Record of the Year

1.Fed Tampers Expectation. The market is now pricing in just over 105 bps of rate cuts this year, compared to 175 bps expectations earlier in January. Fed Chair Jerome Powell emphasized the need to gain, “greater confidence,” before considering rate cuts. The reason for the downgrade of rates is tied to better-than-expected economic growth combined with elevated inflation.

Chart 1: FOMC Fed Target Rate Remains Steady Since July¹

We have seen inflation progress; CPI is down from peak levels of 9.1% in June 2022 to 3.4% currently. In addition, core PCE on a 3-month annualized level is running at 1.5% y/y growth and under 2% for the past six months. Yet, the Fed wants to gain more confidence that inflation will get to its 2% target and stay there. 

Chart 2: Goods Disinflation Is Leading the Trend Downward²

Chart 3: Treasury Curve Remains Elevated Compared to One Year Ago³

Thus far, economic activity remains strong. The economy grew +3.3% in the fourth quarter and early indicators project +4.2% growth in the current quarter. Leading indicators across sectors like housing and consumer spending data indicate broader strength for 2024. Home buying activity is picking up as mortgage rates are 100 bps below their October peak – real-estate showings were up +9.9% last week, compared to the first week of the year.⁴ Supply remains low, and affordability is improving. Employers added 353,000 jobs in January, nearly doubling expectations, and prior reports were revised 126,000 jobs higher. Unemployment remains low at 3.7%. Fourth quarter earnings are above expectations, and a pickup in sentiment can generate sustained improvement to capital markets activity.

Chart 4: January Consumer Confidence Highest in More Than a Year⁵

2. Earnings Are Beating Expectations. Earnings are on pace to expand +5.3% y/y in the fourth quarter after roughly 60% of the S&P 500 market cap has now reported earnings. 88% of companies that reported have beaten expectations. The biggest companies are growing the fastest and maintaining the highest earnings growth expectations. Semiconductors and the pharma/biotech/life science industries have the highest growth expectations, while the energy and banking industries have the slowest growth expectations.

We continue to incorporate a contrarian view on markets and investing in opportunities that have not yet found the headline narrative. Mega-cap growth stocks that have outperformed have much higher expectations than those that have not attracted the crowd. In fact, excluding Tesla (TSLA), analysts project that the widely referenced “Magnificent Seven” will report +63% earnings in the fourth quarter, compared to expectations for the other 494 companies in the index that are expected to post an 8.6% decline. We are finding plenty of names that can beat those low expectations.

Chart 5: Concentrated Group of Stocks Are Driving the Earnings Growth, High Expectations Persist⁶

There are many more companies in the S&P 500 that did not participate in last year’s rally which are at great value and will benefit from many of the leading indicators, like lower inflation and the strong consumer. We think there is opportunity within banking and energy to participate in market outperformance. Financials remain well-capitalized and rebounding from a trough activity/lending environment in 2023, while M&A activity in the energy sector and consistent cash flows underscore that this sector has secular opportunities for the next decade.

3. The Week Ahead.

Earnings – Monday: EL, CAT, MCD; Tuesday: CARR, GEHC, CMI, AMGN, F; Wednesday: UBER, CDW, HLT, EMR, DIS, MCK, PYPL, WYNN; Thursday: HSY, ZBH, DXCM, TTWO; Friday: PEP.

Economics – Monday: ISM Services PMI (January).

Stephanie Link: CNBC TV Schedule

Return for Selected Indices⁷

Sources

1. FactSet (chart). As of February 4, 2024.
2. FactSet (chart). As of February 4, 2024.
3. FactSet (chart). As of February 4, 2024.
4. Wall Street Journal. As of February 5, 2024.
5. FactSet (chart). As of February 4, 2024.
6. Wall Street Journal (chart). As of February 5, 2024.
7. Bloomberg. As of February 4, 2024.

Disclosure

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, as a member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.