Why might overly optimistic investors want to pump the brakes?


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The glass is half full on Wall Street. But does it have to be so?

There’s a lot for investors to celebrate right now, but a look under the hood reveals a significant amount of deterioration.

Here at Before the Bell, we play Debbie Downer in Wall Street’s Pollyanna and lay out some of the arguments for the market’s continued rise.

Markets are hot: There has been an optimistic narrative in the markets over the past few weeks. The S&P 500 hit a new high for the first time in two years, and the Dow Jones surpassed 38,000 on Monday for the first time ever. In Europe, the German DAX index traded at an all-time high on Wednesday, and the Stoxx index is close to achieving a new record high.

Real bond yields (i.e. the yield on US Treasury bonds minus inflation) are near their lowest levels in six months. Financial conditions are deteriorating as borrowing costs decline, which may help economic growth.

But Wall Street’s gains are small: The major indexes are up, but the broad market is not.

As of last week, Nvidia And Microsoft They accounted for about 75% of the S&P 500’s gains this year, according to analysts at Bespoke Investment Group. They found that the 20 largest stocks in the index accounted for 110% of the index’s gains, while the remaining 480 stocks acted as a drag.

Last year, the S&P 500 rose just over 24%, but if you weight every stock in the index equally, it rose just 11.6%. This is the biggest outperformance of the S&P 500 over its equal-weighted version since the 1998 dot-com bubble, Deutsche Bank strategist Henry Allen said in a note to clients on Tuesday.

A narrow rise does not necessarily mean a collapse is coming. But it’s the big tech companies that are largely driving the markets higher, concentrating the gains in a very few stocks It carries inherent risks. “These stock gains may be vulnerable to changing sentiment toward that group,” Allen wrote.

The economy is strong: Economic data has been very resilient over the past few months.

The unemployment rate in the United States is 3.7% – and the Federal Reserve predicted almost a year ago that it would reach 4.6% today. Consumer sentiment in January reached its highest level since July 2021, according to the University of Michigan Consumer Confidence Index, and Retail sales rose 0.6% in December.

Economists polled by the National Association for Business Economics now overwhelmingly say the U.S. economy will avoid a recession this year.

Moreover, inflation rates have declined broadly, and Americans expect this to continue. The University of Michigan found that consumers expect inflation to fall to 2.9% by next year, the lowest level since December 2020.

But investors are adjusting expectations: Investors eventually get used to and expect strong data. Any sign of a weak economy could send stocks lower.

“It is difficult for data to continue to surprise in the same direction, as investors simply adjust their expectations,” Allen said.

Potential interest rate cuts: Fed officials expect and openly discuss interest rate cuts this year.

“As long as inflation does not rebound and stays high, I think inflation will remain high,” Fed Governor Christopher Waller said last week. [Fed] “We will be able to lower the target range for the federal funds rate this year.”

Financial markets currently see a roughly 46% chance the Fed will cut rates by March, and a roughly 85% chance the Fed will cut rates by May, according to the CME FedWatch tool.

But Wall Street could be getting ahead of itself: Since the beginning of the year, investors have pushed back timelines for interest rate cuts, Allen said. Just a month ago, more than 75% of investors thought the central bank would cut interest rates at its March meeting.

This is partly due to a strong economy and Geopolitical conflict This could accelerate inflation, which could force the Fed to make a radical change soon after it starts cutting interest rates.

Artificial intelligence may save us: The boom in artificial intelligence has been the main driver of the recent rise in stocks. An emerging industry can do this Increase productivity in the next years.

“In the next few years, the main impact of artificial intelligence on work will be to help people do their jobs more efficiently. This will be true whether they work in a factory or in an office,” Microsoft founder Bill Gates wrote in a blog post last year. .

“AI has tremendous potential to increase productivity,” BlackRock CEO Larry Fink said at his company’s latest investor day. “It may be technology that can bring down inflation.”

But it may kill jobs: But the technology sector The new year has begun With a wave of freshness Job cuts Which comes at the same time as the industry doubles its investments in… artificial intelligence.

Labor unrest continues to unfold In the same industry that creates artificial intelligence That could be an omen as technology reshapes the broader business landscape in the coming years.

‘The straw that broke the camel’s back’: United CEO’s frustration with Boeing

United Airlines, one of the largest buyers of Boeing planes, is starting to become impatient with the struggling planemaker due to its recurring quality problems. My colleague Chris Isidore reports.

“I’m disappointed because…this is what keeps happening at Boeing. This is not new,” United CEO Scott Kirby said in an interview Tuesday on CNBC. “We need Boeing to succeed. But they faced these ongoing manufacturing challenges. They need to take action here.”

Kirby made his comments after the airline warned investors that it would report a larger-than-expected loss in the first three months of this year due to… Grounding for all 737 MAX 9 aircraft Planes after The door plug exploded on an Alaska Airlines flight on January 5, leaving a large hole in the side of the plane.

The plane landed without any serious injuries, but the Federal Aviation Administration ordered the grounding and additional inspections of more than 200 aircraft of this type around the world.

United Airlines said it now expects its fleet of Boeing Max 9 jets to remain grounded through the end of this month, and that the company will report a first-quarter loss of between $116 million and $262 million. That’s more than the $138 million loss already expected by analysts surveyed by Refinitiv.

Beyond the current 737 MAX 9 issue, this is what it means for Boeing’s orders for the 737 MAX 10, a newer, larger, more expensive version of the 737 MAX that has not yet been certified by the FAA. Kirby said it will take at least five years in a best-case scenario before Boeing can deliver the Max 10 planes to United, and the airline is now no longer dependent on getting that plane in the future.

“I think shutting down the MAX 9 is probably the straw that broke the camel’s back for us,” Kirby said. “We’re going to build a plan that doesn’t have the 10 cap.”

shares Boeing It fell 1.6% on Tuesday. shares united It rose by 5.3%.

Netflix gains more than 13 million subscribers in Q4

Netflix announced a significant increase in subscriptions in the fourth quarter on Tuesday. The company added more than 13 million subscribers during the quarter, compared to Wall Street expectations of 8.7 million. My colleague Samantha Deloia reports.

Netflix The stock jumped nearly 10% in pre-market trading on Wednesday.

Last year, the company implemented a number of initiatives aimed at adding subscribers, including a password-sharing campaign that prompted password “borrowers” ​​to create their own subscriptions and the introduction of a low-priced ad-supported subscription tier for $6.99.

Earlier this month, Amy Reinhard, Netflix’s head of advertising, said Netflix’s advertising level had reached more than 23 million monthly memberships.

In a letter to shareholders on Tuesday, Netflix announced the success of its password-sharing campaign.

“We believe we have successfully addressed account sharing, ensuring that when people enjoy Netflix they pay for the service too,” she said.

Looking ahead to 2024, Netflix said it sees “significant opportunities” to continue improving its core TV and movie content, while also expanding its offerings to include gaming, live entertainment and sports programming.

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