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The Wall Street is Concerned That the Rally to Record Highs May Be Running Out of Steam in the Weeks to Come

February 5, 2024
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Despite ongoing deliberations about the sustainability of the record-breaking equity run, Wall Street continues its ascent, navigating uncertainties with resilience. The upward momentum persisted into Friday, as major indices each gained over 1% for the week, propelled by robust performances from Meta and Amazon, along with positive indicators of a robust U.S. economy.

However, the market landscape remains complex, marked by some significant setbacks during an intense week. Following Federal Reserve Chair Jerome Powell's statement that a March rate cut is unlikely, stocks experienced a sharp decline, resulting in the S&P 500's worst day since September.

Apple's lackluster earnings contributed to a more than 3% drop this week, impacting the Dow Jones Industrial Average. Additionally, regional banks, represented by the SPDR S&P Regional Banking ETF, faced a 7% slide due to disappointing results from New York Community Bank, fueling concerns about broader contagion. NYCB shares plummeted by a staggering 42% for the week.

Scott Rubner, Managing Director at Goldman Sachs, noted the current market sentiment, expressing caution as the bar for U.S. equity markets is at an all-time high in February. He emphasized the potential for a downward trajectory, suggesting the implementation of equity hedges in response to the green pre-market bounce.

Looking forward into 2024, concerns persist for investors. While a broadening of the rally was anticipated, small-cap stocks, represented by the Russell 2000, have underperformed, with a more than 3% decline compared to the S&P 500's over 3% increase.

Higher interest rates are expected to further impact small-caps, with Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, highlighting the vulnerability of companies exposed to zombie firms. The Russell 2000, having a higher exposure to such entities, may face challenges as the likelihood of lower rates diminishes.

Sonders also pointed to issues in the regional banking sector, emphasizing the commercial real estate problem as an ongoing concern. Despite a slow-motion crisis, she urged stock pickers to meticulously navigate through the sector for potential opportunities.

Disparities in mega-cap tech stocks have emerged, with Raymond James identifying a new leading portfolio labeled "MnM? Microsoft, Nvidia & now Meta Leading in AI Era." This replaces the previous "Magnificent Seven" that dominated markets last year. While Meta Platforms received bullish projections after strong quarterly results and its first-ever dividend payment, Apple faced setbacks, reporting a 13% sales drop in China.

Investor anxiety about an impending recession lingers, despite no immediate signs in economic data. James McCann, Deputy Chief Economist at Abrdn, anticipates the delayed impact of interest rate hikes leading to a hard landing in the second half of the year.

However, Rhys Williams, Portfolio Manager at Wayve Capital Management, remains optimistic about market resilience, anticipating continued growth as long as major companies outperform. Art Hogan, Chief Market Strategist at B. Riley Financial, echoes this sentiment, expecting stronger economic data to support stocks, with the first-quarter GDP tracking at a 4.2% increase. He anticipates rate cuts will be favorable for equities, even if the timeline for the first cut extends beyond March.


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Bryan Curtis
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