Hope you are all doing well. Stocks started and ended the week with rallies, helping to offset the sell-off from Monday afternoon to Friday morning. Index results varied widely; the Dow rose 2.5% and finished above the 50,000-point level for the first time. However, the S&P 500, which crossed 7,000 on Monday, did not make it back, posting a fractional decline. The NASDAQ fell 1.8%. Three Doors Down frontman Brad Arnold lost his battle to cancer this week. I have broken down this week’s update using lyrics from his hit song Kryptonite.
“You took for granted all the times, I never let you down”
Mega-cap technology companies continue to post earnings that match or exceed expectations. Yet investors stay fearful of a letdown. The fear now is surging AI spending. But the weakness has been concentrated in tech, not the broader market. I believe the clear winners have already emerged; it’s the mega-cap tech firms that can afford to spend, and I believe they will continue to grow their earnings until they show otherwise. For sure, there will be pockets of volatility like we are experiencing now, but longer term, the winners are clear. So far this year, tech stocks are down while other sectors are up. However, long-term stock prices move based on earnings. As of Friday, the tech sector is projected to post average fourth-quarter earnings growth of 30.4%. That’s more than double the 13.0% earnings growth projection for all 11 sectors across the S&P 500.
“I took a walk around the world to ease my troubled mind”
Here in the States, inflation has been stubborn as the Federal Reserve has not been able to get it down to its 2% target. That is not the case in Europe. The Eurozone reported that inflation slipped to 1.7%, below the bank’s target inflation rate of 2.0%. As a result, the European Central Bank (ECB) kept its policy rates unchanged for the fifth consecutive meeting. It’s worth noting that they didn’t raise interest rates as much as we did here. Their key interest rate is at 2.0%. I still don’t think international stocks should be more than a 15% allocation in anyone’s portfolio. My feeling is that profit drives stock prices. Of the ten most profitable companies in the world 8 are U.S. companies. The other two are #5 Saudi Aramco and #10 Industrial and Commercial Bank of China. Nothing from Europe.
“If I go crazy, then will you still call me Superman?”
The stock market hit an all-time high in January. We haven’t had a meaningful drop since April of last year. So, of course, sentiment is positive. U.S. consumer sentiment rose to the highest level in six months. Friday’s preliminary survey reading from the University of Michigan Index of Consumer Sentiment was 57.3, up from a recent low of 51.0 three months earlier. Nevertheless, the measure is well below the 64.7 reading reached 12 months ago when the President first took office. We are not yet at an excessive level of optimism like we were in January 2025, but it bears watching. Consumer sentiment is widely considered a contrarian indicator. That is particularly true at extremes. When sentiment is extremely low, it often signals that the worst of economic or market declines has passed. A good time to buy. Conversely, excessive optimism can signal a “frothy” market, indicating potential downward risks, a good time to sell, or at least pare down risk.
“Kryptonite”
Bitcoin and Silver’s superhuman price acceleration seems to have been given some kryptonite. The price of Bitcoin fell early Friday to as low as $61,000. That level was less than half of its record high of about $126,000 set four months earlier. As of Friday afternoon, Bitcoin climbed back to around $70,000, but it was down about 17% for the week. Silver was trading around $77 per ounce on Friday, down from a record of $121 just a little over a week ago on January 29.
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