S&P 500 Hits Record High Above 5,000 as Earnings Beat Expectations
The S&P 500 closed above 5,000 for the first time ever on Friday, marking a significant milestone for the stock market. This achievement comes as the three major averages logged a positive week for the 13th time in the last 14 weeks. Despite a lack of significant economic catalysts in the past week, investors have been digesting a slew of corporate results that have exceeded expectations. Additionally, Federal Reserve officials have reiterated the central bank’s stance that more confidence in inflation’s path downward is needed.
Looking ahead, the market rally may face new challenges in the week to come. A fresh reading on inflation and consumer spending will be highlighted on the economic calendar. On the corporate side, several notable companies, including John Deere, Coinbase, Airbnb, and Shopify, are set to report earnings.
Consumer Price Index (CPI) for January
Investors will be closely watching the Consumer Price Index (CPI) for January, which will be released on Tuesday morning. Wall Street expects an annual gain of 2.9% for headline CPI, which includes the price of food and energy. This would be a decrease from the 3.4% headline number in December. On a “core” basis, which excludes food and energy prices, inflation is expected to have risen 3.7% year-over-year, a slowdown from the 3.9% increase seen in December.
Morgan Stanley economist Diego Anzoategui predicts more core goods deflation this month, mainly driven by weak used car prices. While there is a gradual deceleration in inflation, services inflation remains sticky with some deceleration in rents inflation but a slight rebound in insurance prices and hotels.
State of the Consumer
The strength of consumer spending has been a consistent trend in recent months. Investors will receive a fresh reading on this trend with the January retail sales report, set to be released on Thursday. Economists expect retail sales to have declined 0.2% in January from the prior month.
Bank of America US economist Michael Gapen anticipates a “soft” print due to seasonal factors and widespread winter storms that likely disrupted retail spending in January. However, Gapen believes that this does not change the overall narrative for the consumer. He notes that the consumer looks healthy, with upside risks to spending from accelerating real wages.
Traditional Autos
Following Tesla’s disappointing earnings report, traditional automakers Ford and GM surprised investors with better-than-expected results. Stellantis, the parent company of Chrysler and Fiat, is set to report earnings on Thursday, making it the last Big Three automaker to do so this cycle. Stellantis CEO Carlos Tavares, who was previously criticized for not moving faster with the company’s EV transition, is now being seen as prescient as demand for EVs has seemingly waned in recent months. Investors will be looking for Stellantis to offer an outlook that sees profit growth and limits EV capital expenditure outlays.
Earnings Breadth Expands
Earnings have been coming in increasingly positive, with 83% of US companies beating earnings estimates. This is the highest mark in two years and significantly higher than beat rates in other countries. This trend could be an indicator of why US stocks are outperforming other markets. Analysts see earnings growth continuing throughout the next two years.
According to Deutsche Bank chief equity strategist Binky Chadha, such elevated beats have historically been seen only in the early stages of recovery from major cyclical downturns. Several strategists have noted a similar trend, explaining how the S&P 500 could rise to new highs later this year without outsized contributions from a few large tech stocks that have been driving the market action as of late.
In conclusion, the S&P 500 reaching a record high above 5,000 is a significant milestone for the stock market. The positive week for the major averages and the strong corporate earnings have contributed to this achievement. However, challenges lie ahead with new economic data on inflation and consumer spending. The strength of the consumer and the performance of traditional automakers will also be closely watched. Overall, the breadth of positive earnings results indicates a promising outlook for the market in the coming years.