Last Week’s Markets in Review: AI Overshadows Fed Minutes

Global equity markets finished higher for the week. In the U.S., the S&P 500 Index closed the week at a level of 5,089, representing an increase of 1.21%, while the Russell Midcap Index moved 0.81% last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -2.44% over the week. Developed international equity performance and emerging markets were positive, returning 1.45% and 1.23%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 4.25%.

Last week’s holiday-shortened trading period had few data releases that would cause significant market movement. Under “normal” circumstances, the Federal Reserve’s January policy meeting minutes would have highlighted the week. Instead, the market was more focused on earnings from artificial intelligence (AI) chip-making giant Nvidia and forward guidance for the now 3rd largest company by market capitalization in the world.

Even though Nvidia controlled headlines and the movement in the markets last week, we cannot discount the importance and relevance of the Fed’s policy minutes. The focus for economists was on any wording that may indicate when the Fed would begin its rate cuts in 2024. As we have discussed in previous market updates in recent weeks, the probabilities from the futures market have dropped significantly on the likelihood that rates would be cut in the earlier part of 2024. The futures market would appear to be right based on recent minutes. While there was no direct verbiage that would state when cuts may occur (nor would we expect there to be), what was apparent was that 10 of 12 committee members exhibited a greater fear of cutting rates too quickly versus the risk of holding rates higher for longer.

Keeping rates higher for longer for equity markets would not be the most desired outcome for investors. The short selloff following Wednesday’s release of the FOMC minutes would only last for two hours until Nvidia influenced a reversal. After the bell, the tech giant reported quarterly sales of $22.1 billion vs $20.5 billion estimates. The company also delivered remarkable earnings, with earnings per share (EPS) of $5.16 vs. the expected $4.64. According to the Wall Street Journal, Nvidia is estimated to currently own approximately 80% of the chip-making market. Because of their massive influence and the understandable hype around artificial intelligence (AI), the conviction for recent high valuations of technology, semiconductor, and AI-oriented companies over the past year can arguably be justified given this market leader’s results.

AI as an investment theme has been one of the most lucrative areas for investment over the last 12+ months. Continued demand for chips to power systems focused on AI and society’s rapid adaption to the new transformative technology has become an asset difficult to ignore for many portfolios. To put this growth into perspective, it took Nvidia 24 years to become a $1 trillion company by market capitalization. Yet, it took just eight months to add another $1 trillion to its value! Technological advancements have vastly influenced economies since the beginning of time, and the introduction of AI has now become the next major driver of innovation. For this reason, significant investment opportunities that had never been considered before may exist, and investors’ portfolios should be reassessed to determine how exposure to these types of companies may potentially be beneficial. However, we do believe it prudent to speak with professional investment advisors before purchasing individual securities, funds, or other investment products that claim to have exposure to this rapidly expanding area and to determine if these investments are appropriate for the investor’s specific goals, risk tolerances, and investment timeframes.

Best wishes for the week ahead!

Equity Market, Fixed Income returns, and rates are from Bloomberg as of 2/23/24. Economic Calendar Data from Econoday as of 2/23/24. Nvidia earnings data sourced from Factset on 2/21/24. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.