January 2024 Month-End US Stock Market Analysis and Research

View risk disclosures

The United States market is up 2.3% Year-to-Date (as of January 31, 2024), with the Communication services (Telecom) sector leading the way, up 7.6%. This is followed by the Technology and Financial sectors, up by 5.3% and 3.1%, respectively. While the majority of these sectors trended up, Real Estate, Utilities, Consumer Discretionary, and Material sectors went down by -4.1%, -3.0%, -4.2%, and -2.7%, respectively. 

In the last year, the market has climbed 18%. Looking forward, earnings are forecasted to grow by 15% annually.

Several key events impacted the US stock market's direction at the end of January 2024

Earnings Season Update:

• Positive Impact: Q4 earnings reports from major companies have largely exceeded expectations, contributing to a boost in investor confidence and driving market gains. Notable examples include Apple's revenue beat and Tesla's record deliveries.

• Sector Impact: Strong earnings in the technology sector (Apple, Microsoft), consumer discretionary sector (Tesla), and healthcare sector (UnitedHealth) have significantly bolstered their respective performances.

Federal Reserve Policy Update:

• Despite the absence of rate hikes, ongoing concerns about inflation and the possibility of future increases have resulted in market volatility. The lack of clear guidance from the Fed has left investors on edge.

• Sectors sensitive to interest rates, such as financials and real estate, experienced muted gains amid this uncertainty.

Geopolitical Tensions:

• The ongoing war in Ukraine and strained US-China relations added a layer of risk to the market, tempering bullish sentiment.

Sector Profit/Earning Ratio:

• Investors favor the Healthcare sector the most for future growth, as it is trading above its 3-year average PE ratio of 50.5x.

• The Energy sector is the least preferred by investors for future growth. However, investor sentiment seems to have improved, given that it is trading above its 3-year average of 4.5x.

Biggest Winners

Communication Services Sector Update

As of the end of January, the Communication Services sector has emerged as the leading sector, driven by the impressive performance of META and Netflix stocks. The surge in sentiment surrounding Meta Platforms (META) is attributed to a significant improvement in online advertising demand, leading to a notable rebound. Despite ongoing headcount reductions, Meta returned to revenue growth in the first quarter. The excitement surrounding artificial intelligence has likely played a role in boosting Meta's shares, given the substantial investments the company has made in large language models, signaling potential advancements in their product offerings.

On a different note, Netflix stocks experienced a surge following record Q4 subscriber growth. This positive momentum reflects the company's strong performance and growing investor confidence in its market position.

Breakdown of the two best movers in Communication Services Sector

META

META is a platform that engages in the development of products enabling people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables worldwide. Learn more about the company here:

Share Price vs Fair Value of META – META is UNDERVALUED

Below Fair Value Update: META ($400.06) is currently trading below the estimated fair value of ($500.81) and is categorized as significantly below fair value by more than 20%.

Financial Position Analysis for META - POSITIVE

Short Term Liabilities: META's short term assets ($78.4B) exceed its short term liabilities ($30.5B).

Long Term Liabilities: META's short term assets ($78.4B) exceed its long term liabilities ($42.9B).

META Future Growth - EXCELLENT

Meta Platforms is forecasted to grow earnings and revenue by 15.7% and 10.4% per annum, respectively. EPS is expected to grow by 15.7% per annum. Return on equity is forecasted to be 21.6% in 3 years.

META stock trend

NETFLIX

Netflix provides entertainment services 

Share Price vs Fair Value of META – NETFLIX is OVERVALUED

Above Fair Value: NFLX ($564.11) is trading above our estimate of fair value ($537.63)

Financial Position Analysis for Netflix - MODERATE

Short Term Liabilities: NFLX's short term assets ($9.9B) exceed its short term liabilities ($8.9B).

Long Term Liabilities: NFLX's short term assets ($9.9B) do not cover its long term liabilities ($19.3B).

Netflix Future Growth - MODERATE

Netflix is forecasted to grow earnings and revenue by 17% and 9.8% per annum respectively. EPS is expected to grow by 17.8% per annum. Return on equity is forecast to be 32.9% in 3 years.

Netflix stock trend

Biggest Losers

Consumer Discretionary and Real Estate Sectors: The biggest losers as of the end of January, these sectors faced significant declines as fears of inflation and economic slowdown prompted investors to seek safer havens. TSLA (Tesla) and AMT (American Tower Corp) led these sectors, experiencing declines of -24% and -11%, respectively.

Consumer discretionary stocks, often the first to suffer when consumers tighten their belts, exhibited lackluster performance, indicating investor skepticism about the long-term viability of current spending patterns. It is noteworthy that consumer discretionary stocks, along with retailers overall, have not yet reached their 2021 peak. Tesla, classified as a Consumer Discretionary stock, declined by -24% in January due to missed expectations on earnings and signals of a slowdown in 2024.

The Real Estate sector, underperforming the broader stock market this month, faced concerns that the Federal Reserve may not bring down the cost of borrowing as quickly as markets hope. This has impacted the Real Estate market, with American Tower Corp declining by -11% in just one month.

February Outlook

January 2024 painted a bullish picture for the US stock market, with major indices rallying on the back of positive earnings reports, investor optimism, and hopes for economic recovery. However, as February unfolds, lingering questions emerge: will the rally persist, or will reality usher in a correction? Let's delve into what to anticipate and highlight key events to monitor.

January Overview:

• Strong Earnings: Q4 reports from key companies surpassed expectations, instilling confidence and propelling market gains.

• Tech Sector Strength: Technology stocks played a pivotal role in driving the rally, benefitting from robust earnings and positive sentiment.

• Economic Optimism: Bullish sentiment was further buoyed by hopes for a sustained economic recovery. Factors such as easing inflation and positive growth signals from China contributed to this optimistic outlook.

February:

• Interest Rate Hikes: The looming February meeting of the Federal Reserve is a significant focal point. Potential interest rate hikes, intended to counter inflation, have the potential to temper market enthusiasm.

• Geopolitical Tensions: The persisting conflicts in Ukraine and strained relations between the US and China introduce an additional layer of risk and uncertainty, influencing market dynamics.

• Earnings Season Wind Down: With fewer major earnings reports on the horizon, the market might experience a reduction in positive catalysts that have been driving gains in the past.

Potential Scenarios for February:

• Continued Rally: A continuation of the January upswing is plausible if positive economic data surfaces, the Federal Reserve maintains a dovish stance, and geopolitical tensions remain subdued.

• Correction: The possibility of a short-term pullback exists if the Federal Reserve signals aggressive rate hikes, geopolitical risks intensify, or earnings reports fall short of expectations.

• Volatility: February may witness choppy trading conditions, with investors reacting to a range of data points and announcements, contributing to heightened market volatility.

Key Events to Watch:

• FOMC Meeting (Feb 1st): The Fed's monetary policy decisions and their impact on interest rates.

• Earnings Season Wrap-Up: Focus on company outlooks and guidance for 2024.

• Economic Data: Inflation figures, retail sales data, and manufacturing reports will influence market sentiment.

• Geopolitical Developments: Updates on the Ukraine war and US-China relations.

The belief on Wall Street that "as goes January, so goes the year" reflects a sentiment tied to the January Indicator. However, it's important to note that this indicator may not rest on a strong statistical foundation. While January performance can offer insights into market trends and investor sentiment, it's crucial to approach such beliefs with a degree of caution, as numerous factors can influence market dynamics throughout the year. Investors often use a variety of indicators and analyses to make informed decisions, considering a broader range of economic and geopolitical factors beyond the performance of a single month.

In a nutshell, February brings uncertainty to the US stock market after a positive January. Factors like interest rates, global tensions, and economic trends will influence the next moves. Whether the market keeps rising, sees a dip, or experiences ups and downs, investors should stay vigilant and flexible in response to changing conditions.