The Dow Jones Industrial Average and the S&P 500 this week hit all-time highs, but there’s an odd lack of exuberance on Wall Street. It’s as if investors don’t trust the rally. That’s probably a good thing. As the old adage goes: “Markets take the stairs up and the elevator down.”

The rise in 2024 has been more measured compared to the swift upturn at the end of 2023. That said, certain segments of the market are still on an upward trajectory. The bullish case remains intact, albeit with an increasing undercurrent of risk and anxiety.

The NASDAQ, dominated by technology stocks, has seen a 2.0% increase year-to-date. Collectively rising by an average of 3.9% YTD have been the “Magnificent Seven” mega-cap tech stocks: Amazon (NSDQ: AMZN); Alphabet (NSDQ: GOOGL); Apple (NSDQ: AAPL); Meta Platforms (NSDQ: META); Microsoft (NSDQ: MSFT); Nvidia (NSDQ: NVDA); and Tesla (NSDQ: TSLA).

On the flip side, the Russell 2000 small-cap stock index has experienced a decline of over 3.0% this year, despite exhibiting stronger momentum at the close of 2023. Waning expectations of an early interest rate cut are causing investors to rethink rotation into cyclical stocks that benefit from accelerating growth.

Accordingly, bond yields have risen in 2024, with the 10-year Treasury yield climbing from approximately 3.88% at the beginning of the year to above 4.10% currently (see TNX chart, with data as of market close January 23).

This trend has exerted downward pressure on bond market returns, with the U.S. Aggregate Bond Index down approximately 1.4% this year.

The unfolding fourth-quarter 2023 earnings season remains a focal point, with around 10% of S&P 500 companies having released operating results so far. These report cards have been diverse, with only about 69% of companies surpassing earnings expectations, a notable drop from the five-year average of 77%.

Read This Story: Q4 Earnings: A Mixed Bag (So Far)

Overall, earnings growth is tracking at -1.9% year-over-year, falling short of the anticipated 1.6% growth at the quarter’s outset. Weak outcomes have been particularly pronounced in the financials and energy sectors.

On a positive note, earnings estimates for 2024 are holding steady, projecting a resurgence to approximately 12% year-over-year growth for S&P 500 companies after a stagnant 2023. Despite the slightly lower current estimates, the outlook supports improved strength in the equity market. The upcoming week will witness an acceleration in the earnings season, with approximately 15% of S&P companies reporting results.

A significant event to watch this week is the release on January 25 of the first look at U.S. fourth-quarter gross domestic product (GDP) growth. Initial expectations point to a decline in GDP growth from 4.9% annualized to around 2.0% in the fourth quarter.

However, the Atlanta Fed’s GDP-Now tracker, a real-time indicator, suggests that growth in the fourth quarter might be closer to 2.4%. If confirmed, this would mark the fifth consecutive quarter of economic growth surpassing the trend range of 1.5% – 2.0%, despite escalating interest rates and heightened inflation. The American economy continues to show unexpected resilience, but without overheating.

According to the Fed tracker, consumer consumption remained robust last quarter at around 2.0% annualized. While a resilient consumer has bolstered recent economic growth, there are anticipated pressures, including reduced excess savings and higher credit card debt, which could dampen GDP growth in the coming quarters.

The main U.S. stock market indices closed lower on Tuesday, as disappointing corporate earnings dampened risk appetite. The final numbers:

• DJIA: -0.25%
• S&P 500: +0.29%
• NASDAQ: +0.43%
• Russell 2000: -0.36%

Rate cut hopes are getting more realistic. The CME Group’s FedWatch tool currently places the odds of the Fed standing pat at its next meeting (and not cutting rates) at 97.4% (see chart).

Nevertheless, the current data does not signal a recession or contraction on the horizon. In early 2023, most analysts were forecasting a recession. It never happened. The prospect of gradual growth slowdown, potentially lower inflation, and an eventual Fed rate-cutting cycle historically creates a positive climate for financial markets.

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John Persinos is the editorial director of Investing Daily.

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