Busy Week Ahead: Powell’s Testimony, Economic Data

All three major indexes remain at or near record territory, though Wall Street is deeply divided as to whether things are pushing into “bubble” territory.

Stock Market

Leading those concerns is what some see as a narrowly led rally driven primarily by AI-related tech stocks. Bears continue pointing to what they consider “extreme” concentration at the top with the 10 biggest companies in the S&P 500 – all but 1 are tech stocks – now accounting for more than +30% of the total index.

Tech bulls continue to argue that these companies and their technology touch every part of the US economy, so it makes sense that they dominate the market. What’s more, bulls point to growth that they believe justifies the hype with the seven largest stocks in the index posting almost a +60% gain in Q4 profits.

They further argue that artificial intelligence has the potential to expand far beyond the tech sector as more industries adopt the technology, which will in turn not only boost revenues for companies creating AI technologies, but the companies integrating it into their operations.

While most tech companies’ Q4 2023 earnings results and outlooks met or topped expectations, those results are now in the rearview and Wall Street is already turning its focus back toward its other chief concern – Federal Reserve policy.

Economy

Bulls are cautiously optimistic that key February data this week will show the trends of disinflation and a cooling US labor market remain intact. Notably, ISM Manufacturing, released on Friday, showed a pullback in the “Prices Paid” component after an unexpected jump the previous month.

The ISM Non-Manufacturing Index is due out tomorrow and expected to show another gain in service sector prices. While shelter price growth remains a key driver of inflation in the sector, costs for services across the board continue to push higher, including everything from healthcare to auto insurance and brokerage fees.

Services inflation was running at an annual rate of almost +4% in January, according to the most recent PCE Prices Index. The Federal Reserve, as well as other economists, believe services inflation is closely tied to the US labor market and wage growth.

Fed officials have noted that wage growth should be in the 3.5% range to be consistent with its +2% inflation target but it’s been running at more than twice that pace.

Average hourly earnings climbed at an annual rate of +4.5% in January, versus +4.3% for the 12 months ending in December.

January payroll data overall showed a much stronger-than-expected labor market, though many bulls believe the numbers were skewed by seasonal factors. That means there is a lot riding on February jobs data due out this week, the main highlight being the February Employment Report on Friday.

Other key jobs data to watch this week includes the Jobs Openings and Labor Turnover Survey (JOLTS) and ADP’s Employment Change on Wednesday. Investors this week are also anxious to hear from Fed Chair Jerome Powell when he testifies before Congress. His semiannual report will be delivered before the House Financial Services committee on Wednesday and the Senate Banking committee on Thursday.