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Category: Market Outlook

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Market Outlook

Rate cut could be on the table at the September meeting, Fed Chair Powell says 

  • A rate cut could be on the table as soon as September, if inflation continues to progress toward the Federal Reserve’s 2% goal, Federal Reserve Chair Jerome Powell said at his post-monetary policy decision press conference. 
  • In the labor market, supply and demand have come into better balance and have returned to about where they were before the pandemic — “strong, but not overheated,” he said. 
  • The second quarter’s data has strengthened confidence that inflation is heading sustainably toward the Fed’s 2% goal, he added. It’s waiting for additional data to further strengthen that confidence before the FOMC reduces the federal funds rate target range. 
  • “We have made no decisions about future meetings, and that includes the September meeting,” he said.
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Market Outlook

Don’t Catch A Falling Knife 

After the disastrous 3.6% drop in the Nasdaq composite and 2.3% drop in the S&P 500, yesterday, don’t be in a hurry to jump back in. Or as they say on Wall Street – don’t catch a falling knife. 

Analysts were right to badger Google’s management on monetization of AI, and Google’s inability to give straight answers made them realize that all that spending is going to see returns a few years out. It was a cue to offload and led to the overbought M-7 and tech crashing. Tesla didn’t help either with the usual vagueness – an inherently risky stock with a lot of promises.  

The other big reason for the fall yesterday was algorithmic trading, or computerized trading. Algo trading uses the VIX (The Volatility Index) as a trigger for selling/buying. The VIX is often known as the Fear Gauge, and it was pretty fearful on Wednesday shooting up from 14.72 to 18.04 – a 23% jump! For the most part of 2024, the VIX has stayed steady between 12-14, so this was way out in uncertain territory. 

As of writing the VIX is at 19.17, up 6%. If you recall we had another 2%, drop last week, at that time the VIX had shot up to 16.52. 

THE DOOM LOOP – When markets are over leveraged, overbought or over concentrated a big fall sends it into a doom loop. An example of this would be a mutual or Index fund manager or ETF having to sell stocks because of redemptions – so he/she’s selling and driving prices down, which further leads to investors knocking on the door for more redemptions…and so on. Similarly, if you’re trading in a margin account you have to sell to meet the margins…this is self-perpetuating – a doom loop. 

For Algo traders its worse, the triggers to buy and sell are preset – “stop loss limits”, the speed is too fast to have any human control, and most computerized trading firms will not allow overrides. 

I would wait for the dust to settle. The S&P 500 is down almost 5% from its all-time high and the Nasdaq 8.5%. These could head to correction territory, especially the Nasdaq, which again is not the end of the world – we had a great first half of the year. There are big earnings next week – MSFT, AMZN, AAPL, META, will update then. 

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Market Outlook

Tech Stocks Tumble Amid Escalating US-China Tensions and Pre-Election Posturing

The anti-China rhetoric likely will continue till elections. The Biden administration wants further curbs on exports, and Trump wants Taiwan to pay for protection….

https://www.bloomberg.com/news/articles/2024-07-16/stock-market-today-dow-s-p-live-updates?srnd=markets-vp&sref=6RluRBXJ

The markers opened weak with the S&P 500 down 1% and the tech heavy NASDAQ Composite (COMP) down 1.75%. The rhetoric will likely not let up till the elections as both parties will try and outdo each other in jingoism. ASML (ASML) was beaten down 10% in spite of great results, reaffirming guidance and bookings. With the ongoing rotation to interest sensitive cyclicals, this pre-election noise will only add to tech volatility.  The COMP is now down about 3% from its high and will likely correct further, we saw that big drop of 2% last Thursday, I would expect to see more of these. I’m not going to buy the tech dip, either wait it out or even take more money off the table on good days.

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Market Outlook

Annual Earnings Forecast for Q2-2024

Analysts forecast that the S&P 500 index’s earnings will likely grow above 12% for the second quarter and about 11-12% for the year to 247.

Source: FactSet

This is way above the 8% average growth, mostly because of a weaker Q2-2023, when earnings actually declined 4% over the previous year. 

Besides, S&P 500 earnings have been stagnant at $220 for the past two years so 2024 had beat the average significantly just to catch up and revert to the mean. 

Here are past 5 years – basically smoothening out the effects of Covid. After the big pandemic fall of 14% in 2020, there was that massive jump of 48% in 2021, and then two years of indigestion and inflation, which now leads to the 12% expected jump in 2024.

FactSet estimates that over the past ten years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.8% on average – everybody sandbags, (under promises and over delivers). I wouldn’t be surprised if earnings actually close over $250 for 2024.

Great, earnings look good with the 11-12% increase, but what about valuations?

The bottom-up target price for the next 12 months for the S&P 500 is 6006.66, which is 7.6% above the closing price of 5,584.54. 

The Forward P/E Ratio is 21.4, which is above the 10-Year Average (17.9), and above the 5-year average of 19.3. 

The two main causes for the high P/E 

a) Out performance and AI expectations, from the Magnificent 7, which controls about 33% of the index.

b) Decline in inflation and expectations of interest rate cuts.

I believe there is exhaustion in the M-7 – there is over participation (everybody and their uncle own Nvidia) and over bought. We we saw it for a bit in the last 3 weeks with Nvidia slowing down, but Apple and Tesla picked up the slack – Tesla rose 40% and 7 days in a row! What looked like a possible correction in the middle of June, never really materialized.

Secondly, now the 10 year has finally come down to about 4.19% and two interest rate cuts are a certainly after benign inflation numbers (still high over 3% and above the Fed target of 2% but definitely in the right direction). I believe the 10 Year will be between 3.5% and 3.75% for the most of 2025, if not lower.

Strategy for the second half of 2024 and beyond. High valuations should keep the index in check, and even cause a 5-7% correction, which is actually a good thing in my opinion. Lower interest rates will keep a floor.

What should we do? In my opinion, 

  1. Lower expectations for sure, if we make a return of 8-10% a year + dividends, that’s great, thus with this target, we can lower risk as well. For most of the year, almost every stock I had recommended had expectation of at least 15% Returns.
  2.  You don’t have to necessarily move away from tech but a mixture of Growth At a Reasonable Price (the GARP strategy) and absolutely looking for and investing in bargains should be the cornerstone of investing for the next 12 months. In two cases recently, GitLabs (GTLB) and Samsara (IOT) waiting for bargain prices have worked very well. I started the first 5% purchase, higher and slowly worked my way down as they kept falling and in both cases the prices are 15- 20% higher than my average cost.
  3. Keep cash handy for corrections and drops – On June 19th, I had sold 15-20% of semi stocks as profit taking; I’m still holding onto about 10% cash, which at 4-5% in money market funds is safe and I won’t invest till I get an outstanding bargain.
  4. Rotation – This week I’ll identify and recommend some GARPS, some dividend picks, and cyclicals.
  1. I picked up Duolingo, consumer, which is expensive – about 40% invested but am adding in the 190 range.

I’ve been pyramiding in the two big pharma companies – Eli and Novo, which is the exact opposite of cost averaging, buying smaller quantities even as they get higher, simply this obesity craze will last, and they’re relatively inured with strong pipelines.

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Market Outlook

 Earnings season for Q2-2024

As usual, the first to report were the big banks. I always look at credit provisioning and charge offs as indicators of economic weakness. 

JP Morgan (JPM) confirmed guidance for the rest of the year for earnings and revenue; earnings growth will be less than 1%, while revenues will grow at a modest 5%. JPM did increase credit loss provisioning to $3.05Bn, higher than 2.8Bn earlier, this is also higher than 1.88Bn in Q1, and 2.9Bn in Q2. Charge offs (mainly on credit card delinquencies) were also higher by $820Mn at $2.2Bn. Jamie Dimon, CEO of JP Morgan, was cautious as usual, JPM tends to over-provide for losses and has been doing it for years.

Wells Fargo (WFC) didn’t need to increase provisioning, but its charge offs were also higher – net loan charge-offs, as a percentage of average total loans, increased to 0.57% from 0.50% in Q1 and 0.32% in Q2 2023.  WFC’s bigger problem is net interest income, it now expects full-year 2024 net interest income to fall 8%-9% from 2023’s $52.4B, compared with its prior guidance of down 7%-9%.

Citi (C) was mixed with higher charge offs but lower provisioning, and also commentary from the CEO, that lower FICO score customers are pulling back on spending. In addition, he’s seeing signs that delinquencies may be bending back down.

These don’t set off any alarm bells but does confirm what we’ve been hearing for most of the year, that outside of tech, the economy is lackluster, and that inflation is stunting growth, especially for lower and middle income groups.

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Market Outlook

Inflation Cools: June CPI Drops, Core Rate Eases to 3.3% Year-over-Year

CPI continues to cool in June, with core Y/Y rate easing to +3.3%

  • June Consumer Price Index: -0.1% M/M vs. +0.1% expected and 0.0% in May.
  • +3.0% Y/Y vs. +3.1% expected and +3.3% prior.
  • Core CPI (excludes food and energy): +0.1% M/M vs. +0.2% expected and +0.2% prior.
  • +3.3% Y/Y vs. 3.5% expected and +3.4% prior.

The 10-year yield has dropped to 4.27% and S&P 500 futures are up 0.3%.

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Market Outlook

Title: PCE for May 2024

Headline, core PCE inflation ease in May, as expected

Headline – May PCE Price Index: +0.0% M/M vs. +0.0% consensus and +0.3% in April.

+2.6% Y/Y vs. +2.6% expected and +2.7% prior.

Core – PCE Price Index: +0.1% vs. +0.1% expected and +0.3% prior (revised from +0.2%).

+2.6% Y/Y vs. +2.6% expected and +2.8% prior.

10-year treasury yield lower at 4.276%

S&P 500 Futures up 0.4%

Breadth in the market was better the past few days, hopefully with these inflation numbers the broader rally should continue.

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Market Outlook

Savita Subramanian on the state of the markets

A Summary of Barron ’s interview with Savita Subramanian – head of U.S. equity and quantitative strategies at BofA Securities

Definitely one of the smarter strategists on Wall Street with a lot of prescient calls, especially being one of the first to raise the S&P 500 2024 target to 5,400, a level we passed yesterday.

https://www.barrons.com/articles/large-companies-value-stocks-market-rally-subramanian-21f7c4c2?mod=hp_LEADSUPP_1

“If I were going to buy one kind of investment for the next 12 to 24 months, it would be large-cap value. That’s where you’re going to get the most bang for your buck. That’s what will lead over the next few years, given the macro environment.” 

“At the beginning of the year, it was much easier to be bullish because there were a lot more bears. And at this point, I feel like a lot of the bears have capitulated.”

“I’m not worried about equities from a valuation perspective because these multiples are sustainable.”  “Inflation volatility has subsided. This is where clients probably disagree with me the most, but I feel that what the Fed does now is less important because it has already done the extreme process of hiking.”

I agree with this to a great extent – interest rate cuts, higher for longer, neutral interest rates have a marginal impact. Directionally, the 10 year is moving lower, and except for shelter inflation, which has a variable called “notional rent” (A computed number based on what you would pay if you were renting your home today), a majority of other indicators have been moving lower.

​​” Until we get to that moment where the Fed says we’re at peak rates, inflation is coming down, and we can be more accommodative, you want to hold inflation-protected sectors such as energy, materials, and financials. These are more cyclical than defensive sectors.”

“When we were in more of an inflationary environment, we wrote about how the best environment for equities was 2% to 4% inflation. That’s where we are right now. The best environment for equities is when real wage growth is positive and nominal sales growth is at reasonable levels.”

A somewhat Goldilocks scenario…

“But I am surprised by how narrow the market has become. I would have expected a broadening out to have happened earlier.” “The earnings of the mega cap tech cohort are so high that we are more likely to see a deceleration than an acceleration. Another reason to expect a broadening out is that we got positive guidance across the board, and not just from tech companies, during first-quarter earnings season.”

“I like a mix of companies that are generating strong free cash flow and enjoying the benefits of this tech revolution, but also companies that are potentially becoming more labor light. If you think about the areas that could benefit from generative artificial intelligence, it’s banks, legal services, and IT [information technology] services.”

“And if you think about cash flow, it isn’t just tech but also utilities, power, infrastructure, and energy companies that are generating substantial amounts of cash. Some are exciting, and some are boring. But they are mostly big. That’s where I differ from a lot of other bulls. I don’t think you want to buy all small-caps, because while some of them are economically sensitive and will benefit from better gross-domestic-product growth in the U.S., others are morphing into smaller-cap companies because they used to be large.”

So be selective, the devil is in the details – cash flow, operational performance are paramount regardless of small, big, value, boring, tech – BUY THE BUSINESS, Buffet style..

When asked about the election – “The fact that both candidates agree that they want to bring back manufacturing from China and other regions of the world to the U.S. has created more jobs. While these policies are protectionist and inflationary, they are also pro-growth.”

“Right now is the most interesting time to be a market strategist, in my opinion. We’re back to a more rational market. When we were in a zero-interest-rate, massive-stimulus-driven market, it was hard to forecast what would happen next. Events were in the hands of central bankers.” “The outlook depends less on central bankers, and more on corporations and consumers.”

Its a very practical approach, and its folks like Savita, who are instrumental in allocating investment capital – this is not a theoretical, economists top down approach, which at the end of day is much less influential/meaningful for investors.

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Market Outlook

May’s CPI cools more than expected, with core CPI rising 3.4% Y/Y

  • May Consumer Price Index: 0.0% vs. +0.1% expected and +0.3% in April.
  • +3.3% Y/Y vs. +3.4% expected and +3.4% prior.
  • Core CPI: +0.2% vs. +0.3% expected and +0.3% prior.
  • +3.4% Y/Y vs. +3.5% expected and +3.6% in April.

These are better than expected numbers and Futures are up 0.7% and the 10 year treasury is down 14 basis points to 4.3%