Broker Check

Weekly Market Update February 23, 2024

February 25, 2024

Fed Funds 5.25% - 5.5%, US Ten Year 4.25%, Oil $76.59

Stock indices continue to reach highs, as fears that the Federal Reserve will not lower interest rates soon are not deterring equity investors. Interest rate futures contracts now see only a 35% chance of lower rates coming out of the May meeting. Federal Reserve Bank of Richmond President Thomas Barkin said recent economic data highlighted how price pressures in some sectors are still too high, despite improvement in the overall inflation picture. Barkin, echoing several of his colleagues, said that the Fed should wait to cut interest rates until it has more evidence that inflation is firmly on a path to the central bank’s 2% target.

 Artificial Intelligence (AI)I and AI-related stocks have been the drivers since October 31, led by now-familiar names like Nvidia (NVDA $797, +100%), CrowdStrike Holdings (CRWD $315, +80%), Broadcom (AVGO $1,300, +54%), Salesforce (CRM $292, +46%), and Accenture (ACN $377, +29%). Their momentum is carrying other stocks that are not in the technology sector but are related, such as Amazon (AMZN $173, +32%) in the Consumer Discretionary sector, Alphabet (GOOGL $144, +15%) in Communications Services, and Mastercard (MA $473, +27%) among Financial Services stocks.

 The chart below from S&P Dow Jones Indices reveals how the technology sector has far outperformed the overall index over the past ten years. While the S&P 500 has climbed three-fold, the Information Technology sector of sixty-four stocks is higher by seven and a half times. The diversion is especially pronounced since the pandemic-induced low of 2020.

The ten largest stocks by market capitalization in the S&P 500 Technology Sector are:

Many of these stocks are trading at very high price-to-earnings multiples, and investors should be wary before diving into them without considering whether future cash flows can justify their high valuations. Aggressive growth stocks should exhibit steadily increasing sales leading to positive operating leverage, where operating income grows at a faster rate than revenues. Do not let FOMO, or Fear-Of-Missing-Out, lead you into overpaying, and maintain a commitment to slower-growing but steadily performing companies in other sectors.

 

Wishing You a Great Week,