Market Insights

Stocks keep making new highs as investors feel more confident about inflation and interest rates.

The S&P 500 traded above 5150 for the first time, but inched lower to end last week down 0.3 percent. The Nasdaq-100 traded similarly, with chip stocks like Nvidia (NVDA) shooting to new records before reversing lower. Small caps and midcaps advanced. That could suggest a long-awaited rotation away from megacap growth stocks has begun.

Interest-rate cuts “can and will begin over the course of this year” if inflation continues to improve, Federal Reserve Chair Jerome Powell told lawmakers in Congressional testimony last week. He also said “we’re not far” from being confident about inflationary trends.

The market now expects the first rate cut at its June 12 meeting, according to CME’s FedWatch tool. The European Central Bank separately indicated it may start easing policy at its June 6 meeting.

Such moves are often good for stocks because they support risk appetite and reduce the appeal of money-market funds. It also increases the importance of tomorrow morning’s consumer price index (CPI), the government’s first reading of inflation in February.

Other economic events last week supported lower interest rates. The labor report showed higher unemployment and slower wage growth. (Overall hiring beat forecasts but previous numbers were revised lower.) Service data showed milder price increases. Labor productivity was also better than expected in the fourth quarter, according to updated numbers from the Bureau of Labor Statistics.

Wild Ride for Chip Stocks

Semiconductors like NVDA are best-performing major industry in the last year, according to TradeStation data. They continued higher last week, climbing more than 8 percent through Friday morning but surrendered most of those gains. Is the excitement around AI finally starting to fade?

By the time the dust settled, the biggest gains were in groups like gold miners, banks and utilities. Those companies are more sensitive to interest-rate cuts.

The Russell 2000 small cap index also closed at a 23-month high. Some strategists have also identified small caps as a potential beneficiary of rate cuts.

The S&P 400 mid-cap index, which focuses on traditional sectors like industrials and retailers, had its first weekly closing high since November 2021. Similar moves occurred in other indexes like the S&P 500 and Nasdaq-100 as they broke out.

Profit Margins Widen

Two of the biggest gainers in the S&P 500 last week were retailers with wider profit margins. Kroger (KR) beat earnings estimates by 18 percent despite revenue coming inline with consensus. Target’s (TGT) earnings surprised by 23 percent despite revenue missing by 1 percent.

That kind of profit improvement is boosting stocks and market valuations. Factset noted that analysts see profit margins widening from 11.2 percent last quarter to 11.6 percent this quarter. Factset also reported that the fewest index members mentioned recession risk in three years (based on a survey of conference calls.) That could also lift optimism and foreshadow stronger earnings.

Albemarle (ALB) fell the most in the S&P 500 after selling shares to finance capital spending. The move highlighted concerns about a widening lithium glut amid weak sales of electric vehicles.

Market Breadth

Last week was noteworthy because gainers in the index outnumbered falling stocks by about 5-to-3 (despite the index’s slight decline). That kind of improving “breadth” is a potentially bullish sign of widening participation in the rally. The advance / decline line also made a new high on Friday as the broader market fell.

Value stocks rose about 1 percent last week and are now outperforming the broader market over the last month. “Growth” stocks, which include AI names and technology, fell about 1 percent. That’s another potential sign of investors rotating away from big Nasdaq companies.

The S&P 500 also bounced last Tuesday around the same level where it bottomed five sessions before. That’s consistent with its pattern since early November, holding recent lows instead of falling more deeply. Such tight price action may indicate buyers outnumber sellers.

Some traders may also notice how the 8-day exponential moving average (EMA) has stayed above the 21-day EMA since early November. That can also reflect a bullish short-term trend.

The Week Ahead

Oracle (ORCL) reports earnings this afternoon.

Tomorrow’s February consumer price index (CPI) inflation report is probably the most important event of the week. It’s scheduled for 8:30 a.m. ET.

Dollar Tree (DLTR) and Lennar (LEN) issue results on Wednesday. Crude oil inventories are also due.

Thursday features the producer price index (PPI) inflation report, retail sales and initial jobless claims. Dollar General (DG) and Adobe (ADBE) are two of the big earnings reports.

Consumer sentiment is on Friday.

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