Market Update End of Week:

Weekly Roundup of the most important financial news

1 - Take a look at your 401(k). The S&P 500 and Dow just hit record highs.

We did it! This week, major indices notched new all-time highs for the first time in more than two years.

• After five consecutive record-setting days, the S&P 500 index closed at 4,894 yesterday

• The Dow Jones Industrial Average crossed 38,000 for the first time, before closing at 38,049

• The tech-heavy Nasdaq closed at its highest value since January 2022 and now sits less than 3.5% away from its peak

The milestones follow major stock market declines in 2022, Wall Street’s worst year since the Great Recession. At the time, investors were concerned about high inflation, high interest rates and a possible recession, and the S&P 500 dipped about 20%.

But what's driving this market euphoria? Let's break it down:

1. Interest Rate Expectations: The anticipation of rate cuts – as soon as March or May – has fueled optimism, encouraging investment in equities.

2. Q4 GDP Report: An early look at fourth-quarter U.S. gross domestic product (GDP) showed 3.3% growth during the period. This handily beat economists’ expectations of 2% growth, further easing recession concerns.

3. Extreme Greed: The CNN Fear & Greed Index, a measure of market sentiment, is currently indicating 'Extreme Greed'. In this context, greed can signal confidence and bullishness, but it's also a sign that the market may be overextended at the moment.

Now, for the question every investor is asking: How long can this bull run last?

2 - The AI revolution continues

AI continues to be the center of innovation, disruption, and growth in the business world. As investment pours into this new technology, AI is rapidly redefining the landscape, crowning new winners and losers almost every day.

The Winners

• Chip stocks: NVIDIA was the top-performing S&P 500 stock in 2023 and continues to scale new heights in 2024. Its success is a testament to the growing demand for advanced computing power driven by AI applications.

• Infrastructure providers: The backbone of AI – server equipment, data centers, and cloud computing – are seeing a surge in demand.
  Companies like IBM and Super Micro Computer offer hardware solutions for AI applications. Meanwhile, cloud computing giants like Amazon Web Services and Microsoft Azure are expanding their infrastructure to support the increasing load of AI computations.

The Losers

• EdTech: Goldman Sachs recently downgraded education companies Coursera, Duolingo, and Chegg due to the impact of AI tools. Analyst Eric Sheridan pointed out that “generative AI may alter learner behavior and ultimately user growth for many edTech companies.”

• White collar workers: The rise of AI is not without its casualties. White-collar workers, once considered immune to the automation wave that impacted blue-collar jobs, are now facing layoffs and job uncertainties.
  As AI improves the productivity of developers, marketers, data science professionals, and more, many companies are cutting staff and pocketing the cost savings.

AI's impact on business and the economy has only just begun.

To catch the next NVIDIA – before it rips 400% – consider what second and third-order effects of this transformational technology have not yet been felt.

3 - Commercial real estate is drowning

While the Federal Reserve appears to have orchestrated a soft landing in the stock market, the same can not be said for commercial real estate (CRE).

Green Street reports a 22% decline in commercial property values since early 2022, with office prices taking an even steeper dive of 35%.

The CRE market's heavy reliance on leveraged (debt-backed) investments exacerbates the impact of falling property values.

Researchers estimate that 14% of all CRE loans and a whopping 45% of all office loans are currently in “negative equity.”

Also known as “underwater” or “upside down”, this precarious situation arises when the market value of a property dips below the loan amount. As a result, property owners owe more on the property than it is worth.

But borrowers aren’t the only ones in trouble.

Lenders, especially regional banks with significant exposure to CRE loans, are also at risk. These smaller, less well-capitalized banks are particularly vulnerable, especially in the wake of last year’s bank failures.

If smaller banks buckle under the strain of troubled CRE loans, we could see further consolidation in the banking industry. (Think J.P. Morgan's acquisition of First Republic's portfolio last year.)

In the meantime, property owners are scrambling to restructure debts and kick the can down the road, praying for rate cuts to ease the pressure.

But unless the shift to hybrid work reverses course, the demand for office space may stay in a slump, leaving the CRE market in a tough spot.