Interactive Investor

Market snapshot: stocks pause for breath

Investors have been used to daily gains across the hot US indices, but there's a sense that stocks are taking a breather after such a rapid rally. ii's head of markets discusses the current situation.

27th February 2024 07:39

Richard Hunter from interactive investor

    US markets have paused for breath after a strong run powered by a largely successful earnings season and renewed excitement over the potential of artificial intelligence, which has driven the main indices to hover around record highs.

    At such elevated levels, expectations will tick up given more stretched valuations, while investors will continue to scrutinise the economic data which has so far defied estimates and lessened any pressure on the Federal Reserve to cut interest rates for the moment. The current consensus points to three cuts this year beginning in June, something of a far cry from the beginning of the year when six cuts were expected to commence in March.

    As such, and in the absence of any high level data, Thursday’s Personal Consumption Expenditures report will take on additional significance, with a hotter-than-expected print likely to test the enthusiasm which investors have had so far this year.

    The reading will follow data from yesterday which saw new home sales for January coming in below estimates, in light of higher mortgage rates. Nonetheless, a rise of 1.5% was accompanied by an ongoing shortage of previously owned homes, while a positive manufacturing reading pointed to underlying economic resilience.

    Elsewhere, and in a rare change to the Dow Jones Industrial Average, Amazon.com Inc (NASDAQ:AMZN) replaced Walgreens Boots Alliance as a constituent of the traditional 30 company index. Amazon becomes the third of the “Magnificent Seven” to be represented, thus arguably modernising what has been an historically industrial group. By the same token, the Dow increases its exposure slightly to the performance of the technology mega caps, where valuation tests are likely to become more pressing given the recent share price surges.

    In the meantime and despite a pause for breath, the main indices remain comfortably ahead in the year to date, with the Dow Jones ahead by 3.7%, the S&P500 by 6.3% and the Nasdaq by 6.4%.

    Asian investors were also more circumspect overnight, with the Nikkei in Japan ending largely flat after testing its own record high once more. A higher-than-expected inflation release unnerved investors somewhat, although it remained in line with the central bank’s 2% target and cemented expectations for an exit from negative interest rates in April.

    The weakness of the yen has helped draw international institutional investors to the region in their droves, despite the country just having entered a technical recession and where China is not currently seen as an attractive alternative.

    In the UK, markets made a positive but unconvincing move at the open, with one of the highlights coming from pleasing Smith & Nephew (LSE:SN.) numbers.

    Elsewhere within the premier index, mining stocks caught the attention of potential bargain hunters, with Endeavour Mining (LSE:EDV) also edging ahead and casting some doubts on whether it will be relegated from the FTSE100 after all. The reshuffle will be announced after the close of business, but based on closing prices from today, which means that easyJet (LSE:EZJ) will need to wait in the wings to discover whether it has regained its position at the top table.

    In the meantime, the cautious gains for the main indices at the open does little to move the dial or indeed replicate some of the gains being seen elsewhere in developed markets, with the FTSE250 down by 2.8% in the year to date, although the FTSE100 has been slowly clawing back some losses and stands down by just 0.6% so far this year.

    Even so, investors have become increasingly infatuated with the fortunes of high-growth tech shares, which has largely excluded the main index from participating in the recent rallies been seen globally.

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