Friday Five

Happy Friday February 2nd!

The Fed Pivot disappoints, Magnificent 7 earnings excite, and strong jobs data scares investors. Watch Space Rock 2008 OS7 live today– an astrological near miss! Punxsutawney Phil predicts an early spring!

#1 – Weekly Market Recap – A robust jobs report puts an end to a volatile week in the markets. Through Thursday’s close, the Dow Jones was up +1.1%, the S&P 500 +0.3%, and the NASDAQ trailed with -0.4% return.

This week marked the “heart” of earnings season with 108 S&P 500 companies reporting earnings. As discussed below, there were mixed results from the group of companies referred to in the media as the “Magnificent 7.” So far, an impressive 74% of S&P 500 companies have beaten earnings expectations, led by companies in Consumer Staples (92%), Energy (88%), Information Technology (84%) and Industrials (83%).

Company earnings were somewhat overshadowed by Wednesday’s Federal Reserve meeting which disappointed investors, sending the S&P 500 down -1.6%. Additionally, this morning’s blowout job’s report indicated that the economy is still strong – which could cause the Federal Reserve to further push back interest rate cuts.

At DSG Advisors, we were not surprised by the Fed’s position, the market’s reaction, or the strong jobs report. We continue to believe that 2024 will be a year of “absorption” requiring companies to grow earnings to justify lofty P/E multiples.

#2 – Powell Pivot Disappoints – The Federal Reserve left interest rates unchanged at 5.25% – 5.5% for the fourth consecutive meeting on Wednesday.

While the Fed acknowledged they anticipate interest rate cuts this year, Powell pushed back on both the speed and magnitude of cuts. Powell signaled that a March cut was less likely than many investors had been expecting.

Investors who interpreted the Federal Reserve’s comments after the December meeting to signal six rate cuts for 2024 were disappointed with the Fed’s rate cut timeline and sent the S&P 500 Index down over -1.6% on Wednesday.

At DSG Advisors, we were not surprised by the message Powell delivered this week, or the market’s reaction. As we wrote in our 2024 Outlook as well as our January 19th Friday Five article:

“Many investors grew increasingly optimistic that the Fed was going to cut rates quickly and meaningfully… The catch, however, is that the Fed is ‘data-dependent’, and investor expectations may have gotten ahead of the current reality… At DSG Advisors, we think that continued ‘hot’ economic data could further temper market expectations for rate cuts.”

This sentiment appears to be particularly accurate given investors’ reaction to the Fed meeting this week in addition to this morning’s strong jobs data.

Week in Review (Extraterrestrial Tourism & Towering Technology)

#3 – Magnificent Earnings – Five of the “Magnificent 7” companies reported Q1 earnings this week providing mostly impressive results. Meta (Facebook), Amazon and Apple reported quarterly earnings after the close yesterday.

Meta posted over $40 billion in revenues and earnings that exceeded analysts’ expectations by a wide margin. Meta also announced that it will start paying dividends. The stock was up over +18% in early trading this morning.

Amazon stock was up +7% in early trading as the retailer showcased its holiday season success and the impact of artificial intelligence on cloud computing demand. Sales totaled $170 billion for the quarter and earnings were $1.03 per share, both of which exceeded expectations.

Apple was down -2% in early trading as earnings disappointed. The technology giant reported revenue that was just +2.1% higher than last year. iPhone revenue grew almost 6%, reaching $69.7 billion in sales which surpassed expectations. Apple rolled out its Vision Pro mixed reality goggles, marking its first entry into augmented and virtually realty vision wear. Given the magnitude of iPhone sales, investors will be keeping an eye on the Vision Pro to see if it can add meaningful revenue for the tech giant.

Earlier in the week, Microsoft reported an +18% revenue increase, beating estimates. The stock, however, was down slightly after the earnings report and appears as if it will finish about flat on the week.

Alphabet (Google), reported a robust +13% revenue growth, outpacing estimates. However, a shortfall in Google’s ad business disappointed analysts, causing Alphabet shares to drop -7.5% on the release. It appears the stock will finish the week down.

Most of the “Magnificent 7” stocks appear poised to continue growing in 2024, albeit at varying levels…which poses interesting choices for investors in the year ahead.

CNBC

Wall Street Journal

#4 – Don’t Look Up – Watch out! Today an asteroid as big as a skyscraper will come within 1.7 million miles of Earth. But don’t worry, 1.7 million miles is about seven times the distance from the Earth to the moon. So, while it is a close call in astrological terms, it will not really be that close.

Asteroids are space rocks that come in a variety of shapes and sizes and are made of material left over from the birth of the solar system roughly 4.6 billion years ago. They orbit the sun elliptically, often rotating erratically, tumbling, and falling through space.

NASA’s Center for Near Earth Object Studies (CNEOS) estimates that this asteroid passing by earth could be similar in size to New York City’s Empire State Building and traveling at a speed of around 41,000 miles per hour. Discovered in 2008, the space rock known as 2008 OS7 won’t swing back our way again until 2032 and it will be much further way – 45 million miles from Earth.

You can watch the asteroid flyby for yourself thanks to a Live Stream from The Virtual Telescope Project which will begin at 2:00pm CT today.

AP News

Space.com

Live Science

#5 – Groundhog’s Day – This morning thousands are gathering in western Pennsylvania where the spotlight will be on a groundhog named Punxsutawney Phil and more importantly, his winter weather prediction.

Each Groundhog Day in Gobbler’s Knob PA, the handlers of Punxsutawney Phil bring the furry rodent outside to see whether he sees his own shadow. If Phil sees his shadow, that means six more weeks of winter. If no shadow, then we can expect an early spring.

This morning Punxsutawney Phil did not see his shadow – an early spring awaits!

The Groundhog Day celebration has been marked in Punxsutawney every year since mention of the holiday first appeared in 1886 in the local newspaper. However, the annual event exploded in popularity after the 1993 Bill Murray movie, “Groundhog Day.”

The celebration appears to be rooted in agriculture and farming lore, marking the midpoint between winter solstice, the shortest day of the year, and the spring equinox. Ancient people would observe the sun, the stars and animal behavior to guide decisions. European and German traditions also involved watching bears and badgers emerging from winter hibernation to forecast weather.

Unfortunately, the groundhog is often wrong when it comes to his predictions. Last year was the third straight year Phil has spotted his shadow, which he has done 84% of the time since the first prediction in 1887. According to the Stormfax Weather Almanac, Phil has been correct in his predictions only about 39% of the time.

“We know this is silly; we know this is fun,” said Marcy Galando, executive director of the Punxsutawney Groundhog Club. “We want people to come here with a sense of humor.”