Extreme greed has returned to Wall Street

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The S&P 500 is on track for its fifth consecutive year Score highThe Dow Jones Industrial Average surpassed 38,000 points this week for the first time ever. The economy is growingInflation rates are declining artificial intelligence revolution He is thriving.

All of this heralds the return of extreme greed to Wall Street.

The tech-heavy Nasdaq is up 3.3% so far this year — and it’s only a month away. The S&P 500 rose 2.6%, and the Dow Jones rose nearly 1%. The S&P 500 and Nasdaq are both on track for their sixth straight gains.

CNN Fear and Greed Indexwhich tracks seven indicators of U.S. market sentiment, switched to “extreme greed” this week, marking a stunning turnaround from just a few months ago, when the index was in extreme fear territory.

So what is behind the shift in market sentiment?

The idea of ​​a soft landing (when inflation rates decline and the economy avoids recession) is likely to play a large role.

The Commerce Department reported Thursday that gross domestic product, adjusted for inflation, rose 3.3% in the fourth quarter of 2023. That measure beat expectations of just 1.5%, according to FactSet estimates.

Consumer spending, which accounts for about two-thirds of the U.S. economy, also grew at a healthy 2.8% in the fourth quarter, according to the report.

Meanwhile, inflation rates fell in the last quarter.

The Personal Consumption Expenditures Price Index, the Fed’s preferred measure of inflation, was 1.7% during the quarter, below the Fed’s target of 2%.

Economists polled by the National Association for Business Economics now overwhelmingly say the U.S. economy will avoid a recession this year, a fate many had predicted in 2023.

This is “the recession that didn’t happen,” Lydia Boussour, chief economist at EY, said in a note to clients on Thursday. “Overall, the economy sailed into 2023 with average growth of 2.5% for the year, easily beating consensus forecasts for a recession. Looking ahead, we continue to see a soft landing as the most likely outcome this year even if there is a combination of headwinds.” The risks mean that the odds of a recession are about 35%.

Central bank officials now 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 expect about a 51% chance that the Fed will cut rates in March, and about a 90% chance that the Fed will cut rates in May, according to the CME FedWatch tool.

The explosion 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. .

Microsoft shares have risen about 7.7% this year, and on Wednesday the software giant became the second company ever to be worth $3 trillion, as the artificial intelligence boom sent its shares soaring.

Meanwhile, Meta shares rose 1.4% on Wednesday to lift the AI-focused company’s market value above the $1 trillion line.

Why Your 401(k) May Be Painful

Yes, the markets are hot right now, but your portfolio may still suffer. This is because while the major indexes are rising, the broader 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.

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