Market Note – February 26, 2024

By Hightower Great Lakes on February 26, 2024

S&P 500 Up 15 of Past 17 Weeks

The S&P 500 ended last week at fresh record highs. AI-linked names were among the standouts, as the highly anticipated NVIDIA (NVDA) earnings beat and guided better than expectations. Much of 2023’s AI hype is coming to fruition in 2024 as secular demand spreads across industries.

Consumer, housing, med-tech, aviation, energy grid and cybersecurity themes are also riding the momentum by beating expectations, commenting on secular growth and issuing upward guidance. We are finding plenty of high-conviction ways to gain exposure to these massive growth themes.

90% of the S&P 500 has reported fourth quarter earnings, and earnings growth is +10% y/y, more than double the year-end expectations and the best quarter of 2023. The ‘Fear and Greed’ investment sentiment indicator is measuring “Extreme Greed.”

While valuations are higher than historical multiples, the strong earnings reports, strong housing market signals and the sharpest monthly increase to manufacturing PMI since February 2022 are all supporting equity markets and risk-on sentiment. On the other hand, energy markets have struggled to catch a wave, and commercial real estate risks remain an overhang with the hawkish Fed.

Housing and Manufacturing Activity Rebound

One of our favorite themes for 2024 is housing. Last week we saw evidence of the continued momentum in the sector. Toll Brothers (TOL), a luxury homebuilder, lifted its full-year outlook while reporting a 40% y/y increase in orders from the three-month period ending January 31.

Homebuilders are benefitting from limited inventory. Toll Brothers cited, “a healthy job market, improving consumer sentiment, and continued low levels of resale inventory,” are all reasons for optimism in 2024.

A strong housing market is good for the overall economy, as housing activity is tied to manufacturing and other industries. The Home Depot (HD) reported a pullback in revenues but an increase in earnings as CFO Richard McPhail said, “our market is on its way back to normal demand conditions.” While mortgage rates recently returned to above 7%, existing home sales increased +3.1% m/m in January and new home sales continued to run up double digits.

February’s flash manufacturing PMI showed the second-consecutive month of manufacturing expansion (after fifteen consecutive months in contraction). New orders surprised to the upside, which is important as a leading indicator of demand.

The data also included factory output at the fastest pace in ten months, while input cost growth was the lowest since October 2020. Despite the Fed’s noted patience on easing monetary policy, disinflation trends are consistent with the Fed’s 2% target, according to economists.

Similarly, Walmart (WMT), which reported global e-commerce revenues +23% y/y, indicated that prices have fallen in some categories. Specifically, general merchandise items are lower than a year ago, and some are priced lower than two years ago.

The Berkshire Report

Warren Buffett’s Berkshire Hathaway (BRK) reported 28% y/y operating earnings growth in the fourth quarter and a record $167.6 billion cash pile. The conglomerate used $9.2 billion to repurchase shares in 2023.

Insurance underwriting helped to propel earnings in 2023, and Buffet emphasized that he plans to own shares in Occidental Petroleum Corp. (OXY), a company in which Berkshire Hathaway is now the largest stakeholder with 28% stock ownership, “indefinitely.” Berkshire also benefitted from a 61% return from its investments in Japanese trading houses last year.

There is not a more prudent and patient investor in the world than Warren Buffett. Berkshire’s earnings and activity are great barometers for the broader U.S. economy. While some businesses slowed, like rail and energy, “insurance performed exceptionally well last year.” The rising cash emphasizes that Buffett is remaining patient and will act when the “occasional large-scale opportunity” presents itself.

Natural Gas Prices Are Cheapest Ever

Gas producers are dialing back on drilling and pushing for more export terminals. Producers are blaming too much supply for the low prices. Natural gas prices spiked in 2021 as demand hit all-time highs amid the Russia/Ukraine war and sanctions. Natural gas is a cleaner alternative energy resource, and recent innovations/efficiencies have spurred a supply boom.

Chart 1: Natural Gas Futures Priced at $1.69, Compared to $9.68 Peak in August 2022[1]

Chesapeake Energy (CHK) announced plans to reduce natural gas production in 2024, a move that if followed by other peers, could support a turnaround in prices. Chesapeake forecasts a 20% drop in production spending in 2024. Some analysts predict that solving oversupply in 2024 could set up a bullish narrative for 2025.

Hawkish Fed

The long-end of the Treasury curve rallied late last week, extending the week’s inversion steepening momentum; the U.S. 2-year yield rose by 6 bps, the 10-year fell by 6 bps and the 30-year fell by 8 bps. The market has reversed its expectations for a March cut to 3%, and May cut expectations have fallen from 51% to 16% in the last two weeks on persistent inflation and hawkish Fedspeak.

High yield spreads remain tight, reaching a new 52-week low last Friday at +360. Muni yields remain unchanged on the week again and Muni/Treasury ratios remain historically rich (2-, 5-, 10-year ratios are all below 60%).

The Week Ahead

Earnings – Monday: DPZ; Tuesday: SJM, AMT, LOW, AZO; Wednesday: NRG, DVN, TJX, CRM, MNST, HPQ; Thursday: BBY, HPE.

Economics – Tuesday: Consumer Confidence (February); Thursday: PCE (January), Personal Income (January), Chicago PMI (February), Friday: ISM Manufacturing (Friday), Michigan Sentiment (Friday).

Return for Selected Indices^[2]

Click here to read last week’s Market Note (2/12).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of February 25, 2024.

[2] Source: Bloomberg. As of February 25, 2024.