U.S. stocks rallied to close higher on Friday, as the S&P 500 and Dow snapped a three-session losing streak and the Nasdaq rose more than 2%, as quarterly earnings helped lift Netflix, while Google parent Alphabet climbed after announcing job cuts.
Shares of Netflix Inc jumped 8.46% as the streaming company added more subscribers than expected in the fourth quarter and said co-founder Reed Hastings was stepping down as chief executive.
Netflix's quarterly report comes as the technology and other growth-related sectors face hurdles due to the rising interest rate path of the U.S. Federal Reserve and recession worries that have led companies such as Microsoft Corp and Amazon.com Inc to lay off thousands of employees.
Alphabet Inc was the most recent company to announce job cuts as it said it was cutting 12,000 jobs, sending shares 5.34% higher.
The gains sent the communication services index up 3.96% as the top performer among the 11 major S&P 500 sectors, notching its biggest daily percentage gain since Nov. 30.
High-growth sectors such as communication services were among the worst performing in 2022 and were notably weaker in the last few months of the year as investors gravitated towards stocks with high dividend yields.
"Today’s action is probably because we had three down days so it got into a little bit of an oversold position and they are just doing a little bit of bargain hunting today," said Ken Polcari, managing partner at Kace Capital Advisors in Boca Raton, Florida.
"If people are viewing an opportunity, if they are getting more comfortable with the Fed’s narrative... investors are starting to buy into that narrative and saying 'OK that is the way it is, let’s look at the stocks that got really beaten up' because the market is a discounting mechanism."
The Dow Jones Industrial Average rose 330.93 points, or 1%, to 33,375.49, the S&P 500 gained 73.76 points, or 1.89%, to 3,972.61 and the Nasdaq Composite added 288.17 points, or 2.66%, to 11,140.43.
For the week, the Dow lost 2.7%, the S&P 500 shed 0.66% and the Nasdaq gained 0.55%.
Comments from Federal Reserve officials have largely said they expect interest rates to climb to at least 5% this year as the central bank continues to try and tamp down high inflation. On Friday, Fed Governor Christopher Waller said the central bank may be "pretty close" to a point where rates are "sufficiently restrictive" to cool inflation, which gave an additional boost to equities.
The Fed is largely expected to raise rates by 25 basis points (bps) at its Feb. 1 policy announcement.
Still, concerns about corporate earnings persist as the U.S. economy shows signs of a slowdown and a possible recession.
Analysts now expect year-over-year earnings from S&P 500 companies to decline 2.9% for the fourth quarter, according to Refinitiv data, compared with a 1.6% decline in the beginning of the year.
Gains on the Dow were curbed, however, by a 2.54% fall in shares of Goldman Sachs Group Inc after the Wall Street Journal reported the Fed was probing the company's consumer business.
Volume on U.S. exchanges was 11.90 billion shares, compared with the 10.87 billion average for the full session over the last 20 trading days.
Advancing issues outnumbered declining ones on the NYSE by a 3.55-to-1 ratio; on Nasdaq, a 2.63-to-1 ratio favored advancers.
The S&P 500 posted one new 52-week high and four new lows; the Nasdaq Composite recorded 77 new highs and 20 new lows
Tanaya Macheel and Carmen Reinicke of CNBC also report stocks close higher Friday, Nasdaq notches third straight week of wins:
Stocks rallied on Friday to finish the week strong after briefly losing the momentum of the January rally.
The Dow Jones Industrial Average added 330.93 points, or 1%, to close at 33,375.49, while the S&P 500 advanced 1.89% to 3,972.61. Both indexes snapped a three-day losing streak. Meanwhile, the Nasdaq Composite rose 2.66%, with help from Netflix and Alphabet, to end the day at 11,140.43.
The Nasdaq was also the outperformer for the week, posting a 0.55% gain and its third positive week in a row. The Dow finished the week lower by 2.70%, and the S&P posted a 0.66% loss, both breaking two-week win streaks.
All of the major averages are still in positive territory for the year.
“We’re having a more emotional reaction that expected,” said Jeff Kilburg, founder and CEO of KKM Financial. “A lot of people got so pessimistic and we saw parabolic moves to kick off the year. Now, as expected, the markets aren’t going in a straight line.”
“We are finding a way to continue to move and have higher lows,” he added. “The higher lows put a little bit of confidence in the bulls. However, the technicals are still favoring the bears and selling rallies.”
Investors continued to monitor earnings reports and mega cap tech shares led the market higher. Netflix gained about 8.5% after posting more subscribers than expected even though its quarterly earnings missed analysts’ estimates. Alphabet rose more than 5% after the company announced it will lay off 12,000 employees.
“You’re seeing more weight go into some of the beat-up technology and because people are becoming a little bit more thoughtful of opportunity in the absolute tech wreck we saw in 2022,” Kilburg said.
Lewis Krauskopf of Reuters also reports a spate of earnings reports in coming weeks is set to test a recent bounce in technology and other megacap stocks, a category whose leadership position in U.S. markets has faltered after last year’s deep selloff:
The tech-heavy Nasdaq 100 index (NDX) has gained over 3% in 2023, double the rise for the S&P 500 (SPX). Shares of some megacap companies - which include those grouped outside of tech in sectors like communication services and consumer discretionary - have shot higher, with Amazon (AMZN), Meta Platforms (META) and Nvidia (NVDA) posting double-digit percentage increases.
Several factors are driving that outperformance, including investors piling into stocks they believe were overly punished in 2022. A moderation in bond yields, whose jump last year particularly pressured tech-stock valuations, is also likely helping the group, investors said.
Now, however, the focus is shifting to whether these companies can withstand a widely expected economic downturn while supporting valuations that some investors believe are too high.
"To keep this rebound going, the guidance for ’23 has to be less worse than what people are anticipating," said Peter Tuz, president of Chase Investment Counsel, whose firm recently pared its holdings in Apple (AAPL) and Microsoft (MSFT).
Tech and growth stocks led U.S. equity markets for years following the 2008 financial crisis, aided by near-zero interest rates. They struggled along with broader markets last year as the Federal Reserve raised rates to fight surging inflation, and some investors doubt they will regain the market's pole position any time soon. The Nasdaq 100 fell 33% in 2022, while the S&P 500 lost 19.4%.
The top six stocks by market value in late 2021 - Apple, Microsoft, Alphabet (GOOGL), Amazon, Meta and Tesla (TSLA) - have seen their collective weight in the S&P 500 fall from 25% to 18%, according to Strategas Research Partners.
That dynamic echoes a pattern seen after the market’s dot-com bubble burst after the turn of the century. The six biggest stocks at that time saw their collective weight in the S&P 500 decline to 5% from a peak of 17% over a number of years, according to Strategas.
"This leadership unwind ... is going to be one that is measured in years, not in months or quarters," said Chris Verrone, head of technical and macro research at Strategas.
EARNINGS TESTCompanies comprising over half the S&P 500's market value are due to report results in the next two weeks, including Microsoft, the second-largest U.S. company by market value, on Tuesday, Elon Musk's Tesla and IBM (IBM) on Wednesday and Intel (INTC) on Thursday. Apple, the largest U.S. company by market value, and Google-parent Alphabet report the following week.
Fourth-quarter earnings in the tech sector are expected to have declined 9.1% from a year ago, compared to a 2.8% decline for S&P 500 earnings overall, according to Refinitiv IBES.
A critical question for many megacaps, once heralded for their stellar growth, is whether they can increase revenue and profits significantly while cutting costs in the face of a possible recession.
Alphabet Inc (GOOGL) said Friday it is cutting about 12,000 jobs, or 6% of its workforce, the latest tech giant to announce layoffs. Microsoft on Wednesday said it would eliminate 10,000 jobs while Amazon started notifying employees of its own 18,000-person job cuts.
"The biggest positive could be if they could show a control of expenses while keeping at least reasonable growth intact," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey. "It’s a hard balancing act."
Valuations for tech and megacap companies have moderated after last year's selloff, though they still stand above those of the broader market. The S&P 500 tech sector still trades at a roughly 19% premium to the broader index, above its 7% average of the past 10 years, according to Refinitiv Datastream.Nonetheless, some investors are reluctant to bet against tech stocks.
The Wells Fargo Investment Institute counts tech as one of its favored U.S. sectors.
The firm expects an economic downturn and believes many tech companies have businesses that are resilient to economic uncertainty, said Sameer Samana, a senior global market strategist there.
"It’s just too important and too big a weighting not to participate," Samana said. "But the years of handily outperforming the S&P are probably now behind us.”
In related news, Reuters reports that BOJ Governor Haruhiko Kuroda, who addressed the World Economic Forum in Davos, Switzerland, said the central bank will maintain its "extremely accommodative" monetary policy to achieve its 2% inflation target in a stable, sustainable manner:
Alright, it's Friday and I will try to keep it short.In currencies, the dollar shot up against the yen after the BOJ governor's remarks.
The dollar rose as high as 130.60 yen and was last up 0.9% at 129.51. The greenback had its biggest percentage gain since early January.
"There are some doubts within the BOJ whether the boost in inflation in Japan is going to deliver them all the way back to 2%," said Thierry Wizman, global FX and rates strategist at Macquarie in New York.
At the same time, investors are debating whether the Federal Reserve's aggressive approach to tightening monetary policy to battle inflation might push the U.S. economy into recession.
U.S. Treasury yields rose as investors considered whether the Fed is likely to keep raising rates as far as it has indicated. Also, investors bet that a recent bond rally may be overdone in the near term.
Benchmark 10-year yields were last at 3.482%, after falling to 3.321% on Thursday, the lowest since Sept. 13 and just above its 200-day moving average. The yields have dropped from 3.905% at year-end, and from a 15-year high of 4.338% on Oct. 21.
In energy, oil prices rose and registered a second straight weekly gain as China's economic prospects improved.
Brent crude settled at $87.63 a barrel, up $1.47, or 1.7%. U.S. crude settled at $81.31 a barrel, gaining 98 cents, or 1.2%.
The same goes for the broader market, smart money is shorting it at these levels:
There are a lot of reasons why I remain bullish on the greenback but the big gains were made last year.
During the fall of 2021, we warned that the US economy’s rapid transition from reflation to overheating worsened the appeal of 60/40 portfolios. The key risk, as we correctly anticipated, was a surge in long term yields in response to high inflation and Fed tightening – weighing heavily on valuation sensitive ‘growth’ stocks.While no long only strategy delivered positive real returns in 2022, rotating away from tech and nominal bonds in favour of ‘value’ and defensive names helped limit portfolio losses. Risky assets today are trading at much cheaper valuations, which in combination with decelerating inflation has fueled a mini rally over the past few months.
The macro context, however, makes a sustained ‘bull’ run an unlikely outcome. In particular, our research points to a sharp slowdown in activity in 2023 and 2024 (F1), with persistently high inflation limiting the extent of Fed support. A weak earnings outlook (F2) and limited upside for valuations call for active sector and style rotation to generate strong returns.
If you don't know them, I suggest you subscribe to a free trial and learn more about Montreal-based Numera Analytics, they're truly excellent providing great macro research covering the world.
In his latest weekly commentary, A Sneak Peek Into Doctor Housing’s Portfolio For 2023, Francois Trahan notes in the email he sent out this morning:
Apologies for publishing a day later than usual this week, but I am back on the road meeting with clients. These face-to-face meetings are giving me a good sense of sentiment, and it’s clear that conditions have changed from a few months ago. Truth be told, pitching the bearish story had become fairly easy last September. Today, it is met with more questions, concerns, and doubts. It seems that investor consensus went from believing we are facing a recession to now thinking that any recession would be mild, or we may even get away with a soft-landing scenario.
The short-term gauges we track argue that the bear market rally will likely end in the next 2-4 weeks and give way to a renewed downtrend in equities. This development should also help revert investors’ expectations back to the realities ahead: the dire economic outlook is the result of the most aggressive Fed tightening cycle in generations. Contrary to popular belief, the peak in headline inflation is not what has been driving equities higher these last few months. This is a story that everyone wants to be true as it implies better days ahead but unfortunately that is not the case.The driver of risk today is the economy. The market is fearful of slower growth. The chart above shows that credit spreads correlate best with Initial Claims and in all honesty the relationship is not in the direction we expected. Spreads are widening with every uptick in claims (and vice versa) thus pressuring P/Es. This is a market that fears a recession, and that outcome begins with weaker labor markets. The early-cycle housing industry (see chart above right) paints a grim view of Initial Claims and dictates a VERY bearish outlook for stocks. Today's report looks at what housing has to say about the economy, inflation, and of course financial markets.
Francois has posted a lot of great insights on Twitter here to back up his claims.
Don't get too excited about EPS reporting season ... the outlook is pretty terrible (see ISM advanced 12 months!). This might be the last positive quarter we see for quite some time. Just sayin'. pic.twitter.com/Qb1NoTDZPD
— Francois Trahan (@FrancoisTrahan) January 19, 2023
As for me, I maintain that the Fed might even hike by 50 basis points at its next two meetings, although given recent inflation data came in better than expected, the market is pricing in two 25 bps hikes.
I also maintain the big risk this year is that wage inflation starts rising as the economy starts slowing.
So forget about headline inflation, keep your eyes peeled on wage inflation in the US and rest of the world.
We shall see but more importantly, I agree with Larry Summers, a 1970s crisis awaits us if central banks relent on rates:
Summers Warns of 1970s Crisis If Central Banks Relent on Rates https://t.co/0MGGPXGi03 via @YahooFinance
— Leo Kolivakis (@PensionPulse) January 20, 2023
Below, Harvard Professor and former U.S. Treasury Secretary Larry Summers shares his thoughts on the economy's journey from secular stagnation to runaway inflation, and where central banks go from here. Take the time to read my LinkedIn post here and see al the comments.