What Happened Last Week
- Breadth Expands: Cyclical and smaller-cap parts of the market continue to lead the major indices.
- Sell the News: Despite strong earnings, investors sold bank stocks after their reports, potentially signaling investor exhaustion.
- Iran Tensions Simmer: The U.S. has thus far held off on striking Iran, but asset repositioning indicates that a strike remains a possibility.
What We’re Watching This Week
- Earnings Week Two: Regional banks, healthcare companies, and Netflix are among the highlights this week.
- Geopolitical Tensions: With Mideast tensions on the back burner, investor attention turns to the standoff over Greenland.
- Domestic Policy: The President is set to unveil an affordability agenda at a speech in Davos this week.
Investment Management Team’s Views
Market broadening continued last week as the average S&P 500 stock and the small cap index posted gains while the benchmark index and tech-heavy NASDAQ 100 fell. The shift in sentiment towards the rest of the market has been sharp, but may have some room to run as years of chasing the AI theme will take longer than a few weeks to unwind. Last week’s cyclical trade outperformance is even more impressive given how poorly large bank stocks traded after their earnings releases. Financial results were strong,, and the banks all shared favorable outlooks and sanguine macro commentary, but higher costs disappointed investors. That “good news, bad price action” dynamic has our attention as earnings season rolls on.
While geopolitical tensions over Iran continued to simmer last week, the weekend brought further unease as President Trump ratcheted up pressure on Europe over Greenland. The President has threatened tariffs against European nations over their opposition to a U.S. annexation of Greenland. Beyond this brewing geopolitical crisis, investors are watching the White House for clues on the Fed Chair race and the possibility of a more interventionist stance to address affordability issues. Investors have opted for the familiar playbook of selling dollars, U.S. equities, and bonds, and buying precious metals in this latest bout of uncertainty. Weakness in Japanese government bonds is adding global pressure to the long end of the curve after leaders signaled higher fiscal spending ahead of the February 8 snap elections.
The short week ahead is a busy one. A swathe of regional banks, healthcare companies, and Netflix will report earnings this week. We will be paying close attention to price action in regional banks after their reports. Additionally, we will watch investors’ willingness to monetize or roll hedges early this week, which may provide insight into overall risk appetite and the direction of the market in the short term. President Trump is expected to speak on affordability at the World Economic Forum in Davos this week, but the meeting with global heads of state may also provide the platform to offramp Greenland tensions, or coordinate allied action against Iran. Lingering in the background, the Supreme Court may also issue critical rulings over the legality of tariffs and Lisa Cook’s firing.