In January, the stock market experienced a significant rally due to easing expectations from the Federal Reserve (Fed). However, February brought about a different scenario. The month commenced with the Fed raising the benchmark rate by 25 basis points to 4.75%, and further increases of 25 basis points were anticipated in March and May. This shift surprised the market, which had previously priced in rate cuts for the latter part of the year. Now, the prevailing assumption is that the Fed will maintain higher rates for an extended period, with the terminal rate reaching approximately 5.4%.

The surge in rate expectations was partly fueled by robust job numbers, with the Change in Nonfarm Payrolls exceeding expectations at +517k. Average hourly earnings remained above 4.4% year-over-year, particularly in the Leisure and Hospitality sector, which saw a substantial gain of 7.0%. Following the positive job data, inflation readings were mostly in line with expectations, although services inflation remained elevated. Housing prices cooled as mortgage rates rose, and commodities experienced a downward trend. January’s Consumer Price Index (CPI) month-over-month matched expectations at 0.5%, but the year-over-year figure came in at 6.4%, surpassing the expected 6.2%. Additionally, Producer Price Index (PPI) data for January exceeded expectations, reporting a 0.7% month-over-month increase and a 6.0% year-over-year increase.

Apart from economic indicators, February marked the conclusion of fourth-quarter 2022 earnings reports. Positive earnings surprises were more rewarded than usual, with companies experiencing a 1.1% price increase in the two days surrounding the announcement. Conversely, negative surprises resulted in a smaller-than-average decrease of 0.6%. Large-cap growth stocks outperformed, with the Nasdaq 100 only falling 0.4%, while large-cap value stocks faced more significant declines.

Regarding Q4 earnings, over 68% of S&P 500 companies reported positive earnings per share (EPS) surprises, below the five-year and ten-year averages. Revenue growth averaged 5.6%, the lowest since Q4 2020. Energy, Consumer Discretionary, and Industrials led in sales growth, while Materials and Technology reported negative growth. Earnings growth was mixed, with only four of 11 sectors reporting year-over-year growth.

Looking ahead to March, key events include the FOMC decision, Nonfarm Payrolls, and the CPI release. Bond market dynamics will continue to influence equity valuations, and geopolitical tensions, such as the ongoing conflict in Ukraine and strained relations between the U.S. and China, could impact global trade.