- The last few weeks have brought a shift in the equity markets narrative, from AI-fueled tech leadership, to a broadening rally, to now a more cautious tone. Last week, the S&P 500 and Nasdaq continued to drop, as rotational positioning from winners to laggers moved the Dow and Russell 2000 higher, in what was a busy week for corporate earnings. The shift in market tone has been accompanied by a rally in Treasuries, particularly in the policy-sensitive 2Y which has dropped from 4.7% to 4.4% in the last three weeks. The 10Y yield has also fallen to around 4.2%, compared to about 4.5% on July 1st.
- The change in tone is partially due to earnings reports that show the AI-driven tech revolution remains in early innings, with Tesla (TSLA) and Alphabet (GOOGL) both falling after announcing 2Q24 earnings, which we discuss in more detail below. The most important name in the AI-space is Nvidia (NVDA), which is not scheduled to report its earnings until late August. We note that Nvidia’s pace of upside surprises has slowed in the past few quarters, and the Street has come closer to incorporating the company’s growth trajectory into consensus estimates, tempering the size of its earnings beats.
- The other driver of the change in market tone has been increasing chatter for the Fed to cut rates as soon as this week given somewhat softer consumer credit data. In our view, the Fed is doing its best to balance the risks of a recession (cutting too late) and a resurgence of inflation (cutting too soon). We continue to believe that a -25 bps cut at the September meeting is the next move. After that, incoming inflation and payroll data, along with potential implications for changes in fiscal and tax policy, will drive monetary policy. This Fed is data-dependent for a reason.
- Indeed, we saw abundant evidence of cross-currents in the economy from last week’s macro data. 2Q24 advance GDP was better than forecast 2.8% (est. 2.0%), while durables goods orders were lower than expected (-6.6% vs. est. 0.3%). Initial (235K) and continuing jobless claims (1.85 mn) were in-line with expectations.
- June PCE data showed further progress on inflation is somewhat stalled, with headline PCE up 0.1% MoM, while core PCE was up 0.2%, both unchanged from May. On a YoY basis, headline PCE came in at 2.5%, while core PCE was 2.6%, also unchanged from May.
- June personal income and spending figures showed a moderation in the pace of consumer spending, as expected. June personal income rose by 0.2% MoM while spending climbed by 0.2%, compared to 0.4% and 0.4% (revised), in May.
Equities and Earnings Update
- In large cap tech earnings, Alphabet (GOOGL) posted an extremely modest positive surprise that only topped EPS estimates by 2.7% as better-than-anticipated revenue growth in Google Cloud (28%), was largely offset by the weaker-than-projected growth in YouTube revenues (13%). Separately, Alphabet had its $23 bn offer for Wiz declined as the cybersecurity firm stated it will stick to plans for an IPO.
- Tesla (TSLA) topped sales estimates by 6%, but lower margins translated to a 10% EPS miss, which compounded with the announcement that it will delay its much anticipated August 8 Robotaxi event to a later and yet to be scheduled date led to large share sell-off.
- In other earnings, 3M (MMM), ServiceNow (NOW) and Brystol Meyers (BMY) led positive surprises while Dexcom (DXCM), United Parcel Services (UPS), Edwards Lifesciences (EW) and Ford (F) posted the biggest disappointments.
- In corporate news, ChatGPT owner OpenAi launched a search engine AI prototype generating competition concern for Alphabet (GOOGL) shareholders. Viking Therapeutics (VKTX) announced it will move directly into an accelerated regulatory pathway via final-phase testing for its once-a-month weight loss shot sending Eli Lilly (LLY) into a continued sell-off that began last week when Roche (RHHBY) also revealed regulatory progress for its weight loss daily pill. General Motors (GM) announced it will resume previously suspended fully autonomous driving operations with $850 mn in capital to be committed to keep it running till 1Q25, citing significant technological progress as the reason for the continuation despite its $3 bn losses to date.
The Week Ahead
- The Fed meets Wednesday. No change in the Fed funds rate is expected at this meeting (dark orange bar below), but it is likely that Chair Powell may signal growing confidence in reaching the Fed’s 2% inflation target, teeing up a cut at its next meeting in September (lighter orange bar). This meeting is not accompanied by an update to the Fed’s Summary of Economic Projections (SEP).
- Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Meta (META), McDonald’s (MCD), Pfizer (PFE), Procter & Gamble (PG), PayPal (PYPL), Starbucks (SBUX), Advanced Micro (AMD), Pinterest (PINS), Humana (HUM), Boeing (BA), Mastercard (MA), Altria (MO), Qualcomm (QCOM), Lam Research (LRCX), eBay (EBAY), DoorDash (DASH), Block (SQ), Intel (INTC), Snap (SNAP), Coinbase (COIN) are among companies set to report their 2Q24 earnings.
- We get the first look at July macro data with ISM manufacturing and a raft of employment data. ISM Manufacturing is expected to be at 49.0, mostly unchanged from June’s 48.5 reading, and still in slight contraction. We also get JOLTS job openings (for June) and ADP payrolls (for July, est. 168,000) before the July monthly payroll report on Friday. Nonfarm payrolls are expected to expand by 175,000 compared to 206,000 in June. The unemployment rate is estimated to hold steady at 4.1%, while average hourly earnings are estimated to climb by 3.7% YoY and 0.3% MoM.
Market Summary – Returns and Yields
- Small cap equities continued to rally while broader indices fell. Fixed income was mixed as duration sold off slightly and the front end rallied.
- Looking by sector, healthcare and utilities were the only gainers last week, while communication and info tech were the biggest losers.
- For the year to date, all equity sectors are higher, with info tech and communication still leading the way.
For additional insights, be sure to check out last week’s blog post.
Definitions, sources, and disclaimers
Definitions:
- Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
- GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
- The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
- Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
- The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
- The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
- The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
- Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
- Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
- The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
- The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).
Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).
Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.
Important Disclosures:
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
Not FDIC Insured | Not Bank Guaranteed | May Lose Value | Not Insured By Governmental Agencies | Member FINRA/SIPC, Registered Investment Advisor
Related posts
