Wall Street will try to maintain AI-fueled momentum in the final week of February, as inflation concerns linger

Published Fri, Feb 23 20241:04 PM ESTUpdated Fri, Feb 23 20244:18 PM EST

In the final week of February, Wall Street will strive to maintain its AI-fueled rally even as economic concerns linger and the Federal Reserve's favorite inflation measure is on deck. Stocks registered a winning week, aided by Nvidia's blockbuster earnings results. The S & P 500 leapt to an all-time high, while the Dow Jones Industrial Average powered through the 39,000 threshold for the first time ever. The Nasdaq Composite is on the brink of its own all-time closing high. Each of the major averages notched weekly gains exceeding 1%. Nvidia, which Goldman Sachs called "the most important stock on planet earth," added more than 8% to its considerable advance this week, jumping 16% on Thursday alone following its earnings beat. The chip company is now higher this year by 59%. .SPX ALL mountain S & P 500 For investors, this week confirms the tech momentum driving markets for the better part of the last year is justified, and many expect it can continue for a while longer. But many worry the writing is on the wall for these market leaders as economic and inflation risks linger. "It'd be awfully hard to bet against the sort of AI craze in the short term," said Patrick McDonough, portfolio manager at PGIM Quantitative Solutions. "The flip side to that, or maybe the one single cloud that's out in our perfect sunny day, would be the stickiness of inflation, and what that impact is." 'The party is not going to end anytime soon' U.S. equities were not the only ones rallying on the back of Nvidia this week. In fact, markets around the world notched record highs, with Japan's Nikkei 225 hitting an all-time high Thursday for the first time since 1989. Europe's Stoxx 600 also reached record levels . What's more, the rally broadened out to more parts of the market besides the mega-caps and semiconductors. All 11 S & P 500 sectors closed out a positive week, including this year's underperformers real estate and utilities. But many investors say record highs suggest now is the time to diversify holdings, such as quality names in other parts of the market, or in bonds. "The band is still going strong, so this party is not going to end anytime soon," said PGIM's McDonough. "But I don't think we're in for another year or two years or three years or five years of the U.S. large-cap cleaning the market. There will have to be some diversification just from an economic standpoint." McDonough, who still anticipates roughly 5% upside for U.S. large caps, said investors can find opportunities in relatively cheap emerging markets names, or in small caps where some companies have posted "sneaky good" outperformance over the last several years. Charlie Ashley, portfolio manager at Catalyst Funds, similarly said equities could likely drift another 5% higher from here, but said he would add positions to short-term fixed income securities. Specifically, he prefers investment grade corporates with solid balance sheets that do not need to refinance their debt. In Nvidia, specifically, he said he would "be more of a profit taker here," even if it continues to climb. But he said he prefers domestic leaders within the tech, health care and finance sectors. Elsewhere, Dhaval Joshi, chief strategist of Counterpoint at BCA Research, is leery of the AI momentum outside of Nvidia. "AI is in a sort of gold rush and … Nvidia's selling the picks and the shovels," Joshi said. "So, what we know is in a gold rush, the guys that are selling the picks and shovels always do very, very well. But the guys who are looking for gold don't necessarily do very well." The 'lone cloud' of inflation The Fed's preferred inflation gauge will also be released in the week ahead. The report, due Thursday, will likely take greater significance after the consumer price and producer price reports earlier this month came in hotter than expected. If the January personal consumption expenditures report comes in softer than anticipated, the report will likely not be a market-moving event. However, a stronger-than-expected reading that suggests the CPI and PPI were not anomalies will likely ding equities and send bond yields higher. Investors are concerned that sticky inflation will mean that the Fed will hold onto its higher-for-longer interest rate policy. The CME FedWatch Tool shows that markets are pricing in just a 55% likelihood the central bank will cut rates by a quarter percentage point in June, after holding in March and May. Next week will also be the final week of February, with stocks headed for another strong month of gains. Year to date, the Dow is higher by roughly 4%, while the S & P 500 and Nasdaq are both up by more than 6%, a stellar start to the year that has left many investors wary. "If you annualize that, that's a huge year, almost as big as last year," Catalyst Funds' Ashley said. "But I think what's going to happen is we're through earnings season so far, and I think that we can get some drift, and then the next cycle of earnings, I think, is going to be pretty important amongst other things. So, that earnings cycle is going to be critical." "I think we're in a very kind of delicate spot where there's a lot of factors that can have an outsized influence on the market, or the second quarter," Ashley continued. On the economic front, there are a raft of economic releases on deck in the coming week. January durable orders data is out on Tuesday, while January wholesale inventories is out on Wednesday. Elsewhere, corporate earnings season winds down with releases from Salesforce , TJX , Best Buy and Domino's Pizza on deck. Week ahead calendar All times ET. Monday February 26, 2024 8 a.m. Building Permits final (January) 10 a.m. New Home Sales (January) 10:30 a.m. Dallas Fed Index (February) Earnings: Fidelity National Information Services , Domino's Pizza Tuesday February 27, 2024 8:30 a.m. Durable Orders (January) 9 a.m. FHFA Home Price Index (December) 9 a.m. S & P/Case-Shiller comp.20 HPI (December) 10 a.m. Consumer Confidence (February) 10 a.m. Richmond Fed Index (February) Earnings: eBay , First Solar , Extra Space Storage , Axon Enterprise , Norwegian Cruise Line Holdings , J.M. Smucker , AutoZone , Lowe's Wednesday February 28, 2024 8:30 a.m. GDP Chain Price second preliminary (Q4) 8:30 a.m. Wholesale Inventories SA preliminary (January) 1:45 p.m. New York Federal Reserve Bank President and CEO John Williams keynote remarks in an event LIA Regional Economic Briefing, New York Earnings: HP , Monster Beverage , Salesforce, TJX Cos. , Paramount Global Thursday February 29, 2024 8:30 a.m. Continuing Jobless Claims (02/17) 8:30 a.m. Initial Claims (02/24) 8:30 a.m. PCE Deflator (January) 8:30 a.m. Personal Consumption Expenditure (January) 8:30 a.m. Personal Income (January) 9:45 a.m. Chicago PMI (February) 10 a.m. Pending Home Sales Index (January) 11 a.m. Kansas City Fed Manufacturing Index (February) 8:10 p.m. New York Federal Reserve Bank President and CEO John Williams moderated discussion in an event Citizens Budget Commission 92nd Annual Gala, New York Earnings: Hewlett Packard Enterprise , Autodesk , Best Buy , Bath & Body Works , Hormel Foods Friday March 1, 2024 9:45 a.m. Markit PMI Manufacturing final (February) 10 a.m. Construction Spending (January) 10 a.m. ISM Manufacturing (February) 10 a.m. Michigan Sentiment final (February)