Highlights for This Week Include:

The February business surveys are consistent with moderating, but sustainable U.S. economic growth. The global surveys are consistent with accelerating global growth. Historically, this has provided a positive backdrop for stocks.

The S&P 500 jumped 5.2% in February, with all sectors registering gains during the month. Leadership remained decidedly cyclical over defensive. Financials and Energy were the only cyclical sectors to underperform in February, alongside the most defensive sectors of Utilities, Consumer Staples, Real Estate, and Health Care. We continue to favor cyclicals, led by technology-related industries.

Business Surveys Suggest Moderation in U.S. but Acceleration in Global Economic Growth

While the ISM Services PMI (a timely business survey) was lower in February, it remained in expansion territory for the 14th consecutive month and is consistent with continued economic expansion, albeit at a slower pace. Despite the dip in the PMI, the net number of industries registering growth increased to 11 from 3 in the prior month, the second most since last June. The improvement in breadth argues for sustainability of the current expansion. The ISM estimates that the latest PMI corresponds with 1.2% annualized economic growth.

Importantly, the ISM Prices Index dropped, reversing most of the jump in the prior month. Cost pressures have eased substantially from peak levels earlier in this cycle and are now close to pre-pandemic levels, suggesting lower future inflation readings.

The ISM Manufacturing PMI fell in February and has been in contraction territory for 16 consecutive months, indicating persistent weakness in factory activity. The ISM estimates that the latest reading corresponds with 1.5% annualized economic growth, which is below-trend growth.

The J.P. Morgan Global Composite PMI (a timely global business survey) indicated that global economic growth accelerated to an eight-month high in February. Growth was registered in both the manufacturing and services sectors during February, with rates of increase hitting nine- and seven-month highs, respectively.

There were also signs of the upturn broadening, with all six of the sub-sectors covered by the survey (business services, consumer goods, consumer services, financial services, intermediate goods, and investment goods) seeing output rise concurrently for the first time since May 2023. Accelerating economic momentum, as indicated by the composite PMI, has historically been associated with positive stock market performance.

Stock Market Internals Remain Constructive

Broad market indexes are all bullish across the market cap (size) spectrum, which is yet another risk-on signal as it indicates improving breadth. This includes the S&P 500, Equal-Weight S&P 500, Nasdaq 100, Russell 2000, S&P 400, and Russell Micro-Cap indexes. A weaker U.S. dollar and lower Treasury yields are also bullish signals.