The US market appeared to shrug off bad economic news last week as core inflation over the past year came in higher than expected at 3.3% (vs 3.1%), while January retail sales were worse at -0.9% compared to -0.2%. You can read more about Morningstar’s take on the inflation data surprise here.
The most obvious explanation for the insouciance of investors is that economic data reflects the past while investment is always focused on the future. Unless this historic weakness changes the perception of investors about the future, it should not impact prices. As noted last week, it is clear that investors were already concerned about the prospects for consumers as the US Consumer Cyclical sector has been the weakest over the year to date, delivering a return of 1.3% and lagging the broader US market by 3%. While the 11.9% decline in Tesla TSLA reduced returns by 2.3%, this was partially offset by Amazon AMZN that accounted for over two thirds of the sector’s gains- and most of its earnings growth.
US Equities Lag Overseas Peers
The US Dollar fell by 1.1% during the week, adding to returns from overseas markets with the Developed Markets ex US index up 2.3%. As a result, the US is now lagging its overseas peers by 3.1% year-to-date. Returns from the Emerging Markets index have been lower at 1% over the week and 3.1% since the end of 2024. However, China has been noticeably strong, rising 12.7% this year in US Dollar terms.
Early Signs of a Rotation
When viewed alongside US sector returns which show that Technology and Communications Services- excluding the soaring Meta Platforms META- have lagged the broader US market, there is some evidence that a ‘rotation’ is underway. Investors appear to seek returns from previously unloved companies and markets that are being traded at attractive prices. While such events can only be identified with certainty in hindsight and the scale of such a change in sentiment is impossible to predict, the current gaps in valuations within the US and across global markets provide attractive opportunities for investors who are selective with their capital.
Meta Platforms Stock vs. Morningstar Fair Value Estimate
Meta Platforms Stock vs. Morningstar Fair Value Estimate
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Source: Morningstar Direct.
If this rotation were to persist, it is likely that returns at the broad market level will be negative, as the large, growth-oriented companies that previously led the market higher comprise a major part of the index. Consequently, investors should be prepared for worrying headlines. One way they can equip themselves for this outcome is through education. As investors are increasingly turning to AI to learn, Morningstar behavioral scientist Danielle Labotka has recently investigated the usefulness of AI as a teaching tool for investors. You can access a summary of her work here.
Aerospace and Defense in Focus
Regardless of market leadership, the defense industry is likely to be increasingly newsworthy as geopolitics continues to dominate headlines. Morningstar analysts covering defense stocks have recently published a detailed review of the global defense sector to help investors understand that ecosystem and how it may be impacted by the changing political landscape. You can access the report here.
Coming Up: FOMC Minutes
The key economic news in the shortened week ahead is likely to be the release of the minutes of the last meeting of the Federal Reserve’s Open Market Committee on Wednesday. Economists and market commentators are set to closely scrutinize it for guidance on the future path of interest rates. A significant change in tone may affect interest rate expectations and consequently exchange rates and asset prices.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
