By Jack Kraft, CFA, Investment Strategist
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U.S. equities finished the week with mixed results: Positive updates on inflation boosted investor sentiment for growth stocks and big tech, while more value-oriented stocks failed to rally. The blue-chip Dow Jones Industrial Average lost 0.7% and experienced its third losing week out of the past four, while the S&P and Nasdaq jumped 1.6% and 3.3%, respectively, marking their seventh positive week in the last eight, bolstered by the recent tech rally. Meanwhile, the 10-year U.S. Treasury yield fell 25 basis points last week, trading around the 4.2% level despite the June Federal Reserve (Fed) meeting showing a surprising amount of hawkishness from committee members.
With the S&P 500 and Nasdaq both notching all-time highs last week, many would think investors went into the weekend with enthusiasm, but after taking a look under the hood of these market cap-weighted composites, many could be left feeling on edge. In fact, the equal-weighted S&P 500, which takes out the size effect, showed the average stock in the index actually declined by 0.5%. Furthermore, seven of the 11 S&P 500 sectors ended the week in negative territory, with energy and financials losing more than 2.0%. Holding up the market, per usual, was the technology sector, with a stellar gain of more than 5.6% amid optimism surrounding artificial intelligence (AI) and semiconductor stocks. In fact, when looking at the 100 best-performing stocks over the past year, over 50% of them have landed in the technology, industrials and financials sector, while utilities, real estate and consumer staples have lacked little to no participation.
Market breadth, which measures the overall number of stocks advancing versus declining, has been poor since the S&P 500 has rebounded from its most recent drawdown in April. The market-cap weighted S&P 500 is up 9.4% from the April bottom, while the equal-weighted S&P 500 index is up only 2.4%. More interesting is that since May 14, the S&P 500 is up 3.5%, while the equal-weighted S&P 500 is down 1.8%. This reinforces my view of the market’s narrowness since April, with the key risk to monitor being the possibility of the mega-tech companies (listed below) failing to meet the high earnings expectations set by analysts. On the other hand, if these companies can continue without missing a beat, a “catch up” trade will be overdue from the remaining 495 stocks in the index.
In stock-specific news, the Magnificent Seven failed to waiver, as Nvidia and Apple jumped roughly 8% and 9%, respectively. Nvidia benefited from an upbeat earnings report from competitor Broadcom as strong AI revenue drove better-than-expected profits. Elsewhere, Apple saw shares rally amid an update on plans to integrate future iPhones with generative AI, which could drive upgrades to newer models. Looking at year-to-date performance, five stocks (MSFT, NVDA, GOOG, AMZN and META) have accounted for 60% of the S&P 500’s return in 2024. These technology mega caps have two things going for them: 1) they have been coined as the “New Defensives” by some investors and 2) they have strong fundamentals underpinning the moves in the stock price, such as above-average revenue growth, earnings growth and return on capital. As long as earnings estimates remain as strong as currently forecasted by analysts, I see demand from investors coming in to “buy the dip” when the opportunity presents itself in these names.
Economic data was a big driver of optimism in markets last week, as the Consumer Price Index (CPI) report showed slowing month-over-month inflation. May Core CPI came in below expectations and showed the slowest increase since August 2021. Diving into the report, airline, car insurance and discretionary goods prices were all softer, while shelter remained firm. An update on producer price inflation, which indicates “pipeline inflation,” declined by 0.2% and was the softest reading in eight months. Overall, these inflation reports were a confirmation that the disinflationary trend was still intact and welcomed relief for Fed officials.
These two upbeat data prints have market participants forecasting the Fed starting its rate-cut cycle as soon as September, with another possible cut on the table in December. In my opinion, markets seem to overreact when inflation data is supportive of a rate cut (think back to the six cuts forecasted at the start of the year). Currently, the CPI index is sitting at 3.3% year-over-year, well above the 2% Fed target. Additionally, when the Fed released the dot plot from its latest meeting, it showed members have shifted to be a little more hawkish. This tells me the Fed remains in a “wait and see” approach to rate cuts, which seems appropriate given they will receive three more CPI reports before the September Federal Open Market Committee meeting.
Looking ahead to the holiday-shortened trading week, investors will have a slew of economic reports, while corporate earnings reports remain light. Headlining the economic calendar will be updates on retail sales on Tuesday and the Philadelphia Fed manufacturing index on Thursday. Other key updates to keep an eye on are flash reports on June services and the manufacturing Purchasing Managers’ Index (PMI), existing home sales and housing starts. On the earnings front, some notable companies issuing profit reports include Lennar (LEN), Accenture (ACN), Kroger (KR), Jabil (JBL) and FactSet (FDS). In central bank news, nine different Fed presidents and governors will be giving speeches throughout the week. Many investors will be looking for clues on how the group is interpreting the fresh inflation data and when a rate-cutting cycle could kick off.
Economic Calendar 06/17/2024 – 06/21/2024
| TIME (ET) | REPORT |
PERIOD |
MEDIAN FORECAST |
PREVIOUS |
| MONDAY, JUNE 17 | ||||
| 8:30 AM | Empire State manufacturing survey |
June |
-10.5 |
-15.6 |
| TUESDAY, JUNE 18 | ||||
| 8:30 AM | U.S. retail sales |
May |
0.20% |
0.00% |
| 8:30 AM | Retail sales minus autos |
May |
0.20% |
0.20% |
| 9:15 AM | Industrial production |
May |
0.40% |
0.00% |
| 9:15 AM | Capacity utilization |
May |
78.60% |
78.40% |
| 10:00 AM | Business inventories |
May |
0.30% |
-0.10% |
| WEDNESDAY, JUNE 19 | ||||
| Juneteenth holiday | ||||
| 10:00 AM | Home builder confidence index |
June |
45 |
45 |
| THURSDAY, JUNE 20 | ||||
| 8:30 AM | Initial jobless claims |
15-Jun |
236,000 |
242,000 |
| 8:30 AM | U.S. current account |
Q2 |
-$205.5B |
-$194.8b |
| 8:30 AM | Housing starts |
May |
1.38 million |
1.36 million |
| 8:30 AM | Building permits |
May |
1.46 million |
1.44 million |
| 8:30 AM | Philadelphia Fed manufacturing survey |
June |
4.9 |
4.5 |
| FRIDAY, JUNE 21 | ||||
| 9:45 AM | S&P flash U.S. services PMI |
June |
53.9 |
54.8 |
| 9:45 AM | S&P flash U.S. manufacturing PMI |
June |
51 |
51.3 |
| 10:00 AM | Existing home sales |
May |
4.07 million |
4.14 million |
| 10:00 AM | U.S. leading economic indicators |
May |
-0.40% |
-0.60% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market