“There is no such thing as failure, there's just giving up too soon.” ― Jonas Salk

Good evening,

After Nvidia (NVDA 3.79% ) took markets on a wild ride last week, much of this week was somewhat more range-bound. Nevertheless, stocks continued their advance. The Nasdaq hit an all-time high close on Thursday, breaking a record set in 2021, then set a fresh record on Friday. The S&P 500 also reached new highs, and on Thursday it celebrated Leap Day by extending its monthly win streak to four. 

With the bulk of earnings season now behind us, investors resumed focusing on inflation data and what the Federal Reserve’s response might be. This week, the main macro data arrived via Thursday’s release of the January PCE Deflator reading. 

Two weeks ago, markets sank on higher-than-expected January CPI numbers, even though January seasonal surges in inflation readings are not unusual. CPI tends to foreshadow PCE, so although Core PCE MoM came in on Thursday at 0.4% – the biggest monthly jump since January 2023, the reading was roughly in line with Street expectations, and the S&P 500 and Nasdaq both rose afterward. To Lee, this was further evidence of market strength. “There were no major revelations in the PCE numbers, but the market's reaction tells me there is still gas in the tank,” he remarked on Thursday.

Head of Technical Strategy Mark Newton has a similar opinion. In his view, “equity trends show no evidence of wavering. Despite this week’s mild consolidation in equity indices, the Cyclicals have managed to kick into gear to provide support to equities and little evidence of any trend break has occurred in uptrends of QQQ 1.54%  or SPX.” He added, “Until or unless last week’s lows are challenged (4946 for SPX), SPX very well can continue its rise into mid-March without much trouble, technically.”

The week’s market action also suggests that the rally is broadening. As Newton pointed out, “RSP 0.83% , the equal-weighted S&P 500, logged new all-time high closes on both a monthly and weekly basis.” In fact, the equal-weighted S&P outperformed the S&P 500 index this week. 

Lee observed that, heading into March, “a few things have stood out to me, as far as how well they have worked so far this year. The first is AI, Nvidia, and Super Micro (SMCI 15.81% ) and related names. Another has been Financials (XLF 0.69% ) and Industrials (XLI 0.66% ).”

He has also noticed “kind of a ‘stealth rally” taking place with small-caps. “If you compare the Russell 2000 and compare it to the RSP 0.83%  (S&P 500 equal-weighted index), you can see that small caps have outperformed the broader market,” Lee pointed out. “We still see 50% upside for small caps, based on their valuation levels.”

The stealth rally is shown in our Chart of the Week:

FSI Sector Allocation Strategy

These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton, part of the March 2024 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.

Elsewhere 

Sweden officially has the required unanimous support of NATO members to join the alliance, after months spent winning support from Turkey and Hungary. Sweden first sought admission to NATO in response to Russia’s 2022 invasion of Ukraine.

Elon Musk has sued OpenAI, alleging breach of contract. Musk alleges that OpenAI, set up as a non-profit, has deviated from its binding mission to “benefit humanity” and instead now focuses on “maximizing profits” for its partner, Microsoft (MSFT 1.51% ). Musk helped to found the ChatGPT developer, though he later left the firm. 

India is still the fastest-growing major economy in the world, a title it claimed for the second straight year. Government statistics show that strong manufacturing growth helped India’s GDP expand at an annualized 8.4% in 4Q2023. Private consumption rose 3.5%.

The Biden administration described Internet-connected Chinese autos as a potential threat to national security, citing fears that data about American drivers could be sent to authorities in Beijing. Some observers suggested that the move aims to pre-empt the threat to U.S. automakers from the significantly lower prices of Chinese vehicles, though the Commerce Department has begun investigating whether software integral to Chinese electric vehicles could track where Americans drive, where they charge their cars, and perhaps what they listen to while in them.

A judge for the U.S. District of Delaware rejected AstraZeneca’s (AZN -0.09% ) arguments seeking to challenge the authority of Medicare to negotiate the prices of certain prescription drugs, such as the company’s Farxiga (Dapagliflozin), a treatment for Type 2 diabetes, heart failure, and chronic kidney disease. Other drugmakers have also launched lawsuits challenging Medicare's authority in this matter, on various Constitutional grounds.

Microsoft announced a partnership with a French AI startup Mistral AI. The Redmond giant will make Mistral’s “Le Chat” chatbot and other AI models available on its Azure cloud, while taking a small stake in the company. Industry observers note that Mistral hopes to differentiate itself by the efficiency of its data curation, which in turn should allow its models to use less computing power. Among Mistral’s other investors are Eric Schmidt, former CEO of Google, as well as Andreessen Horowitz and General Catalyst. 

And finally: A new study in the British medical journal Lancet reports that, as of 2022, more than 1 billion people in the world are obese. Since 1990, adult obesity rates have more than doubled, and children/adolescent obesity rates have quadrupled. (For the purposes of this study, obesity is defined as a BMI of 30 or more, though the authors acknowledge that there are problems with using BMI as an obesity metric.)