As the S&P 500 Index concludes its strongest run in nearly four decades, investors face a challenging road ahead as February, historically one of the most tumultuous months for US stocks, begins. The recent robust rally, propelling the S&P 500 to its first records in two years with a nearly 20% surge since October, has sparked concerns on multiple fronts. The latest big-tech earnings have served as a reality check for the artificial intelligence hype, earlier fueled by fevered speculation about Federal Reserve easing in the coming months has cooled, and elevated valuations are drawing comparisons to the dot-com bubble.
February's historical performance adds another layer of apprehension, ranking as the third-worst month for the S&P 500 in the past 30 years, following September and August, according to Bloomberg data.
Despite the current optimism driving the market to all-time highs, some of Wall Street's most optimistic voices are growing cautious, viewing the enthusiasm as a potential contrarian signal. A survey of newsletter writers conducted by Investors Intelligence revealed the highest ratio of bulls to bears since mid-2021, months before stocks approached their previous peak, as analyzed by Yardeni Research. Nick Giacoumakis, president of NEIRG Wealth Management, warns against a 'rah-rah' mob mentality in the stock market, cautioning against unrealistic expectations of Fed easing and multiple rate cuts.
The month has kicked off impressively, marking the 13th gain in 14 weeks for the market, a streak not seen since 1986. The strength was particularly fueled by robust earnings from Meta Platforms Inc. and Amazon.com Inc., compensating for results from Microsoft Corp., Alphabet Inc.'s Google, and Advanced Micro Devices Inc., which fell short of investor expectations in the artificial intelligence sector.
Jeffrey Hirsch, editor of the Stock Trader's Almanac, notes that February often starts on a high note but typically experiences a fade in strength around mid-month as investors book profits. This pattern is especially prevalent if stocks receive a boost in January following tax-loss harvesting in December.
Concerns arise from the recent signals from the Federal Reserve, with Chair Jerome Powell indicating that rate cuts are not imminent. Swap traders adjusted the probability of a March rate cut to around 20% after a strong jobs report, and there is no longer a consensus on a May reduction. This cautious stance has led some investors to question who remains to buy after significant fund manager investments in stocks in the preceding months.
Despite the potential for a market correction, some investors are eagerly awaiting a pullback to deploy capital. Nancy Tengler, chief investment officer at Laffer Tengler Investments, expresses the desire for a market correction to add shares of Palo Alto Networks Inc., Microsoft, and Amazon to her portfolio.
Giacoumakis of NEIRG Wealth acknowledges owning megacap tech stocks but refrains from adding to his positions due to lofty valuations. The Magnificent Seven companies in the S&P 500, including Apple Inc., Alphabet, Amazon, Meta, Microsoft, Nvidia Corp., and Tesla Inc., carry a 33% premium to the index in terms of forward price-to-earnings.
While sentiment remains buoyant, historical patterns suggest that stocks may be poised for a pullback. Jeffrey Hirsch anticipates the S&P 500 potentially reaching 5,000 this month before retreating to its prior high near 4,800, representing a 4% decline. He notes that market breadth is already lacking, with fewer stocks participating in the current rally.
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