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Category: Market Outlook

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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%

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Market Outlook

 Fed Officials Dial Back Rate Forecasts, Signal Just One ’24 Cut

Officials acknowledge ‘modest further progress’ on prices

Fed boosts estimate of long-run neutral rate further

Federal Reserve officials penciled in just one interest-rate cut this year and forecast more cuts for 2025, reinforcing policymakers’ calls to keep borrowing costs high for longer to suppress inflation.

They now see four cuts in 2025, more than the three previously outlined.

The Federal Open Market Committee adjusted language in its post-meeting statement released Wednesday, noting there has been “modest further progress toward the committee’s 2% inflation objective” in recent months. Previously, the statement pointed to a “lack” of further progress.

The S&P is still up 0.96% and the 10 year is at 4.29% – no major reaction.

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Market Outlook

 Payrolls Report For May 2024

US Payrolls Rose by 272,000 in May, smashing Estimates of 180,000

The wage gain is also strong, at 0.4%, double the pace of the average hourly earnings advance of the previous month.

The unemployment rate is up, though, that’s as the labor force participation rate fell — unfortunate news for the Fed.

  • May nonfarm payrolls: +272K vs. 182K expected and 165K prior (revised from +175K).
  • Unemployment rate: 4.0% vs. 3.9% expected and 3.9% prior.
  • Average hourly earnings rose 0.4% in May, accelerating from 0.2% in April and topping the 0.3% consensus. Y/Y, average hourly earnings increased 4.1%, compared with the +3.9% consensus and +4.0% in the prior month (revised from +3.9%).
  • Futures are down 0.4% and the 10 Year treasury yield has increased 13 points to 4.43%
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Market Outlook

Economic Update: April Core PCE Price Index and Personal Income

April Core PCE Price Index: In line with estimates.

  •  +0.2% M/M vs. +0.2% consensus and +0.3% in March. +2.8% Y/Y vs. +2.8% consensus and +2.8% prior.
  • PCE Price Index: +0.3% M/M vs. +0.3% expected and +0.3% prior. +2.7% Y/Y vs. +2.7% consensus and +2.7% in March.
  • Personal outlays: +0.2% M/M vs. +0.3% consensus and +0.8% prior.
  • Personal income: +0.3% M/M vs. +0.3% consensus and +0.5%.

Futures are up slightly by 0.3% and Treasury yields are lower at 4.53%

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Market Outlook

S&P 500 Q1-2024 Earnings Season Recap: Strong Growth Signals Amidst High Expectations

Earnings Season Recap – Q1-2024, 93% of S&P 500 companies have reported.

Earnings and revenues haven’t disappointed for Q1-2024

On a year-over-year basis, the S&P 500 is reporting its highest earnings growth rate since Q2 2022. This is a welcome return to profit growth after the 4 quarters decline and slowdown. To recall, S&P 500 earnings have stagnated at about $220 per share in 2022 and 2023.

If 5.7% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q2 2022 (5.8%). 

Overall, 93% of the companies in the S&P 500 have reported actual results for Q1 2024 to date. Of these companies, 78% have reported actual EPS above estimates, which is above the 5-year average of 77% and the 10-year average of 74%. However, the magnitude of the beats is not high – 7.5% above estimates, which is below the 5-year average of 8.5% but above the 10-year average of 6.7%.

Revenues:

60% beat estimates – Below the 5-year average of 69%- and the 10-year average of 64%. Remember, this is after an extraordinary bout of inflation in 2022 and 2023. This had to come down because you’re comparing it to a higher base. The magnitude of beats is also low compared to historical averages – only 0.8% above, compared to 2% for 5-year averages and 1.4% for the 10-year. I suspect it will be difficult to raise prices further without reducing demand.

Overall – if 4.2% is the actual revenue growth for the quarter, it will be the 14th consecutive quarter of revenue growth for the index. 

Where will 2024 end up?

Estimates are looking pretty good – 9.2%, 8.2%, and 17.4% for Q2, Q3 and Q4 respectively. Though I’m hard-pressed to see that kind of a jump in Q4. I suspect quarterly growth will be smoother and not the massive spike in Q4.

The overall calendar 2024 growth call is at 11.1% – consistent with earlier calls and my projections of earnings growth from $220 per share in 2023 to $245 per share for 2024. FactSet had an interesting observation – markets have punished negative EPS surprises, – confirming the one trend we’ve been witnessing ourselves, that markets are overbought, and expectations are too high, and unless you beat severely or raise guidance, your stock will get hammered – Facebook (META) was the biggest example.

Q1-24 net profit margins were solid – indicating that price increases and better expense management vaulted NPM to 11.7% – above the previous quarter’s margin of 11.2% and the 5- and 10-year averages of 11.5% and 11.6%.

Overall S&P 500 earnings and revenue increases look good for 2024-2025. Current estimates for calendar 2025 are an even higher earnings growth of 14.1% – this could come down, though – 2024 is not going to be an easy year to beat by 14.1%!

As you know the S&P 500 is a value-weighted index and large caps such as the M-7 tend to skew the numbers higher, even with Apple and Tesla being negative. Also, the “AI” effect has spread, and copper companies and utilities are getting a second look because of power demands, as are smaller players supplying components towards the gold rush among others – thankfully this is moving to other sectors of the economy.

Valuations remain high, of course, the forward P/E is 20.7 – above the 5-year average of 19.2- and the 10-year average of 17.8. Thankfully, at least interest rates are a little lower at 4.45% compared to 4.75% in April. My inclination is that this will trend lower to 4.1% to 4.25% by the end of the year. 

Bottom line – Harder to find bargains. No major surprises, we remain on track for earnings to get to $245 for 2024 and possibly to $270-$275 for 2024, my cash holdings are down to 6-7%. Wall Street is even more aggressive – closer to 4%.

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Market Outlook

Jobs Report: June 2024

A good jobs report.

206,000 net new jobs V 190,000 expected.

4.1% unemployment rate, a bit higher than expected, the Feds expected this rate by Dec 2024.

Revisions are the bigger story with 57,000 and 54,000 lower revisions for April and May 2024. So, the 206,000 jobs for June may be revised as well following the trend.

Wage rate – Average hourly earnings climbed by 0.3% in June from the previous month, taking the annual increase to 3.9%.

Futures are flat, and the 10-year has dropped to 4.29%.

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Market Outlook

Chair Powell’s Remarks: Navigating the Fine Line Between Employment and Inflation Amidst FOMC Decisions

Image Source: Nerd Wallet, Federal Reserve

From Chair Powell “I don’t see the stag nor the flation”

Fed FOMC meeting: Mixed bag, with wild gyrations in the S&P 500, which at one point during J Powell’s Q&A jumped to an intraday high of 5,096 from the low of 5,013.

The tenor though didn’t seem overly hawkish, instead, it seemed more cautious – clearly, they have a lot of work to do ahead and can’t take any chances either – a very fine tightrope to walk, Powell wants to stick to his dual mandate of keeping employment strong and inflation under control. He kept talking about balances – a difficult task, indeed,

The big positive seemed to be the reduction in quantitative tightening to $25Bn from $60Bn. The markets were expecting $30Bn

The Federal Open Market Committee did decide to ease its quantitative tightening by slowing the pace of its balance sheet runoff. The FOMC will reduce the monthly redemption cap on Treasury securities from $60B billion to $25B.

Let’s wait for the Friday payroll report.

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Market Outlook

March Core PCE Price Index Matches Expectations, While Personal Income and Outlays Show Steady Growth

March Core PCE Price Index:

+0.3% M/M vs. +0.3% consensus and +0.3% prior.

+2.8% Y/Y vs. +2.7% consensus and +2.8% prior.

PCE Price Index: +0.3% M/M vs. +0.3% expected and +0.3% prior.

+2.7% Y/Y vs. +2.6% expected and +2.5% prior.

Personal income: +0.5% M/M vs. +0.5% expected and +0.3% prior.

Personal outlays: +0.8% M/M vs. +0.6% consensus and +0.8% prior.

The 10-year is down slightly to 4.67%