Stocks Pull Back on Valuation Concerns

Friday’s stock market declines ensured weekly losses for the key US equity indices, with the Dow Jones Industrial Average posting its worst weekly performance since October. The S&P 500 declined -0.23%, while the Dow and the NASDAQ fell -0.85% and -1.15%¹, respectively. In fixed income markets, the Bloomberg US Aggregate Bond Index rose 0.82%¹ as the US 10-year Treasury bond declined 10bps to end the week at 4.09%². The week was characterized by mixed corporate earnings from retailers, Fed Chair Powell’s testimony on Capitol Hill and a key jobs report.

The sell-off on Friday was driven primarily by investors taking profits in some market leaders as exceedingly high valuations have many investors concerned that stocks could be due for a pullback after this year’s rally. For the week, Apple, Microsoft, Amazon, Alphabet and Tesla all declined, while Nvidia and Meta pulled away from the pack.

As Q4/23 corporate earnings season ends, key retailers Target, Costco and GAP released their results. Target shares closed higher by 12% after a stronger-than-expected report. Despite the company’s comparable sales declining for a third quarter in a row, the company showed progress in boosting both profits and margins. Profits jumped as the company better managed inventory and benefited from falling supply chain, freight, and e-commerce fulfillment costs.³

Costco missed Wall Street’s revenue expectations for its holiday quarter, despite reporting year-over-year sales growth and strong e-commerce gains. Comparable sales for the company increased 5.6% year over year and 4.3% in the U.S. Shares of the retailer fell about 4% in aftermarket trading after the stock had hit a 52-week high.^4. GAP outperformed, as its largest banner, Old Navy, returned to growth for the first time in more than a year during its holiday quarter. Sales at Old Navy grew 6%.⁵

During Federal Reserve Chaiman Jerome Powell’s highly anticipated appearance on Capitol Hill he maintained a consistent stance. In responding to a question regarding rates and inflation, Powell indicated, “We’re waiting to become more confident that inflation is moving sustainably at 2%. When we do get that confidence, and we’re not far from it, it’ll be appropriate to begin to dial back the level of restriction.”⁶

The U.S. Bureau of Labor Statistics’ February jobs report showed total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9%.⁷ While the increase in jobs was above expectations, possibly indicating a stronger economy, the rise in unemployment and a lower-than-expected increase of 0.1% in average hourly earnings offered some hope that inflation was cooling in line with Fed expectations. Also of note were the material revisions to prior month total nonfarm payroll data, lowering job growth by 167,000 jobs.⁷

Despite strong earnings and a more favorable inflation outlook, the likelihood of an interest rate cut by the Federal Reserve at its upcoming meeting in March, especially after recent comments by Powell and his colleagues, is minimal. Currently, the market’s expectation of an interest rate cut at the Fed’s June meeting is 52%, according to CME Group’s FedWatch Tool.⁸

Sources:

1. Morningstar Direct
2. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202403
3. https://www.cnbc.com/2024/03/05/target-tgt-earnings-q4-2023.html
4. https://www.cnbc.com/2024/03/07/costco-cost-q2-2024-earnings.html
5. https://www.cnbc.com/2024/03/07/gap-gps-earnings-q4-2023.html
6. https://www.cnbc.com/2024/03/07/powell-says-fed-is-not-far-from-the-point-of-cutting-interest-rates.html
7. https://www.bls.gov/news.release/pdf/empsit.pdf
8. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html