Mega sized companies are continuing to shake off the rocky start to the year amid conviction that the Federal Reserve will soon cut interest rates and the belief that the artificial intelligence boon is set to continue.
Is this realistic?
Commenting about monetary policy and interest rates, at the beginning of the year it was almost foregone conclusion the Fed will lower interest rates in March. At the time of this writing, the market is now suggesting only a 46% probability. A multitude of Fed officials have pushed back on this belief stating the first reduction may not occur until mid-summer.
The benchmark 10-year Treasury is more than 20 basis points higher than 2023-year end levels.
While only 11% of the S & P 500’s market value has reported earnings so far, about 85% of companies in the index have exceeded estimates according to Bloomberg. Tech heavy weights NFLX and TSLA reports profits today and tomorrow, respectively.
Bloomberg writes the “Magnificent Seven” are expected to deliver combined profit growth of about 46%.
Oil is up about 7.5% since the start of the year yet the oil sector is down about 5%. Is this realistic given the tensions in the Middle East, tensions that may stoke inflationary pressures that could threaten the optimistic monetary policy outlook, an outlook that is already challenged by Fed officials? Nivida is almost worth as much as the oil sector. Is this realistic?
Speaking of potential imbalances, the Russell 2000 is still mired in a Bear Market, defined as a 20% decline of more from its apex. The disconnect between the NASDAQ/S & P 500 which has been propelled by the massive increase in “The Magnificent Seven” and the Russell 2000 is historical. This disparity has never occurred.
As with all imbalances, the imbalance will be corrected but the question is to when and as to how and from what catalyst.
Commenting on yesterday’s market activity, oil rebounded from about a 2% early morning decline, the decline the result of Libya restarting its largest oil field that was disrupted by civil unrest.
However, the 2% decline was reversed to almost a 3% gain following reports a new front has been opened in the Ukrainian War highlighting the vulnerability of oil exports from Russia’ western ports. The first ever drone attacks occurred in a region that once viewed as “untouchable.”
Is this only a headline or something of significance? As noted several times a geopolitical premium is lacking in most markets, perhaps most pronounced in the oil markets.
Treasuries were mixed with the yield curve nominally steepening ahead of the deluge of offerings.
Last night the foreign markets were down. London was down 0.10%, Paris down 0.23% and Frankfurt down 0.03%. China was up 0.53%, Japan down 0.08% and Hang Seng up 2.64%.
Futures are flat ahead of several significant earnings releases. The 10-year is off 5/32 to yield 4.14%.
