Technology stocks continued to power U.S. equities higher last week with the S&P 500 closing at a new all-time high as the index pushed past its high-water mark set at the end of 2021. For the week, the tech-heavy Nasdaq Composite led the way with a 2.3% gain, while the S&P 500 increased 1.2% and the Dow Jones notched a 0.8% return. The equity market rally showed no signs of yielding to a jump in interest rates as traders have dialed back some of their rate cut optimism that supported the year-end rally in the face of sustained strong economic data. The U.S. 10-year Treasury yield pushed back above 4% and closed the week at 4.14%.

Last week’s earnings results from global chip manufacturing giant Taiwan Semiconductor (TSM) gave technology stocks a shot in the arm that sparked the rally to new highs. TSM’s management team guided that they anticipate sales to grow over 20% in 2024. As the company serves as a contract manufacturer for many of the world’s leading chip designers like Nvidia and Broadcom, its positive outlook boosted investor confidence that electronics demand would be strong in the year ahead and that the artificial intelligence investment boom would continue to expand sharply. The S&P 500 semiconductor sector gained over 8% last week in response.

The corporate earnings optimism will be tested over the next few weeks as fourth quarter earnings season kicks into full gear this week. Almost 60% of the S&P 500 will report over the next three weeks, including 75 reporters this week. So far, outside of tech stock enthusiasm, corporate earnings results have been somewhat lackluster despite a low bar of expectations. Only 62% of company earnings results are exceeding consensus forecasts compared to a 5-year average beat rate of 77%, according to FactSet. The expected year-over-year earnings growth rate for the S&P 500 in the fourth quarter has fallen to -2% from the expectations for +2% growth before the start of earnings season.

On the economic front, last week’s updates gave encouraging data points on the resilience of the U.S. consumer. The December consumer sentiment survey from the University of Michigan showed a sharp increase in sentiment in response to slowing inflation. Additionally, retail sales grew 0.6% in December compared to expectations for a 0.4% increase. Looking at 2023 as a whole, retail sales grew 3.4%, which implies that most of the consumption increase came from price growth (CPI also increased 3.4% in 2023) rather than from consumers buying a larger volume of goods and services. However, real consumption improved in the second half of the year as retail sales averaged growth of 0.5% per month compared to inflation of 0.3% per month on average from July through December.

In the week ahead, in addition to the ramp-up in earnings announcements, investors will also get a first preliminary look at U.S. GDP growth in the fourth quarter as well as an update on the Fed’s preferred inflation gauge, the PCE index (Personal Consumption Expenditures). Economists anticipate that real GDP grew 1.5% in the fourth quarter (2.6% year-over-year), down from the third quarter’s 4.9% growth rate (2.9% year-over-year). Annual core PCE growth (excluding food and energy) is expected to have ticked down to 3.0% in December from 3.2% in the prior month.