Stock Indices Show Optimism in Early Futures Trading
Early Friday futures trading reveals that stock indices are off to a positive start. However, whether this optimism will hold when Wall Street opens will likely depend on labor market data.
Investors are hoping for a U.S. nonfarm payrolls report that shows steady jobs growth and modest wage inflation. This outcome would be preferred by equity bulls because it is unlikely to deter the Federal Reserve from cutting borrowing costs in the spring.
Big Tech Boosts the Market, but History Suggests Caution
Once again, big tech companies are driving the market’s performance. However, investors should be cautious about assuming this trend will continue indefinitely. History shows that periods of significant outperformance are often followed by periods of underperformance.
According to Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, high valuations and unrealistic growth expectations can lead to disappointments and significant devaluations. This can result in sectors that previously enjoyed extraordinary gains reversing much of their performance.
Suzuki points to previous trends that have dominated the market, such as the rise of international stocks over U.S. stocks in the late 1960s to late 1980s, and the dominance of U.S. stocks over cash in the late 1980s to early 2000s. These trends eventually gave way to new investment opportunities.
Danger in Relying Solely on U.S. Equities
Investors should be cautious about relying solely on U.S. equities. While the U.S. stock market has seen a surge in its global share and market concentration, it is also the most expensive it has ever been compared to the rest of the world.
Investors appear to be doubling down on this concentration, with the average retail investor having a significant portion of their stock portfolio tied up in just three tech stocks.
According to Suzuki, the current dominant trade is set to end, as structural shifts in the global economy are underway. He suggests that now is a once-in-a-generation opportunity to rebalance portfolios and look for investment opportunities outside of U.S. large cap growth stocks.
Market Updates
U.S. stock-index futures are trading higher on Friday, with benchmark Treasury yields edging up. The dollar is slightly softer, while oil prices gain and gold trades around $2,050 an ounce.
Key asset performance in the last five days shows modest gains in the S&P 500 and Nasdaq Composite, with fluctuations in the 10-year Treasury yield, gold, and oil prices.
Nonfarm Payrolls Report and Other Economic Data
The highly anticipated January nonfarm payrolls report will be released at 8:30 a.m. Eastern. Economists are forecasting a net addition of 185,000 jobs. Other U.S. economic data due on Friday includes December factory orders and January consumer sentiment.
Shares of Meta Platforms and Amazon.com are higher in premarket trading following well-received earnings reports. However, Apple’s stock is down after reporting weak sales in China.
Chevron’s stock is up after the company announced a record return to shareholders in 2023, offsetting a decline in profit and revenue shortfall.
Interesting Reads
– India is attracting investors as Chinese stocks struggle.
– Missing China billionaire banker returns to resign.
– Could Japan’s lost decades happen in America?
Analyst comment
Heading 1: Positive news. The market is off to a positive start, but the optimism depends on labor market data. If the nonfarm payrolls report shows steady jobs growth and modest wage inflation, it would be preferred by equity bulls and unlikely to deter the Federal Reserve from cutting borrowing costs in the spring. Market expected to stay positive.
Heading 2: Cautious news. Big tech companies are driving the market’s performance, but caution is advised as periods of significant outperformance are often followed by underperformance. High valuations and unrealistic growth expectations can lead to disappointments and devaluations. Sectors that previously had extraordinary gains could reverse. Investors should be cautious and reassess their investments.
Heading 3: Neutral news. Investors should be cautious about relying solely on U.S. equities as the market is the most expensive it has ever been compared to the rest of the world. Structural shifts in the global economy suggest that the current dominant trade will end. Opportunity to rebalance portfolios and look for investments outside of U.S. large cap growth stocks.
Heading 4: Neutral news. U.S. stock-index futures are trading higher with benchmark Treasury yields edging up. Dollar slightly softer, while oil prices gain and gold trades around $2,050 an ounce. Modest gains in S&P 500 and Nasdaq Composite, fluctuations in 10-year Treasury yield, gold, and oil prices. Market showing some stability.
Heading 5: Mixed news. Highly anticipated nonfarm payrolls report and other U.S. economic data to be released. Positive performance for Meta Platforms and Amazon.com in premarket trading, but Apple’s stock down due to weak sales in China. Chevron’s stock up after announcing a record return to shareholders, offsetting decline in profit and revenue shortfall. Earnings reports and macroeconomic data will influence market.
Heading 6: Neutral news. Various interesting reads not directly impacting the market.
