The stock market's recent gains are based on three pillars – and two of them are now weakening. The rally is looking increasingly fragile.
But maybe not on the surface. The
S&P 500,
after all, it rose 1.4% last week to close at 4958, an all-time closing high. The
Dow Jones Industrial Average
rose 1.4% and also reached a record close
Nasdaq Composite
advanced by 1.1%.
The fact that the indices remained so strong seems surprising given the flood of news that the markets had to contend with over the course of the week. For one thing, Federal Reserve Chairman Jerome Powell told investors not to expect a rate cut in March, a more aggressive statement than expected. That's not what many expected, and it caused the S&P 500 to fall 1.6% on Wednesday.
The Fed's caution was understandable given Friday's red-hot jobs report. The U.S. economy added 353,000 jobs in January, well above the FactSet forecast of 176,500. That will only increase fears that the economy remains too hot for the Fed's liking. Additionally, ahead of the release, the Atlanta Fed's GDPNow tracker pegged U.S. economic growth at 4.2%. There are no signs of a recession there, but not exactly the kind of data that would prompt the Fed to act.
“We don’t check early and often [for rate cuts], but at a more moderate pace and a little later,” said Chris Harvey, chief U.S. equity strategist at Wells Fargo Securities. “We will re-evaluate the shares in the short term.”
It's possible that strong economic growth can offset the Fed. What it can't do, however, is offset Big Tech, which has driven the market higher this year – even though recent earnings reports have been mixed.
Advertisement – Scroll to continue
alphabet
'S
The profits were the biggest disappointment. They beat by just 3%, causing the stock to fall 6% from Tuesday's close through the end of the week. Microsoft
'S
Tuesday night results and Apple
'S
Thursday's stock market report wasn't quite good enough either, as stocks ended the trading day on a lower note.
These disappointments were offset by Amazon.com
,
This rose 7.9% on Friday after reporting on Thursday evening, notably by Meta Platforms
,
This rose 20% and alone accounted for around 40% of the S&P 500's gain last week.
However, the rest of the market had a mediocre week, with 271 stocks closing higher and 231 closing lower. Furthermore, the
Invesco S&P 500 equal weight
The exchange-traded fund was flat for the week, which isn't exactly a sign of strength. A look at this year's numbers shows a similar picture: almost half of the stocks in the S&P 500 posted losses this year.
If tech stocks can't resume their winning ways, the stock market could be set for a decline – even if the S&P 500 is trading near a record.
Advertisement – Scroll to continue
“Breakouts in weak … participation (market breadth) should be viewed with skepticism until proven otherwise,” writes Craig Johnson, chief market technician at Piper Sandler.
And even new highs cannot guarantee that the market will continue to rise. In early 2022, the S&P 500 hit a new high but then fell sharply as the market underestimated the Fed's determination to cool the economy. A decline now may not be as bad as it was two years ago, but the market could still experience a difficult period in the coming weeks.
With so much pushing and pulling, it's hard to say who will prevail. Does the market need interest rate cuts? Can faster growth offset a restrictive policy outlook? Can anything take the baton from Big Tech or will Amazon and Meta continue to do the heavy lifting? Everything suggests that the market may be more fragile than it looks.
Advertisement – Scroll to continue
Remember that the good times can keep going – until they don't go away.
Write to Jacob Sonenshine at [email protected]
Comments are closed.