What happened last week
- Hot inflation print pushed back the start of rate cuts; more importantly, longer-term interest rate expectations drifted higher, weighing on equities.
- The move higher in rates coincided with YTD equity market leaders (AI winners) underperforming the small-cap and value laggards (AI losers).
- The S&P 500 broke a 5-week winning streak, closing a hair above the 5,000 level.
What we’re watching this week
- Nvidia’s earnings on Wednesday is a large potential catalyst for dispersion; it could reinforce or reject YTD leadership.
- Global PMI data should provide investors with a signal on global growth.
- Outside the US, Chinese onshore markets reopen; we are looking at how local investors react to recent policy support.
Horizon’s Investment Management Views
Upside surprises to both consumer and producer price inflation last week left a clear message for fixed income investors – rate cuts are coming later than we thought. The front end of the curve drove the repricing in yields as the timing of the first Fed rate cut was pushed back into summer. With the 10-year yield closing above 4.2%, we think the door is open to modest upside in interest rates over the next few weeks. The move in rates pushed investors to sell equities, breaking a 5-week winning streak in the S&P 500.
Under the hood of the equity market, the price action was less straightforward and contrary to our current market framework. Equity sectors that have been more sensitive to yields, like small caps and value, outperformed mega-cap tech and growth AI winners last week. This is surprising since the YTD leaders have been largely resilient to moves higher in rates. To us, this price action looked like position squaring heading into Nvidia’s earnings this week; however, we will be paying close attention to the relationship between rates and equity market leadership. We are prepared to act if we think that the correlation has durably changed.
This holiday-shortened trading week will bring plenty of catalysts. On the earnings front, as we mentioned earlier, AI-darling Nvidia reports earnings this week after the close on Wednesday. Not only is Nvidia now the third largest stock in the S&P 500 Index, but the way it trades is a key sentiment barometer for the recent themes leading domestic equity markets, namely the “Magnificent 7”, growth, and quality. Zooming out, PMI data for February in the U.S. and most of the developed world will provide an important update on global growth conditions. Lastly, we look to China, which returns from its Lunar New Year holiday. We are looking for confirmation from China’s local bond market, a more powerful signal than the “fast-money” dominated offshore equity market, that China’s supportive policy actions are translating to a rebound in investor sentiment.
PMI = Purchasing Managers Index. The commentary in this report is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device. Before investing, an investor should consider his or her investment goals and risk comfort levels and consult with his or her investment adviser and tax professional. Mega-Caps are companies with market caps over $200 billion. The Magnificent 7 consists of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Equities are represented by the S&P 500 Index which is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC.
