Dow Jones, Nasdaq, S&P 500 weekly preview: Are new highs sustainable?

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Dow Jones, Nasdaq, S&P 500 weekly preview: Are new highs sustainable?
Credit: © Reuters.

The S&P 500 (SPX) hit a new record high last week after finally clearing 4,818.62 – the level set in the first week of 2022. The index gained 1.2% last week and is now likely to continue pushing toward the psychologically-important 5,000 level.

Nasdaq Composite Index (IXIC) jumped 2.3% as tech stocks continue to ride the AI momentum. The index closed the week at 15,310.97 with the record high sitting at 16,212.23. Finally, the Dow Jones Industrial Average (DJI) was up 0.7%, marginally posting a new record high as the bulls continue closing in on 40000.

This week’s economic calendar is full of important data, notably the 4Q US GDP, which is out on Thursday.

“We expect growth to be driven by consumer spending, but growth in nonresidential business fixed investment likely remained subdued,” BofA economists wrote in a note.

The December PCE inflation report is also out this week (Friday), while investors will also be closely watching updates from central banks e.g. ECB, BoJ, and BoC.

“We expect the ECB to remain on hold with no policy changes nor changes to communication, and we stick to June for the first cut. We see no changes in targets or communication from the BoJ, and we expect Norges, BoC to remain on hold this week,” BofA also said.

In other data, we will also see the latest readings on Philadelphia Fed non-manufacturing activity, Richmond Fed business conditions, PMIs, Core PCE Price Index, initial jobless claims, durable goods orders, new home sales, PCE deflator, personal spending & income, pending home sales, etc.

Earnings take the central stage

Based on the results from 10% of S&P 500 companies for Q4 2023, 62% have reported positive surprises in both earnings per share and revenue, according to FactSet.

While this suggests a notable portion of companies exceeding expectations, the overall blended year-over-year earnings decline for the S&P 500 stands at -1.7% for Q4 2023. If realized, this would mark the fourth instance of a YoY decline in the past five quarters.

Examining earnings revisions, the estimated YoY earnings growth rate for the S&P 500 was 1.6% on December 31. However, as of the current reporting period, seven sectors are either reporting or expected to report lower earnings than initially estimated, attributing this to negative EPS surprises and downward revisions to EPS estimates.

Here are the key reporters this week (in order by market cap).

Monday: United Airlines (UAL);
Tuesday: Johnson & Johnson (NYSE: JNJ ), Procter & Gamble (NYSE: PG ), Netflix (NASDAQ: NFLX ), Verizon (NYSE: VZ ), Texas Instruments (NASDAQ: TXN ), General Electric (NYSE: GE ), Intuitive Surgical (NASDAQ: ISRG ), RTX (RTX), Lockheed Martin (NYSE: LMT ), and 3M (MMM).
Wednesday: Tesla (NASDAQ: TSLA ), ASML (ASML), Abbott (ABT), SAP SE (SAP), ServiceNow (NYSE: NOW ), IBM (NYSE: IBM ), AT&T (NYSE: T ), and Lam Research (NASDAQ: LRCX ).
Thursday: Visa (NYSE: V ), Intel (NASDAQ: INTC ), T-Mobile (TMUS), and Comcast (CMSCA).
Friday: American Express (NYSE: AXP ) and Colgate-Palmolive (CL).

What analysts are saying

Analysts at JPMorgan: “The problem is that the market really needs some net earnings upgrades to advance from current levels, not just the beats vs heavily lowered view. This is because the current investor positioning is much higher than what was the case through last year, sentiment is complacent, valuation multiples have rerated, and the key driver of the Q4 rally, the move lower in bond yields, is likely over for the time being.”

At Morgan Stanley, analysts note: “We recommend a quality growth bias as the cohort's relative performance over lower quality cyclicals is strong in decelerating front-end rate regimes and the group is showing relative strength from an earnings revisions perspective.”

Analysts from Stifel comment: “Our 2024 outlook late last year called for the S&P 500 to remain in a sideways trading range in 1H24 as easy Financial Conditions are fully reflected in an expensive 2024 price-to-earnings ratio, especially for Growth stocks. Our S&P 500 EPS estimates are slightly above the Street in 2023 and moderately below in 2024. That remains our view, and in 1H24 we forecast increasing investor confidence in economic growth and sticky inflation, with inflation actually bouncing up 1H24E to the detriment of rate cut views and high-P/E Growth.”

At Fairlead Strategies, analysts believe: “Assuming the breakout is confirmed, we see it as a positive technical catalyst that not only removes resistance from the chart, but also tends to generate additional upside momentum. You’ll see a long-term (6+ months) measured move projection of ~6120 on the monthly chart of the SPX, and an intermediate-term (~3-4 months) projection of ~5220 on the weekly chart. These may be too aggressive, but they dictate a bullish bias nonetheless. The breakout would be confirmed on a second weekly close above 4819.”

Analysts at BTIG point out: “We thought the SPX could make a new high above 4,800 early this year. It has done that, and needs another ~3.5% to get to 5k. While that is possible before a pullback, there are an increasing number of divergences that make us think a ‘push-through failure’ may be likely before hitting 5k.”

From Evercore ISI, analysts state: ““Walls of Worry” being rebuilt. “Upside Wall” at new all-time highs above 4,800 amidst Politics and lower EPS estimates. “Downside Wall” at SPX 4,600 supported by “Soft Landing” bullish sentiment. Further material upside from political outcome reducing the chances of a Biden-Trump rematch. Downside risks as EPS revised lower, Fed rate cut expectations moderate, and surprise weaker Econ. Position for higher volatility, on both sides.”

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