Stock Market Has Yet to Factor In Fed Rates Staying Higher for Longer, and 5 Other Things
The stock market is having an incredible start to the year.
Not only has it continued to climb after a spectacular 2023, but it also seems impervious to suggestions that the Federal Reserve isn’t going to start cutting interest rates any time soon.
That’s got a lot of people wondering if the good run might be coming to an end soon. Nvidia’s earnings on Wednesday may provide a litmus test. It’s probably the stock that has gained the most on the back of optimism about artificial intelligence—it’s up 47% this year and the price has more than tripled in the past 12 months. Can the outlook for sales justify a further run higher?
We’ll also learn more about the Fed’s thinking this week. Minutes from the last meeting are due Wednesday, and we’re due to hear from no fewer than five speakers from the central bank later in the week. Current noises suggest the Fed is in no rush to start cutting. Expectations for the first move lower have been moved back to June. A few weeks ago, it was March, according to the CME FedWatch tool.
If inflation refuses to cooperate and stops coming down, the Fed may even be tempted to raise rates again. The Reserve Bank of Australia is saying that out loud. In the U.S., former Treasury Secretary Larry Summers said on Bloomberg TV that he sees it as a real possibility.
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The good news for stocks has been surprisingly strong economic growth and low unemployment. At some point, though, the radical Fed hikes since 2022 will start to bite. Consumers have run down savings from the Covid-19 pandemic and mortgage rates are going up again. In a broad sense, Capital One’s purchase of Discover, announced early Tuesday, could be seen as a bet that there will be plenty of money to be made from credit cards.
The Fed and the stock market aren’t working together as a team. Eventually, one of them will blink.
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Investors Await Clues on Cuts From Central Bank’s Minutes
The minutes of the last Federal Reserve policy meeting come out this week as investors await clues about when cuts could start. Futures markets see only a small probability of that happening in March, and the probability for a rate cut in June is higher than one in May.
- Fed officials have offered varying outlooks on the topic in recent days. Former St. Louis Fed President James Bullard said Friday the Fed should cut at its next meeting to avoid restraining the economy. Inflation is already moving below 3%, and moving sooner and slower would be wise, he said.
- Bullard, who supported rapid rate increases in 2022 and left the St. Louis Fed last year to become dean of Purdue University’s business school, did note that hotter than expected January inflation data will make it difficult for Fed officials to make the case for a March rate cut.
- San Francisco Fed President Mary Daly supports the policy committee taking its time to cut rates, given there are risks that inflation could flare up. She said at the same conference where Bullard appeared that patience is needed and an expectation of three 2024 rate cuts was a “reasonable baseline.”
- Daly also disagreed with the notion that the last phase of the Fed’s work to push inflation back to its 2% annual target would be the hardest, what the markets refer to as the “last mile.” She doesn’t see evidence for that. Instead, inflation is falling without the economy breaking.
What’s Next: Rate-cut expectations have lifted the
near a record above 5,000. Optimism remains despite the view that the cutting won’t start for a few months.
sees the S&P ending 2024 at 5,200, up from its last estimate of 5,100 in December.
—Liz Moyer and Brian Swint
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Wall Street Awaits Nvidia’s Earnings, Sales Growth Results
When chip maker
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reports its January quarter on Wednesday afternoon, some analysts expect another quarter of artificial intelligence-boosted sales and profit. The same trend resulted in the price of Nvidia shares tripling in the past year. But some are also asking how long Nvidia can maintain high sales growth.
- Independent stock market analyst and Mott Capital founder Michael Kramer said the odds are stacked against the chip maker. The market has placed a giant bet on the shares, meaning Nvidia’s guidance will be a strong factor in the market’s reaction.
- Analysts surveyed by FactSet expect Nvidia to report earnings of $4.59 a share, a more than 700% increase from the same quarter a year ago, when AI was just ramping up. They forecast quarterly sales of $20.28 billion, up from $6.05 billion a year earlier, and 12% higher than the third quarter.
- Nvidia’s sales increased rapidly in each of the past three quarters as graphics chips sales for AI deployment exploded. Nvidia is expected to be the S&P 500’s best performer through 2025 based on estimated compound annual sales growth rates, MarketWatch reported.
- Nvidia has a dominant share of the market. However, there is clearly an appetite from major technology companies to have alternative suppliers of AI chips, and some have established their own in-house operations.
What’s Next: Wedbush analyst Dan Ives predicts peak spending is still ahead for the AI market as companies “head down the AI use case path” over the next few years. He estimates $1 trillion of incremental AI spending in the next decade, starting with enterprises and moving to consumers.
—Janet H. Cho and Adam Clark
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Capital One to Buy Discover in $35 Billion Deal
It’s the biggest deal of the year to date. Capital One has agreed to buy
in a $35 billion all-stock deal that will combine two of the nation’s largest credit-card companies.
- Capital One, the ninth largest U.S. bank and a major credit-card issuer, said the deal is a key part of its ambition to become a global payments company. The merger is expected to close late this year or early in 2025, although it’s likely to face intense regulatory scrutiny.
- The deal represents a 26% premium to Discover’s Friday closing price of $110.49. Following successful completion, Capital One shareholders would own approximately 60% and Discover investors would own 40% of the combined company.
- “Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies,” Capital One’s CEO Richard Fairbank said in a statement.
- Capital One currently uses the
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and
networks for most of the cards it issues, but plans to switch some cards to the rival Discover network, which is smaller than that of the two industry heavyweights.
What’s Next: It’s clear that Capital One wants to go head-to-head with the likes of Visa and Mastercard and believes a tie-up with Discover can help it do that. But the size of the proposed deal means antitrust concerns will be in the spotlight.
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Activist Investor Carl Icahn Wins Two JetBlue Board Seats
Just days after disclosing he had amassed a nearly 10% stake in
’ stock, activist Carl Icahn won two seats on the carrier’s board. The move is raising hopes for a turnaround for JetBlue, even as it appeals a judge’s ruling that blocked its merger with
- JetBlue board Chair Peter Boneparth said the board and leadership team are fully focused on taking “aggressive action” to return to profitability and strengthen JetBlue’s future. Icahn Enterprises’ general counsel Jesse Lynn and portfolio manager Steven Miller will take the board seats.
- Seaport Global analyst Daniel McKenzie sees Icahn’s equity stake as a vote of confidence, but noted that activist investors have a mixed record in the airline industry. Icahn took TWA private in 1988. The airline, saddled with debt, filed for bankruptcy in 1992.
- Icahn’s disclosure of the stake didn’t mention what he thinks of JetBlue’s possible combination with Spirit. JetBlue’s new CEO Joanna Geraghty took the helm last week as the first woman to lead a major U.S. airline.
- It was a second victory for Icahn in a week, after
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agreed to give him two board seats there. Icahn is making a comeback. Last year, a short-seller attack at his
shaved billions of dollars off its market value and Icahn’s own wealth.
What’s Next: JetBlue also named a new chief operating officer and a new president in recent weeks. The former has already started on the job, while the latter will begin this week. The carrier next reports quarterly earnings on April 23.
—Teresa Rivas and Janet H. Cho
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Presidents Day Weekend Box Office Slowest in Decades
Moviegoers observed a relatively quiet Presidents Day holiday weekend at the domestic box office, with four-day sales estimated at $93.4 million,
said.
Paramount
’s
Bob Marley: One Love had higher-than-expected sales, with Comscore projecting it took in $52 million through Monday.
- The biopic sold more than twice as much as
Sony
’ssuperhero action-adventure Madame Web despite playing in fewer theaters. Overall it was the lowest three-day Presidents Day weekend haul at the domestic box office, unadjusted for inflation, since the mid-1990s, Comscore said. (Not counting 2021).
- Paul Dergarabedian, Comscore’s senior media analyst, told Barron’s “the wind has really gone out of the sails for the box office thus far in 2024.” He added that
Dune: Part Two, set for a March 1 release, should revive momentum and that the release calendar was looking optimistic.
- In China, where it has been the Lunar New Year holiday, box office sales rose 18.5% from last year, to a record $1.13 billion, while the number of moviegoers rose 26.4% to 162 million, The Wall Street Journal reported, citing preliminary data from the National Film Administration.
- At the British Academy Film Awards on Sunday, Universal Pictures’ Oppenheimerwon seven prizes including best film, best director, and best leading actor for Cillian Murphy’s performance in the title role. Emma Stone won the leading actress award for Searchlight’s Poor Things, and Da’Vine Joy Randolph won in the supporting actress category for Focus Features’ The Holdovers.
What’s Next:Oppenheimer is nominated for 13 Oscars, including best picture, best director, best actor, and best supporting actor, at the 96th Academy Awards ceremony on March 10. Warner Bros.’s Barbie, the top-grossing 2023 movie worldwide, is nominated in eight categories, but not director or best actress.
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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner
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