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US Earnings Growing –

According to LSEG/IBES data, US earnings is healthy:

• 24Q2 Y/Y earnings are expected to be 12.5%. Excluding the energy sector, the Y/Y earnings estimate is 13.3%.
• Of the 463 companies in the S&P 500 that have reported earnings to date for 24Q2, 78.8% have reported earnings above analyst estimates. This compares to a long-term average of 66.8% and prior four quarter average of 79.0%.

According to FactSet, the number of companies that cited recession on their earnings call is low. Really tough to see a recession either in the current quarter or the next quarter.

US Consumers Strength –

The July data for retail sales vindicated the strength of the American consumer. It is also confirmed by how retailing stocks are performing. Strong performance YTD and also a nice recovery of the panic selling on August 5.

Unemployment Claims Support –

The drop in initial claims continue to support weather related argument on the weaker jobs data for July. Claims for Texas has fallen back to normal. There is still some resilience in the jobs market.

Mid-East Tensions –

Lots of military hardware movement in the region while the world awaits a response from Iran. Oil prices remain steady despite the tension. It helps that demand for oil is weak, as China continues to struggle. China’s first-half 2024 fuel oil imports slide 11% y/y, according to Reuters.

US Stock Market Recovery –

Against the bearish predictions, the US stock market is back. Looking at it from an equal weighted perspective, to strip out the effects from the mega-cap stocks, we see US stocks recovering from their Aug 2nd and 5th sell off. Even technology stocks, where AI remains a divisive conversation, has staged a strong recovery.

The past two days have seen a notable decline in the US stock market, causing understandable concern among investors. It’s important to remember that market volatility is a normal part of investing, and temporary dips can often present opportunities for long-term growth.

Click to read moreMarket Update 6 August 2024

Biden quits: It’s official. He has announced on X that he quits and endorses Harris. It seems to improve the odds that Donald Trump would win the November election. Odds from bettings sites suggest that the probability of Trump winning the election has improved after the announcement. Markets have been discounting the news that Trump will win the election, so we do not expect much impact on financial markets.

US stock market rotating/broadening: The week saw a continuation of the rotation out of Big tech into cyclical sectors like Industrials, banks and small caps. However, they ended the week on a weaker note, but still positive for the week. Market breadth indicators are pretty positive right now, with advances, new highs, equal weighted indicators all turning positive. We should see some momentum carried through in the next few weeks as the earnings report start to stream in.

US earnings: More importantly, we kicked off Q2 earnings reporting in the US. According to Factset, “Of the 70 companies in the S&P 500 that have reported earnings to date for 24Q2, 82.9% have reported earnings above analyst estimates. This compares to a long-term average of 66.8% and prior four quarter average of 79%”. Earning season just started, so we will be watching how companies coped in Q2, and more importantly how markets react to the news.

China plenum: No surprises here. Expectations were low that there will not be a pivot to re-charge the world’s second largest economy. The initial readout continues to echo what has been said over the past few months, with a focus on advanced manufacturing as the new growth driver while maintaining economic stability. This strategy is not without risk, given that the West is worried about Chinese dumping their excess goods on them. We think that China is unlikely to make consumption the main growth driver. Hence, corporate profits and economic growth will be subdued in the next few years. The performance of the Chinese stock markets reflects this forecast.

The biggest news have to be the continued cooling of US inflation. CPI increased 3% on year in June, fell 0.1% on month. The biggest driver was the decline in energy cost, while shelter continue to ease slowly, rising 5.2% on year. Although it continues to come down, it is still way above pre-COVID levels.

While the report is encouraging, the market reaction is important and requires some explanation. The S&P500 dropped 0.88% by the end of the day, with tech leading the losses (-2.5%). It would seem that investors were disappointed with the CPI report, or that investors are now worried that price weakness would translate to economic weakness.

However, given that small caps, banks and housing bounced back strongly, we feel that it is reasonable to conclude that investors are rotating back to non-tech stocks.

• Homebuilders (XHB) +5.88%
• Regional Banks (KRE) +4.21%
• Small Caps (IWM) +3.59%

Looking at equal weighted ETFs leads us to the same result. The equal weighted ETFs did better than the market weighted ETFs for both the broad market and also for sector funds.

• S&P 500 Equal Weighted (RSP) +1.21%; S&P 500 Market Weighted (SPY) -0.86%
• Tech Equal Weighted (RSPT) -0.85%; Tech Market Weighted (XLK) -2.5%

It is thus reasonable to conclude that investors are not bailout out of the market (fearing recession) but are rotating into other sectors/stocks, other than the Magnificent 7 or whatever mega cap stocks. This suggests that the odds of a soft landing is improving. We have earnings for Q2 coming in the weeks ahead. This, coupled with market’s reaction will give us clues as to the outlook for stocks and the economy in Q3 and Q4.

US economy

Soft patch growing. More evidence of late to suggest that the US economy is slowing.

• Jobless claims have risen. Unemployment rate inched higher even though job creation remains plentiful. Not the time to worry but investors need to watch that it does not deteriorate further.

• GDPNow indicator down sharply. PMI for both manufacturing and services are down, below 50.

• Consumption remains robust, core PCE up 3.7% in Q1 2024. Consumer confidence still struggling, according to Mich. Consumer Survey.

• Market breadth is poor. Bull market still led by technology stocks. Equal weight S&P 500 holding up. If it holds the support line and breaks out, we could see a multi-month rally that is driven by fundamentals, rather than AI hype.

Elections:

UK – Labour party wins after 14 years. Financial market reaction is muted, without significant movement in UK stocks, gilts or the pound.

France – Round one to the Right, round two to the Left, albeit slightly. Without a clear majority by any party, there will be jockeying for power sharing arrangement. This could mean status quo for France.

Calls for Biden to dropout – It’s getting louder but what ever happens, it will probably not change much. Donald Trump is still expected to win the election in November.

US stock markets continue to make record highs while market breadth is weakening. The tech sector leads the market, and it is not just the Magnificent 7, an equal weighted tech ETF is also making new highs. Non-tech and small caps are weak, which will need to be resolved in the coming months if the bull market in US equities is to be sustained.

US labour market: some initial signs of stress creeping up in jobless claims. The 4-week moving average is inching up, albeit very slowly. While not a concern currently, investors should watch it very carefully to get a sense of whether the labour market finally breaks down due to high interest rates.

US home sales hit by higher mortgage rates: Mortgage rates jumped to over 7% in mid-April, causing new home sales to fall 4.7%. Homebuilders are beginning to struggle now, but is it a case of consolidation before rallying again or is it a turning point for the US housing market? Watch this space carefully.

Nvidia’s earnings: Wow, blew past estimates. This suggests that the momentum is strong for AI investments and demand.

“Analysts were expecting adjusted EPS of $5.65 on revenue of $24.69 billion, according to data from Bloomberg. The company reported adjusted EPS of $1.09 on revenue of $7.19 billion in the same quarter last year. In the current quarter, Nvidia expects revenue of $28 billion, plus or minus 2%. That’s better than the $26.6 billion analysts had expected.”

Importantly, the stock popped. Investors are still trying to catch up, so that means investors are still cautious about AI demand, providing the necessary ammunition to continue to rally. Big Tech should continue to outperform.

US inflation continues its slow easing. Shelter inflation continues to show hope. Small business also less inclined to raise prices.

US economic surprise index has moved to the downside. Bad news is good for stocks as inflation is easing, raising hopes for looser monetary policy.

US stock market breadth is solid. More new highs than new lows. The rally is sustainable.

US recession chatter is louder: Weaker ISM reports for both manufacturing and services, and a soft labour market report has prompted more recession calls. Investors ought to remember that recessions are caused by 1) a monetary-tightening-induced financial crisis turns into a credit crunch; 2) a geopolitical crisis causes oil prices to soar; or 3) speculative asset bubbles burst. All three have caused recessions in the past.

We have experienced a mini financial crisis early last year when a couple of banks failed, but the economy survived and while bank lending standards tightened, businesses continued to operate normally. Small businesses are the most affected, as the NFIB small business optimism index reached the lowest level since 2012. However, inflation has been cited as the main reason for low business confidence. Furthermore, small cap stocks have held up well although it has underperformed large cap stocks by 30% over 5 years. The odds that small businesses, which are focused on the domestic economy, will not fall into a recession are not increasing. That is good news.

A single month of weaker economic report does not cause us to change our minds on the health of the US economy. Importantly, we see positive signals from financial markets. Market breadth has been improving, correcting the damage done by the recent sell off. The NYSE Advance-Decline index has risen to a new high, that is bullish!

US Earnings Update: As the first quarter earnings season progresses, S&P 500 companies are performing strongly against expectations. A higher percentage of these companies are reporting positive earnings surprises, and the magnitude of these surprises exceeds the 10-year average. Consequently, the S&P 500’s earnings for the first quarter have increased compared to both last week and the end of the quarter. Additionally, on a year-over-year basis, the index is experiencing its highest earnings growth rate since the second quarter of 2022. Eight of the eleven sectors are reporting year-over-year earnings growth, led by the Communication Services, Utilities, Consumer Discretionary, and Information Technology sectors. On the other hand, three sectors are reporting a year-over-year decline in earnings: Energy, Health Care, and Materials. Hard to see a recession in the near term when earnings cycle is up.

US Economics: Labour cost rise by the most in a year, putting pressure on the FED to delay rate cuts. But lower than expected non-farm payrolls (+175K v 243K) introduced the prospect of slower end demand. Still a mixed bag when it comes to data that influence monetary policy.

US FED: No change, neither hawk nor dove. Powell continues to tread carefully to lower expectations of both hikes and cuts. US10Y has fallen in the couple of days but the trend remains up.

US Stock Market Action: After an initial scare to start the week, US equity markets ended on a stronger note. However, there is the 50dMA resistance to deal with. Equal weighted indices are also under pressure, so the short term outlook is cautious at best.