Daily Brief - A High-Wire Act

TLDR: As the S&P 500 flirts with the 5,000 mark, setting new records, the question on everyone's mind is whether it will soar higher or face a pullback.

A combination of factors is propelling the index forward. Recent data shows a robust U.S. economy, with the Atlanta Fed's GDPNow tool estimating a 4.2% growth rate for Q1 2024, a significant jump that bodes well for market optimism.

Additionally, the technology sector, led by the "Magnificent Seven" stocks continue to dominate and significantly contribute to the rally, despite their lofty valuations.

However, valuations remain a hot topic, with the S&P 500's price-to-earnings ratio hovering around the 92nd percentile of its historical valuation, raising eyebrows among some investors.

Yet, strategists at Citi and BMO argue that valuation metrics are a poor predictor of future performance and caution against using them as a sole basis for investment decisions. They suggest a more nuanced view, considering the changing composition of the S&P 500 and the growth potential of its constituents.

As the index edges closer to 5000, the potential for sector rotation looms, with some analysts pointing to historical patterns and divergences within the market. The performance of transport and industrial sectors, compared to the tech-heavy drivers of the recent rally, suggests that a broader market participation could be on the horizon.

Market Movers: When SPX's valuation is high?

Here are the historically best and worst performing SPX stocks when the S&P's P/E is at a high:

The top 3 performing stocks:

1. Tesla (Ticker: tsla) with a 1-month return of 5.76%
2. Fortinet (Ticker: ftnt) with a 1-month return of 4.95%
3. Tapestry (Ticker: tpr) with a 1-month return of 4.85%

The bottom 3 performing stocks:

1. Incyte (Ticker: incy) with a 1-month return of -3.89%
2. Equinix (Ticker: eqix) with a 1-month return of -3.02%
3. Illumina (Ticker: ilmn) with a 1-month return of -2.97%

Earnings Update: Arista Networks reports on Monday

Projections indicate that Arista's earnings are expected to grow by 20.57% year-over-year, with an anticipated earnings per share (EPS) of $1.70. The company's revenue is also expected to see a significant increase, with forecasts predicting $1.53 billion, marking a 19.98% rise compared to the same quarter in the previous year.

Discover how other companies could react post earnings with the help of TOGGLE's WhatIF Earnings tool.

Asset Spotlight: Is Palantir overvalued?

In the 6 past occurrences when Palantir's forward P/B ratio rose, analysis from Toggle indicated a pattern of a median downard movement in the stock price over the next 2 weeks.

Palantir's stock price spiked recently after the company projected nearly 40% growth in US commercial revenue for 2024, attributing much of this optimism to its AI initiatives.