Extreme greed is back on Wall Street

InvestingJan 30, 2024

The S&P 500 is tracking towards its fifth consecutive record high, the Dow Jones Industrial Average crossed the 38,000 mark this week for the first time ever, the economy is growing, inflation rates are easing and the artificial intelligence revolution is booming.

That’s all heralded the return of extreme greed to Wall Street.

The tech-heavy Nasdaq has surged about 3.3% so far this year — and we’re barely a month in. The S&P 500 is up 2.6% and the Dow is nearly 1% higher. The S&P 500 and Nasdaq are both on pace to score their sixth-straight winning sessions.

CNN’s Fear and Greed Index, which tracks seven indicators of market sentiment in the United States, tipped into “Extreme Greed” this week, marking a stunning turnaround from just a few months ago, when the index was in Extreme Fear territory.

So what’s behind the shift in the market’s mood?

The idea of a soft landing (when inflation rates ease and the economy avoids recession) is likely playing a big part.

Gross domestic product, adjusted for inflation, rose by 3.3% in the fourth quarter of 2023, the Commerce Department reported Thursday. That measure blew away forecasts of just 1.5%, according to FactSet estimates.

Consumer spending, which accounts for about two-thirds of the US economy, also grew at a healthy 2.8% rate in the fourth quarter, according to the report.

Meanwhile, inflation rates fell last quarter.

The price index for Personal Consumption Expenditures, the Federal Reserve’s preferred inflation gauge, came in at 1.7% for the quarter, under the Fed’s 2% target.

Economists polled by the National Association for Business Economics now overwhelmingly say the US economy will avoid a recession this year, a fate that many had predicted for 2023.

This is “the recession that wasn’t,” said Lydia Boussour, senior economist at EY, in a note to clients on Thursday. “Overall, the economy sailed through 2023 with growth averaging 2.5% for the year, handily surpassing consensus expectations for a recession. Looking ahead, we continue to see a soft landing as the most likely outcome this year even if a collection of headwinds and risks means that recession odds are around 35%.”

Central bank officials are now expecting and openly discussing interest rate cuts this year.

Fed Governor Christopher Waller said just last week that “as long as inflation doesn’t rebound and stay elevated, I believe the [Fed] will be able to lower the target range for the federal funds rate this year.”

Financial markets currently see a roughly 51% chance the Fed will cut rates in March and about a 90% chance that the Fed will cut rates in May, according to the CME FedWatch Tool.

An explosion in artificial intelligence has been a main driver of the recent rally in equities. And the budding industry could increase productivity in the years to come.

“In the next few years, the main impact of AI on work will be to help people do their jobs more efficiently. That will be true whether they work in a factory or in an office,” Microsoft founder Bill Gates wrote in a blog post last year.

Microsoft shares are up about 7.7% for the year, and on Wednesday the software giant became the second-ever company worth $3 trillion on as the AI boom sent its stock soaring higher.

Shares of Meta, meanwhile, gained 1.4% on Wednesday to bring the AI-focused company’s market cap above the $1 trillion line.

Why your 401(k) might be hurting

Yes, markets are hot right now, but your portfolio could still be suffering. That’s because while major indexes are up, the broader market isn’t.

As of last week, Nvidia and Microsoft accounted for about 75% of the S&P 500’s gain this year, according to analysts at Bespoke Investment Group. The 20 largest stocks in the index, they found, made up 110% of the index’s gains, while the remaining 480 were acting as a drag.

Last year, the S&P 500 rose by just over 24%, but if you were to weigh each stock in the index equally, it gained just 11.6%. That’s the largest outperformance by the S&P 500 over its equal-weighted version since the 1998 dot-com bubble, said Henry Allen, a strategist at Deutsche Bank, in a note to clients on Tuesday.

A narrow rally doesn’t necessarily mean a crash is coming. But it’s largely Big Tech that’s driving markets higher, and that concentration of gains in so few stocks carries inherent risk. “Those equity gains could prove vulnerable to a change in sentiment towards that group,” wrote Allen.

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