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Market update: Off to the races

With a gain of more than 2%, the S&P 500 is headed into the weekend firmly above 4,000 for the first time since mid-December. The breadth of the rally was wide, with nearly 400 stocks in the green on the week. The tech-laden NADSAQ 100 outperformed, with its +4% rise pushing it above its 200-moving average for the first time since March 2022.

That said, stocks don’t have an all clear signal yet. Only one quarter of the S&P 500 has reported Q4 2022 earnings. The takeaway so far: A mixed bag, but better than feared. For one, J&J beat earnings, despite a slowdown in revenue and sales in the face of a strong dollar and diminishing COVID-19 vaccine demand. Microsoft’s Azure cloud business persists as its engine of growth, but the company seems poised to guide expectations lower from here. Looking ahead, many of the “big name” announcements are still to come, including the likes of Google, Apple and Amazon next week.

In the bond market, Treasury yields did a round-trip as economic data showed bits of both strength and weakness. On one hand, preliminary U.S. Manufacturing and Services PMIs for January continued to point towards contraction. On the other, filings for unemployment benefits hit their lowest level since early last year. This leaves investors wondering when, and if, the next shoe will drop.

Elsewhere, the U.S. government is still grappling over what to do with the debt ceiling, and other big macro catalysts, such as the February FOMC meeting and January nonfarm payrolls, are on deck for next week.

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In the meantime, here are five quick observations worth paying attention to.

1. The U.S. economy: Strong (at first glance), but losing steam.

The latest GDP data showed that the U.S. economy grew at a +2.9% real (inflation-adjusted) pace through the final quarter of 2022. The headline number implies strength, but digging into the details reveals less favorable dynamics. There were three components that caught our attention: 1) Inventories, which continued to build as goods demand weakened, contributing about half of the growth reported, 2) consumption, which came in still-solid, but slower than expected, and 3) capex (offering a pulse check on corporate America), which appears to be cooling despite firm spending on tech. In all, the report suggests that while the U.S. economy grew at the end of last year, it appears to be losing momentum.

 

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