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The S&P 500 Index hit a new record high inter-week before closing lower on Friday. For the week, the S&P 500 Index was +1.1%, the Dow was +0.6%, and the NASDAQ +0.6%. The S&P 500 Index was led by the Energy, Communication Services, and Financial sectors, while the Consumer Discretionary, Real Estate, and Health Care sectors lagged. The 10-year U.S. Treasury note yield increased to 4.160% at Friday’s close versus 4.146% the previous week.
Stronger than anticipated Gross Domestic Product (GDP) growth in the fourth quarter helped rally stocks and commodities such as crude oil. Fourth quarter GDP grew at a 3.3% annualized rate. CME Fed funds futures now imply a 50.4% probability that rates remain in the 5.25% to 5.50% target range for March and that the first rate cut happens in May. We will hear from the Federal Open Market Committee (FOMC) on Wednesday and see if they offer further insight to the current path for monetary policy. The Employment Situation Report for January is scheduled for Friday. Data between now and the March FOMC meeting should likely determine the timing of an initial interest rate cut.
The earnings report cadence continues this week with 86 companies in the S&P 500 Index scheduled to report earnings. Current fourth quarter expectations for the S&P 500 Index are earnings growth of 4.9% and revenue growth of 2.7%. For full-year 2023, S&P 500 Index earnings are expected to grow by 3.0% with revenue growth of 2.0%. For full-year 2024, earnings are expected to grow by 10.3% with revenue growth of 4.9%.
In our Dissecting Headlines section, we look at the recent GDP and Personal Consumption Expenditures reports.
Financial Market Update
Dissecting Headlines: GDP and PCE
Two key economic reports from last week demonstrate the economy is growing and inflation is moderating. The fourth quarter GDP report showed the economy growing at a 3.3% annual rate. This was lower than the 4.9% growth rate in the third quarter, but still above most expectations, and led to an overall 2.5% growth rate for the year.
Consumers continued to spend during the quarter with personal consumption expenditures growing at 2.8%. Spending on goods grew 3.8% and spending on services grew 2.4%. Areas such as dining out, travel, and health care all contributed to higher spending. A decrease in single family home construction was a drag on fixed investments. Growth in exports also exceeded growth in imports, led by energy and financial services.
At the same time the economy is growing, inflation continues to moderate. The core Personal Consumption Expenditures (PCE) Price Index for December grew 0.2% month-to-month and 2.9% year-over-year. While still above the Fed’s 2.0% target range, inflation has been trending down since its peak in mid-2022.
These reports provide reason for optimism, especially as the Federal Reserve is moderating its stance on interest rates.
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