Market Insights

Nvidia and the AI boom keep driving stocks to new highs. Still, a long-awaited shift toward smaller companies may be starting.

The S&P 500 rose 1.7 percent in the holiday-shortened week between Friday, February 16, and Friday, February 23. The index also crossed 5100 for the first time, just two weeks after breaking 5000. More than three-quarters of its members and every major sector gained value, a sign of widening participation in the rally.

NVDA was the big story, reporting better-than-expected earnings and revenue on accelerating demand for AI chips. Gross margins widened, boosting profit by 769 percent from the previous year. CEO Jensen Huang noted that business is expanding as more organizations — including sovereign countries — embrace machine learning.

The stock had its second dramatic gap since last May. It also moved past Amazon.com (AMZN) and Alphabet (GOOGL) to become the world’s third-most valuable company. NVDA has advanced 238 percent in the last year, making it the top performer in the S&P 500, according to TradeStation data.

Upgrading the Economy

There were also signs of widening confidence in the stock market and economy:

• Goldman Sachs and UBS raised their targets on the S&P 500, citing higher profit growth. Goldman hiked its price target from 5100 to 5200. UBS went from 5145 to 5400.
• Initial jobless claims fell more than expected as fewer Americans found themselves unemployed.
• S&P Global Ratings said the U.S. economy may expand 2.4 percent this year, up from an earlier projection of 1.5 percent. Exports, government spending and inventory growth fueled the increase.
• The Conference Board’s collection of leading economic indicators stopped predicting recession for the first time in two years.
• Credit spreads on corporate bonds hit a two-year low, according to a Reuters analysis of data from ICE BofA. That suggests investors see less risk of companies defaulting on debt.
• Some 53 percent of retail investors are bullish on stocks, according to Charles Schwab. It was the highest reading since the survey began in 2021.

Chips, Homebuilders Lead

Despite the attention on AI, technology was a mixed bag last week. Semiconductors jumped but software companies lost value. Palo Alto Networks (PANW) led to the downside after offering free products to win business. Apple (AAPL), which still lacks a major AI offering, also weighed on tech.

Homebuilders outperformed despite a lack of news. However, Treasury yields showed signs of peaking. That could be noteworthy because housing stocks rallied in anticipation of lower rates in December.

Cyclical sectors associated with stronger economic growth — materials, industrials and financials — were some of the biggest gainers last week. That may suggest that investors are rotating back toward “value” stocks after the recent surge in “growth” stocks like NVDA.

Garmin (GRMN) was the top performer in the S&P 500 last week after strong demand for fitness products pushed results ahead of forecasts. Industrial-engineering firm Quanta Services (PWR) and business-service provider Iron Mountain (IRM) also jumped on strong results. Discover Financial (DFS) rallied after accepting a $35 billion takeover by Capital One (COF). It’s the biggest acquisition so far this year.

Another big gainer was Jack Dorsey’s payments firm Block (SQ), up 20 percent. Formerly known as Square, the company raised its guidance and announced plans to convert Cash App users into banking clients.

Charting the Market

The S&P 500 has remained in a tight uptrend since it started rallying in late October. Some indicators may suggest buyers are focusing on a wider set of companies after megacap technology firms reported quarterly results.

For example, 92 members of the S&P 500 hit new 52-week highs on Friday. It was the second-highest total since May 2021, according to TradeStation data. (The previous high occurred on December 14.)

Second, more members of the S&P 500 are above their 20-day moving averages than above their 50-day moving averages. This event has sometimes anticipated more gains.

Third, the Advance / Decline line hit a new record high. That indicates more companies are participating to the upside.

The Week Ahead

This week brings a few economic reports and earnings releases.

New home sales are due today.

Tomorrow brings durable-goods orders and consumer confidence. Lowe’s (LOW), Macy’s (M), eBay (EBAY) and First Solar (FSLR) issue quarterly results.

On Wednesday morning, the government will revise its previous estimate of fourth-quarter gross domestic product. Crude-oil inventories are also due, along with earnings from Salesforce.com (CRM), HP (HPQ) and Baidu (BIDU).

Thursday brings the personal consumptions expenditures (PCE) inflation index and initial jobless claims.

Friday’s main item is the Institute for Supply Management’s manufacturing report.

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