U.S. stocks dropped on Friday but closed higher for the week, ahead of Big Tech earnings and the Federal Reserve meeting next week. Once again, the gains were broad, led by techs and the Dow shares. However, analysts are skeptical about the fate of the rally, which may have come too fast, with market sentiment able to change on a flip of a dime.
The S&P 500 ended Jan. 24 at 6,101, up 2.76 percent for the week and shy of an all-time high; the Dow Jones closed at 44,424, up by 2.95 percent; the Nasdaq finished the week at 19,954, up 3.19 percent; and the small-cap Russell 2000 gained 1.81 percent to end at 2,307.
Wall Street began the shorter trading week with bullish sentiment from the previous week, fueled by falling bond yields that make equities more appealing than stocks.
By the middle of the week, the rally gained momentum again, thanks to some positive news from the new administration in Washington. First, the new administration doesn’t seem to be in a rush to impose tariffs, appeasing those worried about the inflationary impact of these policies. This helped stabilize the bond market for the rest of the week, providing a cushion for stocks.
Second, the Trump administration is signaling that it wants to make the U.S. a dominant AI player, including a $500 billion Stargate investment initiative. It helped re-ignite the AI hype, contributing to the gains of the tech-heavy Nasdaq index.
The string of good earnings news continued for the rest of the week, with United Airlines, P&G, GE Aerospace, and Twilio all reporting better-than-expected earnings and helping broaden the rally beyond techs.
There was one more positive factor helping stocks continue their winning streak: falling oil prices as President Donald Trump made good on their promise to bring oil prices down, announcing several policies that put downward pressure on the oil market.
James Demmert, chief investment officer of New York City-based Main Street Research, welcomed the continuing gains in stocks, but remained wary of next week’s Fed meeting.
“Stocks are approaching their prior December highs, after some choppiness over the past four weeks, and while we are encouraged by the market’s strength, we’re not out of this corrective phase,” he told The Epoch Times.
“We expect more downside pressure in stocks as the Federal Reserve meets next week and extinguishes investor expectations about cutting rates anytime soon.”
Meanwhile, he’s concerned about the technical aspects of the market. “Stock market breadth is still narrow, which is a classic indicator of a looming correction or consolidation,” he added.
“Once we are past big tech earnings, we expect market breadth to continue to expand, as it did for most of 2024, before taking a bit of a pause towards the end of last year.”
However, he sees any further consolidation or correction in stocks as an opportunity for investors. “We are still early in the AI and technology-led business cycle and bull market, which is now roughly two years old and may last another five years,” he said.
Demmert is monitoring profit margins in the upcoming tech earnings reports.
“Investors are willing to pay up to own companies like Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL) and Meta (META) because these companies have enormous profit margins,” he said.
“Big tech once again gets to prove to the market that their valuations are justified over these next two weeks of earnings reports, and we expect each of these companies to deliver.”
He believes now is a good time to turn strategic and scale back the biggest winners of 2024. He will use this period of consolidation to reallocate these funds into the second derivative AI companies in software, telecom, and other sectors such as utilities, financials, industrials, and health care.
“In our view, the tough tariff rhetoric is a tool to inspire negotiation to reach more fair terms with our trading partners,” he said. “We would be cautious about equities in China given that they may be unwilling to negotiate.”
John Creekmur, chief investment officer of Creekmur Wealth Advisors, sees that market sentiment on tariffs can change on a dime, with as little as one social media post or comment from Trump.
“This headline risk will likely cause some extra market turbulence soon. Tariff uncertainty has reached a fever pitch, as we are in the early days of the new administration, and it remains clear what level of tariffs will ultimately be enacted,” he told The Epoch Times.
