach users more effectively. There were also signs of its newer Reels service gaining traction.

META had its biggest weekly gain in a year, firmly establishing its market capitalization above $1 trillion. Amazon.com (AMZN) and Microsoft (MSFT) also benefited from the growth of AI.

Fed Still on Pause

Last week also brought some major economic events:

• The Federal Reserve said it wants “greater confidence that inflation is moving sustainably toward 2 percent” before cutting interest rates. Chairman Jerome Powell added that a reduction isn’t likely at its March 20 meeting.
• The economy added 353,000 jobs in January and wages rose 0.6 percent. Both were about twice the forecast amounts. Unemployment also fell more than expected.
• Manufacturing reports from the Institute for Supply Management and S&P Global surprised to the upside as orders rebounded.

While those headlines are consistent with higher interest rates, other developments seemed to support the shift toward lower borrowing costs:

• Fourth-quarter data on employment costs and unit labor costs were lower than expected. Productivity was higher than expected. That’s typically associated with less inflation.
• Crude oil futures dropped 7.4 percent, their biggest decline since early October.
• Chinese manufacturing shrank for a fourth straight month. The Asian giant continues to struggle with heavy debt, potentially reducing inflationary pressures for the rest of the world.
• The U.S. Treasury said it plans to sell $760 billion of bonds this quarter, $55 billion less than estimated in October. Less issuance can reduce yields.

Apple’s China Problem

China was also a problem for Apple (AAPL), whose sales declined 13 percent in the country. That overshadowed better-than-expected earnings and revenue growth. The iPhone maker remains trapped below highs as Wall Street worries about its valuation and growing competition from Huawei. Some analysts, however, see potential from iPhone upgrades and expected AI rollouts.

Alphabet (GOOGL) fell more than 6 percent on weak advertising. Investors are also worried that its AI spending plans will hurt future profitability. Advanced Micro Devices was little changed after beating estimates and issuing weak guidance. The semiconductor stock had almost doubled between late October and its quarterly report.

Heart-valve maker Edward Lifesciences (EW) was the second biggest gainer in the S&P 500 after beating estimates. Other medical stocks like Stryker (SYK) and hospital operator HCA Healthcare (HCA) also rallied on strong results. General Motors (GM) surged after CEO Mary Barra refocused the company on traditional gasoline-powered cars. GM also beat estimates and hiked its dividend.

Industrials Break Out

Most sectors rose last week, according to TradeStation data. Consumer discretionaries climbed the most, led by AMZN and GM. META boosted Communications. Consumer staples, health care and industrials also outperformed the S&P 500. Technology barely gained because of AAPL.

Industrials were the only major sector to close at a new all-time record. There were broad gains in the group as stocks like Caterpillar (CAT), Union Pacific (UNP), CSX (CSX), Grainger (GWW), Fastenal (FAST) and Eaton (ETN) hit new 52-week highs. Some investors may view industrials as a beneficiary of strong economic growth.

Banks fell last week after New York Community Bancorp (NYCB) warned of losses on office properties. Chinese stocks, solar energy, and traditional energy also slid.

Charting the Market

The S&P 500 has risen in 13 of the last 14 weeks. While that could make some investors worry it’s overextended, technical patterns may suggest the index is undergoing strong accumulation.

For example, its dip last Wednesday bottomed 1 point above its low from the previous week. That kind of tight movement (holding such a recent low), may suggest buyers outnumber sellers.

Second, faster moving averages are above the slower moving averages. That’s consistent with an upward price trend.

Oil drillers and gold miners, which typically benefit from negative events, are lagging. Their relative weakness may reflect risk appetite.

Treasury yields also remain near lows despite the strong economic data. That’s typically a positive for risk assets like stocks.

The Week Ahead

This week is much less active. No major economic reports are scheduled, but earnings continue.

Today’s main item is the Institute for Supply Management’s service-sector index. CAT, McDonald’s (MCD) and On Semiconductor (ON) issue results.

Ford Motor (F), Eli Lilly (LLY) and Amgen (AMGN) are some of the big names tomorrow.

Wednesday features crude-oil inventories and numbers from Uber Technologies (UBER), PayPal (PYPL) and Alibaba (BABA).

Initial jobless claims are on Thursday, along with earnings from Affirm (AFRM), Pinterest (PINS) and ConocoPhillips (COP).

PepsiCo (PEP) reports on Friday.