A surge in mega cap tech stocks helped lift the S&P 500 and Nasdaq Friday, with the S&P holding above the 5,000 level for the first time and extending its record high, after December’s revised inflation reading came in lower than first reported. On Friday, market participants earlier received further encouraging data on inflation, after the U.S. Bureau of Labor Statistics released its annual revisions to the consumer price index (CPI). The report showed that core consumer prices rose at a 3.3% annualized rate in the fourth quarter of 2023, unchanged from the previous reading. The CPI revisions likely give the Federal Reserve further breathing room while allaying any concerns traders might have had about progress on inflation. 

But despite the 5,000 point milestone, there’s caution that the S&P 500’s 20% rally since early November may hit a roadblock soon. Unemployment in the US may be low, but the new year has nevertheless been marked by big technology companies slashing employees by the thousands—32,000 to be exact. The 2024 round of mass terminations follows a 2023 period during which the tech industry was also heavily engaged in dismissing large numbers of staff. Fear of a recession that never came, pullbacks on pandemic hiring, satisfying activist investors and reallocation of resources toward artificial intelligence have been among the justifications given.

How much further does the market have to go before another correction?

Future Wealth’s View

There is a saying on Wall Street – “This stock is priced for perfection”. The implication is that every single metric of that company’s earnings – revenues, gross margin, earnings per share, inventories, guidance for the next quarter have to all align with analyst consensus estimates. Else, the stock will plunge even if the company disappoints in one of those metrics.

After a massive runup in the stock market, we are at that point where it’s not individual stocks but the entire stock market that is priced for perfection. Its been a great run for investors since November. On Nov 19, 2023, in our report, we had stated that “Just last week, we had titled our report saying that the turning point is nigh. Well, it now appears that we have officially begun the bull market that has eluded us for over a year since the stock market hit bottom in October 2022.”. The link to the report is here – https://futurewealthllc.com/the-turning-point-is-here/.

While we remain bullish on the stock market despite the massive runup, we believe that until sectors and companies other than the Magnificent Seven (now five) begin to attract investor interest, this recent runup in stocks could be primed for a pullback or correction. As its market share has grown, the Magnificent Seven has come to represent a gigantic 33 percent of the S&P 500 index. The Magnificent Seven stocks have risen 75 percent this year, while the other 493 companies in the S&P 500 are up 12 percent.

There comes a point when greed takes over from rational behavior. The ending is never pretty. As we have said before, it never hurts to take profits.