05.02.202407:20 Forex Analysis & Reviews: Wall Street is on the verge of change: how the US economy ignores the Fed

The current version was alarmed by evidence suggesting that the economy might be too heated for the Federal Reserve to cut rates without risking an inflation rebound. Friday's U.S. employment data served as the latest indicator of stronger-than-expected growth after Federal Reserve Chairman Jerome Powell, a few days earlier, quashed hopes that the central bank would begin to lower rates in March.

"Looking back at the fourth quarter and the recent stock rally, it can largely be attributed to the anticipation of a Fed pivot, and we are witnessing this pivot evaporate before our eyes," said Matthew Miskin, one of the chief investment strategists at John Hancock Investment Management.

The Friday employment report revealed that non-farm payroll employment increased by 353,000 last month, significantly surpassing the 180,000 growth anticipated by economists. Additionally, the economy added 126,000 more jobs in November and December than previously reported.

Many investors consider strong growth a positive sign for stocks, especially if it is accompanied by higher-than-expected corporate earnings. The S&P 500 index reached a new high on Friday following the employment data release, spurred by a sharp rise in shares of Facebook's parent company Meta Platforms (META.O) and Amazon (AMZN.O), which surged by 20% and 8% respectively after their corporate results.

In 2024, S&P 500 earnings are expected to grow by almost 10% following a 3.6% increase in 2023. These expectations will be tested in the upcoming week with another significant batch of reports, including from Eli Lilly (LLY.N), Walt Disney (DIS.N), and ConocoPhillips (COP.N).

Analysts predict a remarkable year for U.S. stocks: 2024 will end more than 10% higher at 5500 points. They attribute this growth to optimism about the business potential of artificial intelligence, which helped stocks like Nvidia (NVDA.O) last year, likely contributing to this growth.

However, sustained growth above trend poses another problem – concerns about inflation rebound.

A longer period of high interest rates could also exacerbate stress in sectors of the economy that are already suffering, such as commercial real estate.

Shares of New York Community Bancorp (NYCB.N), a major CRE lender in New York, fell in recent days, sparking broader regional banking issues after the company cut dividends and announced unexpected losses.

As the fourth-quarter earnings season continues, 230 companies in the S&P 500 index have reported. Of these, 80% exceeded Wall Street's expectations. Overall, analysts forecast a 7.8% year-over-year increase in S&P 500 earnings for the October-December period, a significant improvement from the 4.7% estimate as of January 1.

Meta Platforms shares rose 20.3% to a record level after announcing the payout of its first dividends on the eve of Facebook's 20th anniversary.

Amazon.com (AMZN.O) shares jumped 7.9% following a revenue increase in the fourth quarter as new generative artificial intelligence features in cloud computing and e-commerce spurred solid growth during the holiday season.

Regional bank shares stabilized after two days of sharp sell-offs triggered by disappointing earnings from New York Community Bancorp (NYCB.N). The bank's shares rose 5.0% on Friday, and the KBW regional banking operations index (KRX) increased by 0.2%.

The S&P 500 index rose 1.07% and closed at 4958.61 points. The Nasdaq index gained 1.74% to 15628.95 points, and the Dow Jones industrial index increased by 0.35% to 38654.42 points.

Of the S&P 500's 11 sector indexes, six rose, led by the communication services index (.SPLRCL), which gained 4.69%, followed by a 2.49% increase in the consumer services index (.SPLRCD).

Cigna (CI.N) shares increased by 5.4% after the health insurance provider raised its annual profit forecast.

Microchip Technology (MCHP.O) shares fell by 1.6% following a disappointing sales forecast from the chipmaker.

Skechers USA, a footwear manufacturer, also provided a gloomy forecast, resulting in a 10.3% drop in its shares. Shares of the largest oil company, Chevron Corp (CVX.N), increased by 2.9% after exceeding analysts' estimates.

In the S&P 500 index (.AD.SPX), declining shares outnumbered advancing ones at a ratio of 1.2 to one.

The S&P 500 set 68 new highs and four new lows; Nasdaq recorded 75 new highs and 144 new lows. Trading volume on U.S. exchanges was relatively low: 11.2 billion shares were sold compared to an average of 11.6 billion shares over the previous 20 sessions.

Accelerated growth and expectations that rates will remain at their current level for an extended period could lead to an increase in the yield on treasury bonds. Higher yields may pressure stocks as they compete with bonds for investors, and higher rates increase the cost of capital in the economy.

The yield on 10-year treasury bonds, which moves inversely to bond prices, reached 4.05% on Friday.

Investors continue to anticipate the Federal Reserve cutting rates by about 125 basis points this year. This is less than the approximately 150 basis points estimated earlier this week but still significantly more than the 75 basis points forecasted by the Fed.