Dow Jones, Nasdaq, S&P 500 weekly preview: How far can this rally go?

Investing.com -- The S&P 500 closed last week at a new record high of 5,088, propelled by Nvidia’s blockbuster quarterly report. Earlier on Friday, the equity index rose to 5,111, marking a new all-time high.

The NASDAQ Composite jumped 2.96%, marking its strongest performance since February 2023 after closing at 16,041.62. The index, heavily weighted towards technology stocks, now sits near its record closing peak of 16,057.44. Meanwhile, the Dow Jones Industrial Average surged by 456.87 points, breaking past the 39,000 milestone for the first time and finishing at a new peak of 39,069.11.

Besides the latest rally driven by AI demand, the potential of a US interest rate cut is once again garnering attention in the market. Several Federal Reserve officials stressed the likelihood of rate cuts in the future, although opinions diverged on the timing of such a shift.

Looking ahead to this week, a number of key economic data reports are scheduled to come out in the coming days, and will likely make a notable impact on the current market dynamics. Arguably the most important piece of the data for this week comes on Thursday through the Core PCE Price Index.

“One of the main reasons stocks were able to look past the hot CPI and PPI was because Chicago Fed President Goolsbee said the Fed doesn’t really follow CPI and instead focused on the Core PCE Price Index,” Sevens Report’s analysts said in a note.

“Well, that’s what’s coming on Thursday, so it better not show a firming of inflation like CPI did, otherwise markets will have to more fully acknowledge that inflation pressures could be firming up and that means higher yields and more of a headwind on stocks.”

Moreover, new data on real gross domestic product (GDP), initial jobless claims, manufacturing Purchasing Managers' Index (PMI), and personal income are also slated to be reported in the current week.

The last stretch of Q4 earnings season

With the US stock indexes surging to new record highs, it is safe to say that last week was extraordinary.

Among other things, the key driver catalyzing the current bull market is the ongoing earnings season, most notably the Big Tech giants which continue to capitalize on the AI frenzy.

The key driver last week was the chipmaking behemoth Nvidia (NASDAQ:NVDA), which saw its shares surge over 16% on Thursday after its latest earnings report showed revenue growth of a whopping 265% year-over-year. Moreover, the chipmaker also issued robust revenue guidance for the current quarter, surpassing already high expectations.

“Once again Nvidia smashed numbers for the quarter,” said analysts at Rosenblatt, which raised the price target on NVDA to a new Street high.

The continued growth in the chip manufacturer comes as “the shift to accelerated compute away from general compute is reaching a tipping point, and a disruptive new app, generative AI, is creating a whole new industry,” they added.

But beyond NVDA and other Magnificent Seven tech titans, the actual earnings performance could diverge from these optimistic projections as the year progresses, JPMorgan strategists cautioned in a new note.

“In aggregate, and despite a few notable exceptions, corporate profit margins are elevated in a historical context, and appear to be peaking out,” strategists wrote.

“The historical pattern where profit margins always start to move lower ahead of the next economic downturn is clear,” they added.

This week, investors and analysts will be closely monitoring the upcoming quarterly reports, particularly Unity Software (NYSE:U), Zoom Video Communications (NASDAQ:ZM), Salesforce (NYSE:CRM), and Macy’s (NYSE:M) among others.

What analysts are saying about US stocks

Goldman Sachs: “Our positioning and sentiment indicator has increased further and is now well above the 60th percentile, signaling investors in aggregate continue to lean more on the bullish side.

BTIG: “Despite the AI hype, on an equal-weight basis Healthcare and Industrials are the leading sectors YTD. HC remains one of our favorite ideas for '24, and we now have Biotech breaking out of a 26-month base into a major volume pocket… We would also highlight Materials, which we don't think many eyes are on, yet it's breaking out of its own multi-year base with many constructive charts.”

Sevens Report’s: “At this point, with markets this stretched near term, I can’t help but worry any “bad” news could cause a 10% drop in this market a lot easier than any “good” news could cause a 10% rally.”

Evercore ISI: “So When to Fade the FOMO? The key lies in Financial Conditions, which are historically loose (96th %ile since 1990). A retreat will signal a correction, which in non-Recession years averages -13%, and which we believe arrives in 1H24. There are two other items to focus on. VIX>17.94 and AAPL<$179.25 would be cause to Fade the FOMO. Until then, remain invested.”

JPMorgan: “We note that 2024 EPS projections keep coming down in key regions. Now, could S&P 500 earnings do much better than economy wide profits? It is interesting to note that for S&P 500 all the profit growth in the past few quarters was due to Magnificent 7, and this is one of the reasons why we remain OW Growth vs Value.”