Stocks rallied strongly on Friday, recovering most of the losses from earlier in the week, as a blockbuster January jobs report and strong earnings results from Amazon, Apple, and Google parent Alphabet lifted sentiment.
The S&P 500 surged 2.5% to close at a fresh record, while the tech-heavy Nasdaq soared 3.3%. The Dow Jones Industrial Average jumped 2.1%.
Jobs Report Shows Resilient Economy Despite Rate Hikes
The US economy added a staggering 517,000 jobs in January, far surpassing economists’ expectations. The unemployment rate fell to 3.4%, the lowest since 1969.
The red-hot labor market highlights the resilience of the US economy in the face of monetary tightening from the Federal Reserve. Markets are now questioning whether the Fed will need to be as aggressive with rate hikes going forward.
Fed Chair Jerome Powell said on Wednesday that disinflation has begun but reaffirmed plans to continue raising rates. Investors are hoping strong economic data like the jobs report will give the Fed room to pause rate hikes or even cut rates later this year.
Mega-Cap Tech Earnings Provide Boost
Earnings results from Big Tech giants Amazon, Apple, and Alphabet topped expectations and sent their stocks sharply higher, fueling the broader market rebound.
- Amazon stock rocketed over 8% after revenue beat forecasts, climbing despite the company’s first quarterly loss since 2015. AWS cloud sales grew 20%.
- Apple jumped nearly 6% as iPhone sales powered record profits that crushed estimates. The company also announced a new $100 billion share buyback program.
- Alphabet shares gained over 4% as advertising strength drove profit well ahead of expectations. YouTube ad revenue grew nearly 20%.
Upcoming reports next week from Meta Platforms, Microsoft, and others could provide an additional catalyst for tech stocks.
Market Volatility Likely to Persist
While the January jobs data is an encouraging sign, volatility will likely persist in the near term until there is more clarity on the path of inflation and Fed policy.
Other key events to watch next week:
- Fed officials speaking at events and appearances
- Consumer price index inflation data on Tuesday
- Retail sales numbers on Wednesday
Continued strength in economic reports and corporate earnings would support the case for an easing of Fed policy later this year. This potential “Fed put” has driven much of the rebound in stocks from 2022 lows.
However, any signs of upward inflationary pressure or hints of more aggressive tightening from the Fed could easily spark another pullback.
Outlook for Stocks Over Next 3-6 Months
Looking ahead over the next 3-6 months, here is what analysts are saying regarding the outlook for stocks:
Mohamed El-Erian, chief economic advisor at Allianz, sees stocks moving higher but expects continued volatility:
“I suspect we’re going to trade higher simply because either the Fed is going to surprise on the dovish side at some point or the economy is going to show that it is starting to weaken in a way that takes pressure off prices.”
Morgan Stanley equity strategists see scope for another 7-10% upside for stocks, assuming inflation trends lower and earnings hold up:
“Recession is avoided, inflation falls significantly and the Fed cuts rates before year-end. Against this backdrop, equity markets advance further.”
Wells Fargo strategists predict stocks will be roughly flat for 2023 with returns close to zero for the S&P 500:
“We expect the S&P 500 will trade modestly below 4,000 twelve months from now as solid but slowing economic and profit growth is offset by Fed rate hikes and quantitative tightening.”
So while analysts broadly expect volatility to continue in the coming months, there is potential for additional upside if inflation cooperates and Fed policy becomes supportive.
Sector Performance Last Week
Here is a breakdown of how the 11 S&P 500 sectors performed last week amid the jobs report and big tech earnings (data via Bespoke Investment Group):
| Sector | Weekly Change |
|---|---|
| Information Technology | +4.81% |
| Communication Services | +4.37% |
| Consumer Discretionary | +3.98% |
| Real Estate | +3.67% |
| Financials | +3.64% |
| Industrials | +2.86% |
| Health Care | +2.70% |
| Utilities | +2.53% |
| Materials | +2.46% |
| Consumer Staples | +1.94% |
| Energy | +1.57% |
This table shows the outsized influence of tech last week, with mega-cap names like Apple, Amazon, and Alphabet powering sharp gains. More defensive sectors like utilities and consumer staples lagged the broader market.
So in summary, stocks rallied back strongly to end the week after a series of volatile sessions. The market is keeping a close eye on inflation and Fed chatter for clues on policy direction. While additional volatility seems inevitable, solid economic data and earnings could spark further upside if they keep inflation and recession fears at bay.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
