Red, White and Green

Jul 8, 2024

By Jack Kraft, CFA, Investment Strategist
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U.S. stocks soared higher during the holiday-shortened trading week as weak economic data sparked investor enthusiasm for potential rate cuts. The Magnificent Seven were firing on all cylinders last week, powering the S&P 500 and Nasdaq to record highs. The Nasdaq Composite surged by 3.5%, while the S&P 500 rose nearly 2% over the same period. Meanwhile, the Dow underperformed its peers, gaining 0.7%. In the fixed-income market, Treasuries rallied as yields declined across the curve.

Shares of mega-cap stocks continued to dominate the overall returns of the broader market, with the Magnificent Seven (AMZN, GOOGL, META, AAPL, TSLA, MSFT, and NVDA) accounting for more than 60% of the S&P 500 year-to-date returns. The cohort as a group is up over 30% through the first half of the year and is showing no signs of slowing down. Conversely, the other 493 stocks in the S&P 500 are up 5% through the first half of the year. Standouts last week included shares of Tesla surging more than 25% on better-than-feared vehicle deliveries. This pushed shares into positive territory year-to-date, which at one point in late April were down 40%. This makes Tesla the most expensive stock out of the group when measured by its forward price-to-earnings (P/E) ratio of nearly 100x. To put this into perspective, Nvidia is trading at about half the valuation with a forward P/E ratio of 48x. Other standouts in the group were Apple and Meta Platforms (formerly Facebook), both rallying 7.0% last week.

The U.S. Federal Reserve (Fed) and economic data were the main developments to hit the tape last week. Friday’s jobs report seemed to garner the most attention, with nonfarm payrolls rising 206,000 in June, above consensus estimates. Despite the strong headline number, the unemployment rate unexpectedly ticked up to 4.1% amid downward revisions lowering the three-month average pace to a gain of 177,000 from 249,000. Additionally, the June survey was interpreted as weak, with two-thirds of the monthly gain coming from the healthcare and government industries, while retail and manufacturing jobs declined. Overall, this data looked to be supportive for the Fed to begin its rate-cutting cycle in September.

Last week, the Federal Open Market Committee’s June meeting minutes were released and indicated that while inflation remained high, there was “modest further progress” in reducing it. Participants noted that although pricing pressures were decreasing, and long-term inflation expectations were intact, more positive data was needed to confirm a stable trend toward a 2% inflation rate. Given that members are looking for additional evidence of disinflation, all eyes will be on the Consumer Price Index (CPI) report that is expected to be released on Thursday. Currently, economists are expecting a 0.1% increase from the prior month held down by lower energy and goods prices, while shelter inflation is expected to remain sticky. Another development to watch for early in the week will be an update from Fed Chairman Jerome Powell, who is set to present the semiannual monetary policy testimony before the Senate Banking Committee.

Shifting gears to second-quarter, earnings season is set to kick off late next week, with the big banks reporting before the bell on Friday (JPMorgan, Citi and Wells Fargo). Furthermore, JPMorgan research noted that we could be at an inflection point this earnings season for the 493 stocks in the S&P 500 that have seen little participation in the market rally. The bank also pointed out that FactSet projections for upcoming earnings show revenue growth of 4.6% year-over-year and earnings-per-share growth of 8.8% year-over-year. If the broader index meets these expectations, it will mark the strongest period since the first quarter of 2022 and the 15th consecutive quarter of positive revenue growth. Additionally, eight of 11 sectors are expected to show positive growth, with materials, industrials and consumer staples expected to decline.

This expected earnings growth, along with the disinflationary trend and a Fed-cutting cycle on the horizon, is supportive evidence to remain cautiously bullish for the second half of the year. In the past we have written about how all-time highs for an index are a bullish indicator and historically have been a precursor for more all-time highs to come. This has continued to ring true with the S&P 500 now clocking 34 record closing highs in 2024. To add to this theme, when the S&P 500 is up double digits in the first half of the year, the average return for the second half has been 8%, with a median return of 10%. Furthermore, out of the 23 times this has occurred going back to 1950, the index has been positive 19 of those times for a hit rate of 83%. The one overhang many can point to is valuations, which do remain elevated and why a focus should be on earnings delivery this season as expectations remain high for the Magnificent Seven.

Economic Calendar 07/08/2024 – 07/12/2024

3:00 PM Consumer credit May $8.0B $6.4B
6:00 AM NFIB optimism index June 90.3 90.5
10: am Fed Chairman Powell testimony to Senate
10:00 AM Wholesale inventories May 0.60% 0.10%
10:00 AM Fed Chairman Powell testimony to House
8:30 AM Initial jobless claims 6-Jul 240,000 238,000
8:30 AM Consumer price index June 0.10% 0.00%
8:30 AM CPI year over year 3.10% 3.30%
8:30 AM Core CPI June 0.20% 0.20%
8:30 AM Core CPI year over year 3.40% 3.40%
8:30 AM Producer price index June 0.10% -0.20%
8:30 AM PPI year over year 2.20%
8:30 AM Core PPI June 0.00%
8:30 AM Core PPI year over year 3.20%
10:00 AM Consumer sentiment (prelim) July 68.5 68.2


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