The Week Ahead - 5/12/24
The Week Ahead - 5/12/24
A comprehensive look at the upcoming week for US equities and fixed income
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I know not everyone can be on X several times a day like I can, so I really encourage you to click the link in each daily update to just scroll through that day’s posts, as I am moving away from the time consuming process of going through them to add to the weekly blog.
Also, as a reminder, some things I will still leave in from prior weeks (although much less than before). Anything not updated is in italics. As always apologize for typos, as there’s a lot here, and I don’t really have time to do a good double-check.
The Week Ahead
After one of the lightest weeks for US economic data we’ll get this year, things pick up considerably next week with probably the most important monthly report we get in CPI along with all the other key economic data that normally also comes on CPI week (PPI, retail sales, industrial production, housing starts, etc.). This week though it’s all packed mostly into two days (Wed & Thurs). Tuesday will be a warm-up with PPI & NFIB. You can probably sleep in Monday and basically take Friday off absent something unexpected coming in. In addition to the noted reports we’ll also get NAHB builder confidence, the NY Fed’s survey on consumer expectations (not listed, Monday), import prices, and weekly jobless claims among others.
Outside of economic data Fedspeak will continue to be newsmaking particularly with both the Vice-Chair Jefferson and Chair Powell speaking Monday and Tuesday respectively (Powell speaks at the Foreign Bankers’ Association meeting in Amsterdam). Treasury auctions though will be off outside of the normal cadence of T-Bills (<1yr), while earnings will remain heavy in number but not so much in market cap (3% of SPX earnings power this week), although we do get retail heavyweights Wal-Mart and Home Depot reporting. We also get some big China names with Tencent, Alibaba, JD.com, Bidu, etc. Also, Google will hold its annual I/O Developer Conference. The tech giant is expected to showcase its latest AI tools and AI-linked enhancements to products. Microsoft-backed OpenAI is expected to announce some updates on Monday.
From Seeking Alpha (links are to their website):
Earnings spotlight: Monday, May 13 - Petrobras (PBR), Tencent Music (TME), and Agilysys (AGYS). See the full earnings calendar.
Earnings spotlight: Tuesday, May 14 - Home Depot (HD), Alibaba (BABA), Sony (SONY), Tencent Holdings (OTCPK:TCEHY), and Flutter Entertainment (FLUT). See the full earnings calendar.
Earnings spotlight: Wednesday, May 15 - Cisco Systems (CSCO), Grab Holdings (GRAB), Spire Global (SPIR), and Hut 8 (HUT). See the full earnings calendar.
Earnings spotlight: Thursday, May 16 - Walmart (WMT), Applied Materials (AMAT), Deere (DE), JD.com (JD), Baidu (BIDU), Take-Two Interactive (TTWO), and Under Armour (UAA). See the full earnings calendar.
Here’s the expectations for CPI from BBG. Note a +0.3% in-line read on core CPI would be the first downshift m/m in 6 mths and the first of the year that didn’t come in above expectations:
Ex-US it’s a similarly busy but not overwhelming week as well highlighted by readouts on the strength of the Chinese and Japanese economies, wage data in the UK and the latest European Union forecasts.
Looking north, Canadian data on existing home sales for April will reveal whether the spring market is heating up as buyers anticipate rate cuts. Housing starts, manufacturing and wholesale data will also be released.
China publishes a slew of data Friday that’s expected to show the second quarter got off to a solid start, with growth in industrial output, retail sales and fixed asset investment accelerating year on year. But the housing slump will continue to pose risks, with property investment seen falling more than 9%. There are also reads out CPI, PPI, and financing this weekend.
Japan’s economy is estimated to have contracted in the first quarter on falling private consumption and business investment, as well as the first negative contribution from net exports in a year. Those numbers are due on Wednesday. Growth will likely bounce back in the second quarter thanks to recovering auto output, according to Bloomberg Economics.
In Europe, the UK will take the spotlight with labor-market data that may encourage policymakers watching for waning inflation pressures. Average weekly earnings, excluding bonuses, probably rose an annual 5.9% in the first quarter, according to the median estimate of economists. While still robust, the continuing downward shift would cheer Bank of England officials, two of whom voted on Thursday for an immediate reduction in borrowing costs against seven who favored no change. In the wake of that decision, speeches by UK policymakers will draw attention. Among them, the BOE’s chief economist Huw Pill is scheduled to speak on Tuesday. Over in the euro zone, the calendar features several European Central Bank officials.
Germany’s ZEW investor confidence number on Tuesday will be a highlight in a quieter week for data. The Brussels-based European Commission will release economic forecasts for the region on Wednesday, including projections for growth, inflation, debt and deficits.
In Latin America, Colombia’s economy may have eked out a slight expansion in the first quarter, powered by stronger-than-expected output in February. We’ll also get GDP reads from Brazil and Peru and inflation reads from Argentina and Uruguay.
And here’s BoA’s cheat sheets for the upcoming week.
And here’s a calendar of 2024 major central bank meetings.
Market Drivers
So let’s go through the list of items that I think are most important to the direction of equity markets:
Fed/Bonds
As noted previously this was one of the sections that had grown unwieldy, so I’ve really pared it down. Given I provide daily updates on Fed expectations, Fedspeak, and analyst thoughts on the Fed, it’s duplicative (and time consuming) to gather it all again so, again, I encourage you to look at those (the daily posts) for updates. I will just give more of a quick summary.
A lot has happened over the past two weeks which has whipsawed expectations on Fed rate cuts back and forth as detailed in the daily summaries. Overall, the dominant inputs over that time were a less aggressive than expected FOMC meeting and the weaker than expected jobs report. Those (particularly the latter) saw a material softening in yields and pricing back in of rate cuts. Still, we remain far from the days of multiple rate cuts fully priced in with slightly less than two at this point and anything before July currently off the table completely. That said, we enter a pivotal week filled with a number of high profile reports headlined by the all-important CPI report. How that and PPI (and retail sales to some extent) read out will control the path of interest rates and Fed expectations at least until we get to the PCE prices report at the end of the month.
For now I’m not changing my thoughts from early April, although as I mentioned two weeks ago, it seems July is very close to getting priced out (as I noted it depends entirely on how April’s inflation numbers come in absent some “out of the blue” weakening in employment):
I believe I have to, like most of the rest of Wall Street, take June off the table. I’m not jumping to December like many have, but I just don’t see how with just one CPI report between now and the June meeting there’s any chance absent a negative print (or two) in the two NFP prints. As that’s highly unlikely, I think it will take at least until July when they’ll get not only two CPI prints but also two more PCE prints and another NFP report, but even then it seems like everything has to break right. Still, this is a Fed chair (Powell) and top lieutenants (Vice Chair Jefferson and NY Fed President Williams) that really want to cut rates to preserve the soft landing, they just need the data to cooperate.
But until we see a clear softening in the data (either inflation or employment), for now there’s no cuts on the table.
Turning back to where we are now, the 2/10 curve remains in its range over the past 3 months at -0.37%.
While the 3mos/10yr yield curve (considered a better recession signal than 2/10’s) fell back along with 10yr yields at -0.97% near one month lows.
While long term inflation expectations, as judged by the 5-yr, 5-yr forward rate (exp'd inflation starting in 5 yrs over the following 5 yrs) ticked up after falling all week into Thursday unchanged from where they were 2 weeks ago at 2.34%, after hitting the highest since November a week ago.
All of which saw 10yr real rates edge off their YTD highs but remain over 2% at 2.15%.
Shorter-term real yields though (Fed Funds - core PCE from GDP (so 3mth annualized as of Q1)) fell to just 1.63% on the spike higher in core PCE after hitting the highest since 2007 in Q4 (this is only updated monthly).
While the 10yr term premium estimate as of May 8th fell back from positive territory at -0.11%. This is something markets were laser focused on when it hit +0.38% last October, but then lost interest in. I continue to think as you get into 2H of this yr without a rate cut on the horizon (or heaven forbid a rate hike potentially coming) that this may resurface as an issue that will push yields higher, but so far not the case.
The extended discussion on term premium (what it is, why it’s important, etc.), can be found in this section in the Feb 4th Week Ahead.
As the MOVE index of bond volatility edged lower again this week after hitting the highest since early January four weeks ago.
And the Chicago Fed National Financial Condition Index and its adjusted counterpart (which each include 105 indicators) in week through May 3rd fell to the bottom of their ranges from this year, remaining near the loosest since Jan/Feb ‘22 (before the start of the Fed tightening cycle).
BoA’s financial conditions index was little changed in the week ending May 2nd as “market fears over a hawkish Fed were not realized” still just off the highs of the year & 1.07 standard deviations above normal (from 0.66 two weeks ago). “Overall, we characterize financial conditions as moderately restrictive; above average readings, but well below prior cycle peaks.”
Turning to the discussion on the Fed’s balance sheet/QT we’ll continue to keep getting steady, sizeable auctions of T-bills (<1 yr) as confirmed in the recent Quarterly Refunding Announcement (which was larger than expected). But despite a monthly clip of around $800bn in T-Bill (<1 year) auctions, RRP levels continue to hold in their range since the beginning of March, this week actually increasing to $486bn, $46bn above the level on March 1st despite those continued large T-Bill auctions which had previously sucked out $1.8tn since last May.
And while in prior weeks one potential explanation was banks starting to pick up T-Bills, that seems to have stopped with reserves remaining at $3.33tn, holding above the "scarcity" level estimated at around $3-3.25tn range.
For background on various estimates of when reserves will be “too low” see the Feb 4th Week Ahead.
Getting back to rates, I said two weeks ago 2 year Treasuries were a good buy at 5% which proved accurate, and we could see them again (or higher) on a hot CPI print. I also continue to think 4.7% is a good place to ease into 10yr’s with 5% a definite buy level.
And a nice graphic about Torsten Slok, although you could make this chart for just about anything.
Also removing all the legacy “final hike” and “first cut” materials, which can also be found in the Feb 4th blog post. I will put in new things if they come up.
Earnings
As a reminder, I have removed most of the background material, which you can get in the Feb 4th blog post. As noted last week, it’s time to move on from 2023 earnings and look forward to 2024. For a recap of 2023 you can see last week’s post.
With now 92% of the SPX earnings weight having reported, we can lock in 1Q and start looking towards future quarters (so this will be my last update on 1Q). For 1Q, 78% beat slightly above the 5yr average (77%) with reported earnings coming in 7.5% above expectations which is below the 5-year average of 8.5% but above the 10-year average of 6.7%. FWIW though BBG has a higher 8.4% beat in their numbers, and they say the average profit beat was the highest in two years, with mentions of “recession” on earnings and conference calls hit the lowest since the first quarter of 2022. This has seen 1Q expectations move to +5.4% expected growth (and if we were to exclude BMY which saw a big charge related to licensing costs, the 1Q number goes to +8.3%) from the 3.2% expected at the start of earnings season.
Revenues have not been as strong at just a 59% beat rate below the 5-yr avg of 69% and coming in just +0.8% above expectations versus the 5-yr avg of 2.0% evidencing the importance of profit margins which have been better than expected at 11.7% above the 5-yr avg of 11.5%, and above the 11.2% last quarter.
Turning to full year expectations, as noted in previous weeks back in July analysts had penciled in a nice jump of almost 12% for 2024 earnings to over $247. Typically we would see that number steadily deteriorate through July of the following year (2024) when it should basically “lock in” and we can turn to 2025 (earnings generally end the year w/in 2% of where they are estimated in July of that year). But as you know by now we saw very little deterioration in the 2024 earnings number since July ‘23, and that continued this week as expectations improved to $244.12, around the highest since the start of 1Q earnings and just about where we were last July (although as also noted in weeks past, that masks a big discrepancy between the top 10 which have seen earnings revisions increase ~+18% over that time versus the “other 490” who have seen a more typical ~-6% drop). 2025 earnings expectations also improved to $277.86, the highest in 6mths.
And I’ve covered this in earlier weeks, but in Q1 earnings growth is all a Mag 7 story…
Five of the seven companies in the “Magnificent 7” are projected to be the top five contributors to yearover-year earnings growth for the S&P 500 for Q1 2024. These five companies (in order of highest to lowest contribution) are NVIDIA, Amazon.com, Meta Platforms, Alphabet, and Microsoft. In aggregate, these five “Magnificent 7” companies are expected to report year-over-year earnings growth of 64.3% for the first quarter. Excluding these five companies, the blended (combines actual and estimated results) earnings decline for the remaining 495 companies in the S&P 500 would be -6.0% for Q1 2024. Overall, the blended earnings growth rate for the entire S&P 500 for Q1 2024 is 0.5%.
… but that shifts as we move though the year.
Analysts predict these five companies in aggregate will report year-over-year earnings growth of more than 15% for the remaining three quarters of 2024. However, it is interesting to note that analysts believe the other 495 companies in the index will see improving year-over-year earnings growth during the course of 2024. By Q4 2024, analysts expect the other 495 companies in the S&P 500 to report double-digit (year-over-year) earnings growth as well.
And as noted two weeks ago with the stabilization of the market, we’re seeing a more typical reaction to earnings reports with positive surprises up +0.9% two days before to two days after reporting in line with the 5yr average, but negative earnings surprises continue to be punished more than would be expected with an average price decrease of -2.8% vs the 5yr avg of -2.3%.
Looking ahead, Q2 earnings expectations unlike Q1 softened this week to 9.3% from 9.7% two weeks ago as did Q3 to 8.4%, while Q4 2024 remains a tall order at 17.4%. 2025 is +14.0% up a tenth over the past two weeks. As always of course the question will be if earnings can exceed whatever bar the market has priced in.
Factset’s analysis of analyst bottom-up SPX price targets for next 12 months as of Thursday remained stable at 5,784.13 (a 10.9% increase to the close that day) up ~630 points from 12 weeks ago. Technology has the largest gap at +13.9%, utilities the least +0.4%.
As a reminder, in 2023 they were within a couple percent, but typically they are b/w 3 and 8% too high (towards the lower end the last 10 yrs). Of course that range masks a wide discrepancy between big up and down years for the SPX.
In terms of analyst ratings, same as last week with buy and hold ratings continue to dominate at 54 & 40% respectively (not unusual).
And some other analyst charts/notes on earnings:
A closely watched indicator known as earnings-revision momentum — a gauge of upward-to-downward changes to expected per-share earnings over the next 12 months — has reached its highest level since September, BI data show. This indicates that more hikes to analysts’ forecasts are likely coming in the weeks ahead, according to BI’s Soong.
Citi's Chronert says Citi’s year-end estimate of S&P 500 $245 per share earnings in 2024 “shouldn’t be a problem” to reach despite some "fraying around the edges".
Economy
As I’ve written over the past 18 months, part of my earnings optimism has been due to the economy holding up better than expected. While earnings only track the economy loosely (and markets look forward 6-12 months), there is a clear correlation between recessions, lower earnings, and lower stock prices (although stock prices generally fall in advance of the recession and bottom 6-9 months before the end of the recession). Regardless, seeing a recession coming is helpful, although very difficult. You can reference this Week Ahead (see the Economy section) for a lot of material on how every recession is preceded by talk of a “soft landing” as close as a month before the start. On the IRA infrastructure act, the November 26 report has good info on how that should be supportive at least through the end of this year. I also have removed the notes about how small caps have shorter maturity profiles and more debt which can also be found at that report.
As I’ve been stating since I started doing the Week Ahead posts in mid-2022, the indicators to me are consistent with solid (which at times has been robust) economic growth, and I certainly do not think we’re on the verge of a recession. This week was light on data but things remain broadly consistent with that message although we continue to get more and more signs of some softening (which is surprising only in that it’s taken this long given we’re a year since the Fed Funds rate hit 5%). The upcoming week will be a big one for economic data as noted at the top, so we’ll that will give us a nice refresh on if see more slowing from other April data as expected.
With the continued weak data this week, Citi’s economic surprise index continues to fall now down to -18.5, the least since Jan ‘23.
But perhaps some of that could just be that expectations got a little ahead of themselves.
And GDP estimates are also consistent with a no recession call (again though remembering GDP going into recessions generally doesn’t look like one is coming (it was up around 2% in Q2 & Q3 2008 well after the recession had started)).
Goldman's 2Q GDP est now up to 3.4% from 2.9% two weeks ago.
BoA’s tracking was closer to actual at 2.1% for 1Q. They haven’t released their 2Q tracking estimate yet.
And the Atlanta Fed (which as a reminder had seen 2.7% for 1Q vs 1.6% as the actual first est) sees their 2Q GDP estimate jump to 4.18% from 3.31% on 5/2 due primarily to increases in the contributions from consumption (+0.47%), non-resi investment (+0.16%) & inventories (+0.24%). Other inputs changed less than +-0.04%.
NY Fed’s 2Q GDP Nowcast unchanged this week with no data releases included in its model after falling over a half percent last week to +2.23%. Atlanta Fed in contrast is at 4.18%.
And the St. Louis Fed GDP tracker, which I gave a lot of grief all of ‘23 as it was way too low but was the closest I saw for 1Q (at 1.71% vs 1.6% actual first est) initiates 2Q at 2.37%, the best in their model since Q2 ‘22.
While the Weekly Econ Index from the DallasFed (scaled as y/y rise for GDP) as of May 4th improved to +1.74%, but only after a big neg revision to prior week to +1.63% (this series is consistently revised down), leaving the 13-wk avg flat again at +1.62%.
Here’s the components.
Other economy stuff:
Multiple
Like the other sections, I’ll just post current week items regarding the multiple. For the historical stuff, see the Feb 4th blog post.
With the 3-week rally in the indices, P/E’s have also bounced back although remain off their highs as earnings expectations have also improved. The large cap SPX forward P/E is now 20.1 from 19.7 two weeks ago which was the least since early January, mid-caps are at 15.2 from 14.8 & small caps at 14.2 from 13.8. The “Megacap-8” as of last week was at 27.8 from 26.5.
As BoA reminds us according to their work, valuation matters little in the near term, but is almost all that matters in the long-term.
And some analyst thoughts on valuations.
Breadth
As I go over this daily, so I won’t reprise that information. Overall, it has been off and on over the past week, but nothing that would indicate a huge concern.
Positive volume has been supportive.
As % of stocks over 200-DMAs has also improved along with the rally.
As have the % of stocks above 50-DMA’s.
As have % of stocks above 20-DMAs.
While the equal-weighted SPX vs cap-weighted ratio remains near the lowest since 2009.
And IWM:SPY (small caps to large caps) fell back this week remaining not far from those “since 2001” lows.
Every sector was up this week ex-discretionary, but if you wanted a broadening of the market, you got it with the top performers utilities, staples, RE, materials, financials, industrials, and health care in that order (the only sectors up over 1%).
Which was also reflected in last week's SPX stock-by-stock chart map which was pretty green although a lot of what was red was deeply red. Outside of Meta the Mag 7 was up solidly.
Flows/Positioning
BofA using EPFR data in the week through May 8th saw global equity flows remain positive for a 3rd week +$14.8bn, largest inflow in 6 weeks & the 21st inflow in the last 28 weeks. Equity flows are ~+$333bn the last 46 weeks (and +~$136bn last 16 wks):
Inflows:
Financials led inflows a week after leading outflows, the 5th inflow in 7 weeks +$0.4bn (+$1.7bn last 7 wks).
Materials the 1st inflow in 4 weeks (but 11th in 14 weeks) +$0.4bn.
Consumer stocks a rare inflow +$0.2bn (still -$15.2bn last 30 weeks).
Utilities got inflows for a 2nd week (the first since Jan) after a 15-week string of outflows (the longest streak since 2003) and only the 6th in 30 weeks, +$0.02bn.
Outflows:
Tech led outflows, a rarity as it has normally led inflows over the past year, -$1.2bn, the largest outflow in 7 weeks, still +$20.5bn last 17 weeks (and $48.0bn last 40).
Healthcare continued to be unloved -$0.2bn (-$14.6bn last 31 weeks)
Energy the 21st outflow in 25wks -$0.2bn.
Real estate also another outflow -$1.1bn (-$2.9bn last 5 weeks).
Breaking down EPFR data in the week through May 8th by country/style flows:
US 3rd week of inflows, +$9.1bn now ~+$151bn the last 25 weeks.
Japan 15th inflow in 17 weeks (and 2nd in a row) +$2.2bn, now +$22.8bn YTD after +$7.3bn in all of 2023.
Europe 2nd wk of inflows (although 1st 2 wks this yr & just 3rd in 61 weeks) +$0.2bn, still -$19bn YTD after -$66.9bn in 2023.
EM 7th outflow in 9wks -$1.6bn (-$3.0bn last 5 wks), still though +$54bn YTD, just off the pace for a record year, as China saw a 7th week of outflows in 8 weeks (-$1.5bn) (but still +$47.8bn YTD). India continued to see inflows though now +$10.4bn YTD and on pace for largest annual inflow ever. EM took in +$91bn in 2023.
US large caps continued to see inflows +$8.7bn, the 29th inflow in the last 36 weeks, ~+$139bn last 27 weeks after $125bn in all of 2023.
Small caps though remained erratic with a large inflow after last week’s large outflow +$1.7bn (but -$4.8bn last 4 weeks), -$0.3bn YTD.
US value even saw a rare inflow, just the 5th in 20 weeks +$0.3bn (still ~-$24bn in 2024 after a record -$73bn in 2023).
Looking at EPFR data in the week through May 8th for fixed income saw a 57th inflow to bonds in 58 weeks (and 20th straight) +$17.8bn, the largest since July 2021 now ~+$217bn YTD (annualizing to $595bn):
IG/HG a 28th consecutive week of inflows (and 54th in 58 weeks) +$7.3bn now ~$157bn the last 19 weeks, on track for a record $463bn in 2024 after +$162bn in 2023.
HY 2nd inflow in 6 wks, but 21st in 27 weeks +$3.4, largest since November, still +$25.3bn last 26 weeks.
Bank loans the 10th inflow in 11 weeks +$1.8bn, the largest inflow since Apr ‘22.
Munis 15th inflow in 17 weeks +$1.6bn, the largest since Jan ‘23.
Treasuries resumed inflows after 2 weeks of outflows, but 12th inflow in 13 weeks +$4.0bn.
EM debt saw 3rd week of outflows (and 33rd in 39 weeks), -$0.6bn. EM debt saw -$37.0bn in outflows in 2023.
TIPS the 29th outflow in 35 weeks -$0.2bn. TIPS saw record outflows of -$33bn in 2023.
Gold/Silver saw another outflow according to EPFR data through Wed (no performance chasing here) the 37th week of outflows in the last 49 weeks -$0.7bn.
EPFR saw cash funds with a “big” inflow (+$67.8bn) following three weeks of outflows (although the last two weeks were smaller totaling -$7.3bn following the pre-Tax Day -$160bn outflow) bringing the YTD total to +$209bn (annualizing to $569bn after record +$1.3T in 2023 and +$3.3T since 2019 through the start of 2024). The total inflow to money markets over the last 24 weeks is still ~+$640bn.
Crypto funds (assuming #Bitcoin) returned to a mild inflow after two weeks of outflows (last week the biggest since June ‘22), the first outflows since the Bitcoin ETF’s started trading in early January (+$0.1bn, -$0.6bn last 3 weeks).
ICI data on money market flows in the week to May 8th like the EPFR data saw a large inflow although at +$31.1bn less than half the EPFR number, although it looks like a timing issue as last week ICI saw +$23.6bn while EPFR saw -$1.6bn. Regardless, the inflow raised the YTD total to +$146bn pushing the total sitting in MMF’s as of Wednesday to $6.03tn, ~$76bn off the record high set five weeks ago.
Looking at systematic flows, BofA est's that “after noting since early April that risks were skewed toward trend followers selling equities, our model now projects that CTAs are reaccumulating their longs in the US and Europe next week…Meanwhile Nikkei-225 trend strength is still projected to decline next week which could lead to continued trend follower selling. The buying in China that we highlighted in last week’s report is set to continue at rapid pace next week.”
Net exposure for the SPX, NDX, RUT, Nikkei225 & SX5E are now down to 27, 22, 1, 33 & 46% respectively from 33, 26, 3, 36 & 49% last week and 71, 57, 55, 69 & 86% four weeks ago.
In terms of gamma positioning, BoA estimates that “as the S&P grinded higher [last] week SPX gamma has grown appreciably in size and now sits at +$8bn (98th %ile). Notably if equities continue to rally, then gamma may climb in tandem providing an increasing headwind to further upside and would reach a maximum of +$12bn near the all-time-high in the S&P (~5255). If equities instead see a shallow decline, gamma may also fall but likely not far below $5bn near term as the gamma profile is quite flat to the downside and well supported by 1wk to 1m options.” In short, we’re back to strongly positive gamma which will dampen volatility in both directions.
And BoA estimates that like CTAs, volatility targeters (risk parity) have dialed back SPX leverage last week to almost match the Feb lows, which should see them turn buyers in the upcoming week.
And company buybacks which will continue to ramp back up this week supporting equities.
And look positive for future quarters.
Analysts at Goldman Sachs project that total S&P 500 repurchases will reach $925 billion this year and $1.075 trillion in 2025, which would mark annual growth rates of 13% and 16%, respectively.
Analyst Commentary
With the two week rally the bears became less and less vocal although there is still a healthy amount of caution:
From week of 5/1
“While markets may enjoy the earnings results from the big tech companies, when earnings season is over, investors will be left justifying high market multiples in the face of interest rates that are likely to remain higher for longer,” said Megan Horneman at Verdence Capital Advisors.
“When you look at the size and the scope and the scale of the rally off the October lows, and then you layer on top of it, the stickiness of inflation in the end, ... I wouldn’t be surprised to see some dampener on the market for a little period of time,” Dan Greenhaus, chief strategist at Solus Alternative Asset Management.
Since the October 2022 bear-market trough, stock gains have been driven mostly by multiples expansion linked to hopes for imminent Fed rate cuts and lower normalized rates — but the evolving narrative has been frustrating, according to Lisa Shalett at Morgan Stanley Wealth Management. “While Fed pauses are typically supportive of stocks, long periods of ‘higher for longer’ can end poorly, with some part of the economy ultimately stressed, as with emerging markets in 1997, tech stocks in 2001 and housing/banking in 2007,” she noted. “This cycle’s candidates could be low-end consumers, small businesses dependent on credit and commercial real estate owners.”
From week of 5/6
US growth momentum is resilient, but likely slowing, and that could weigh on equities, which have decoupled from the Fed by assuming that an acceleration in growth was lying ahead, a JPMorgan team led by Mislav Matejka wrote.
The equity rally “created a complacent technical picture,” with sentiment and positioning indicators still near highs, despite some recent consolidation, they said.
“Over the near term, US benchmarks can continue to push back toward their recent 2024 highs,” said Dan Wantrobski at Janney Montgomery Scott. “However, we do not believe that the signals for further volatility ahead have been canceled/negated at this time — and thus we continue to watch for another potential downleg in US equities over the coming weeks.”
Lack of conviction among investors to buy into the recent bounce in US stocks shows the market is far from turning fully bullish, said Citigroup Inc. strategists. The recent unwind of short positions has left the S&P 500 close to one-sided net long, but investors appear hesitant to add to the existing bullish positions, a team led by Chris Montagu noted. “Flows tell a story of limited enthusiasm with a trickle of new long positions and only marginal increase in risk appetite,” Montagu said.
“I said a few years ago when the Fed was aggressively raising interest rates that I was more worried about a death by a thousand cuts economic response, rather than a big immediate economic event/decline, and I’m sticking to that,” said Peter Boockvar the author of The Boock Report. “This sure feels much more like a 1.5% type economy rather than the 3%ish that some think we’re still in.”
Marko Kolanovic: “Maintaining a balance between growth, inflation and financial conditions will be challenging [for the FOMC] and we do not have conviction in the medium-term sustainability of the expansion.”
Although inflation data has overshadowed most other reports this year, it’s important to remember that consumer spending is the main pillar that has been holding up the economy, according to Chris Zaccarelli at Independent Advisor Alliance. “Today’s lower-than-expected consumer sentiment numbers are a warning sign that the consumer shouldn’t be taken for granted,” he noted. “In addition, inflation expectations have been rising as well — which is a double whammy for the Fed.” Zaccarelli also noted that if spending slows down and inflation increases, “we’ll get the opposite of the Goldilocks scenario that many were hoping for, and the Fed will be in an especially difficult position of choosing between accommodating a slowing economy and fighting increasing inflation expectations.”
And the bulls have become more vocal
From the week of 5/1:
UBS’s Chief Investment Office continues to see the current environment as supportive for US equities — driven by solid earnings growth, a potential Fed pivot later this year, and accelerating artificial-intelligence investment. “We remain constructive on US equities, and expect AI-related companies to drive strong earnings growth in the years ahead,” said Solita Marcelli at UBS Global Wealth Management. “It is key for investors to hold a healthy strategic allocation to tech stocks, but also advocate diversified exposure across regions and sectors.”
“Equity markets have been in a sideways churn for two months as bulls and bears wrestle for control,” said Mark Hackett at Nationwide. “Following the dramatic run since October, a pause is not unexpected or unhealthy.” He added that it is hard to see a dramatic breakout in either direction in the near term — as both sides have a compelling argument and expectations are not overly optimistic or pessimistic.
The recent stock rally signaled that traders are more driven by “fear of missing out” than confidence about fundamentals as there is still uncertainty as to where earnings go from here and few market catalysts on the horizon, according to David Bahnsen, chief investment officer at The Bahnsen Group. “With no rate cuts possible until July and not likely until September, and the next earnings season two months from starting, there are no apparent catalysts to change the near future direction of stocks other than speculation around what various data points,” he noted.
“Despite the lack of good news on inflation, there is a silver lining for patient investors,” said Mark Hackett at Nationwide. “As the Federal Reserve extends the timeline for interest rate cuts, historical data shows that longer Fed pauses often correlate with better equity returns. This should give investors reasons to be optimistic.”
“While we continue to see a constructive macro backdrop for risk assets, investors should stay vigilant on a range of economic and geopolitical risks that could send market volatility back up again,” said Mark Haefele, chief investment officer for the firm’s global wealth management. “With markets oscillating between pricing different scenarios, asset class volatility could remain elevated. Investors can mitigate such volatility and keep their portfolios on track by diversifying and balancing across asset classes,” the investment head said in the Wednesday note, adding that quality bonds in a portfolio, and oil and gold for portfolio hedges, are attractive plays for investors in this environment.
Robust corporate earnings will continue to lift the S&P 500 to 5,500 by the end of this year as profit margins improve, according to Societe Generale SA.
“Profits are the glue in this cycle,” the firm’s head of US equity strategy Manish Kabra wrote, adding that 2024 should be considered “an inflationary year, rather than stagflationary” as earnings-per-share growth is poised to accelerate further.
“Mixed” messages from key US economic data and the accompanying swings in stock markets mean investors should load up on defensive sectors such as consumer staples, according to Morgan Stanley strategists. A soft landing or a so-called no landing, where growth is resilient even as rates stay high, both remain possible for the US economy, the team led by Michael Wilson wrote in a note. This uncertain backdrop warrants an investment approach that can work as market pricing and leadership between groups of stocks gets whipsawed by the potential outcomes. “One might even want to consider adding a bit of exposure to defensive sectors like utilities and staples,” in the event that gauges of business activity slow further, Wilson said. Next week’s consumer price data will have a major role in “informing the path of monetary policy and the market’s pricing of that path,” Wilson said. “The price reaction on the back of this release may be more important than the data itself given how influential price action has been on investor sentiment amid an uncertain macro set up,” he added.
Browne & Sharef (PIMCO): “As we progress through 2024, we expect defensive and cyclical stocks will emerge from their earnings contractions, potentially leading to significant price appreciation...Macro trends and supportive bottom-up signals have us modestly overweight equities in multi-asset portfolios.
Wall St bulls are also starting to come to grips w/a "high for longer" rates environment. According to BMO since 1990, the SPX has posted average annualized gains of almost 15% when the 10-year Treasury yield was >6%, compared 7.7% when <4%.
From week of 5/6
The backdrop for stocks remains supportive, driven by healthy and broadening profit growth, inflation that will likely resume falling, a Fed that is more likely to cut than hike rates, and surging investment in artificial intelligence, according to David Lefkowitz at UBS Global Wealth Management.
“It’s good that we’re getting some sort of a continuation, because it seems as if the market is saying that the pullback is over and we’ll just work our way back up,” CFRA chief investment strategist Sam Stovall.
There are still questions surrounding the actual trajectory of inflation, according to Rob Haworth, senior investment strategist, wealth management with U.S. Bank. “I think the market is looking for a bit of a tiebreaker in terms of what’s happening with inflation,” said Haworth He added that he has become “a little more constructive” on his outlook due to ongoing economic strength. “Inflation is remaining persistent but not not accelerating to a problematic level. So we think there’s room to own risk assets here,” Haworth added.
Strategas Securities market technician Chris Verrone told clients Tuesday that when the S&P 500 starts May in an uptrend — as it is today — stocks have historically produced above average performance through July. The opposite is true when beginning this May through July period in a downtrend,” he said.
“As this market continues to gather pace from late-April’s oversold condition and reclaim some key levels (the S&P is back through its 50-day [moving average]), we’d look to seasonality as a tailwind into summer,” Verrone wrote in a note to clients. Other helpful signs for the market include credit spreads that have narrowed, the VIX volatility index returning “to its pre-correction levels,” bank stock indexes at their highest since late March and consumer discretionary stocks doing better relative to consumer staples companies.
“A rally of the laggards is our key allocation call, and so far, we’re witnessing signs that it’s happening,” said Florian Ielpo, head of macro research at Lombard Odier Asset Management. “For this to persist, the market needs to maintain a delicate balance — a sweet spot where the job market remains mildly soft and earnings growth continues.”
Senyek at Wolfe Research noted that he’d remain constructive in equities unless the economy shows signs of spilling into recession, or inflation is sticky enough that the market starts to price in a Fed hike. “Neither are part of our base case!” Senyek concluded.
“What’s important in all of this context is, ‘are we in the early stages of a long-term bull market or not?’” Chris Hyzy, chief investment officer of Merrill and Bank of America Private Bank. “It feels comfortable saying it on a day like this, but we are, in our opinion.
“Better than expected Q1 S&P 500 earnings and the recent pullback in stock prices brought P/E multiples of several key US benchmarks back to attractive levels in our view,” said John Stoltzfus at Oppenheimer Asset Management.
Sentiment
Sentiment (which I treat separately from positioning) is one of those things that really only matters at the extremes (and even then, like positioning, it really is typically helpful more at extreme lows vs extreme highs). Sentiment was incrementally more bullish last week week, and more so this week. As I’ve noted previously it’s more of a coincident indicator than a forward looking one until we get to an extreme which we haven’t seen this year I don’t think.
The correlation between the 10-DMA of the equity put/call ratio (black/red line) and the SPX after spending much of the year with unusual behavior has behaved more normally the last month or so first increasing as the SPX fell and now falling as the SPX has rallied although it stalled out this week, so we’ll see if it starts moving sideways like it did earlier this year.
More sentiment indicators:
And the CNN Fear & Greed Index back out of Fear for the first time in a month at 48.
And Goldman’s sentiment indicator back to “stretched” for the first time in 5 weeks.
While the BofA Bull & Bear Indicator increases for 3rd week to 5.4, still though down from 6.5 nine weeks ago. Rise due to “bullish hedge fund positioning (less SPX & US$ hedging), strong credit technicals, global stock index breadth, inflows to EM stocks & HY bonds.”
After the most bullish read since Oct, Helene's followers ease off a bit but remain bullish for a 4th consec week, the longest streak since December. As you may recall, markets did very well during that last streak (which was 9 consec weeks).
Seasonality
As we move into May, we’re entering what is commonly though of as a seasonally weak period ("Sell in May” and all that), but which in reality on average sees positive returns and which also is normally good in an election year. But as I’ve noted in previous weeks, we’ve also very much front run typical gains to this point, so the recent digestion of those gains is completely understandable and may (should) continue for a while. And as Jeff Hirsch noted last week below, May has seen "erratic" performance over the years that has made it "a tricky month." That said, as BofA and Carson research both note below presidential years have typically seen “big summer rallies”.
Note, summer rallies are common in election years. Also 9 of last 10 May's have been positive.
While many are feeling bullish for a "summer rally" Jeff Hirsch notes that historically when April, normally a strong month, is down, so are Q2 & Q3.
I'm not sure how Jeff defines "top election yrs" but this Q1 was above even that. But as he notes those outperforming years on avg saw a decline into June before things ramped up in line with the normal election yr seasonality.
And from BBG:
Since 1950, whenever the SPX finished higher in both January and February, full-year returns for the index have averaged 19.8% — with 27 of 28 occurrences producing positive full calendar-year returns, according to Adam Turnquist at LPL Financial. “Can the winning streak continue?,” Turnquist said. “March has historically been a good month for stocks as the S&P 500 has posted an average return of 1.1%. However, during election years, average March returns dip to only 0.4%, with notable historical weakness midmonth.”
For references to all of the “up YTD through Feb” see the March 3rd post. For all the very positive stats through March (strong 1Q, strong two consec quarters, etc.) see the April 14h post.
For the “as January goes so goes the year”, see the February 4th Week Ahead.
Final Thoughts
As you know, my message since around the third week of January had been “things are primed for a pullback of some magnitude (meaning more than the 3% we’ve seen since October), but that doesn’t mean one is coming at any particular time.” We finally got it in April, and we also saw the rejection from the 50-DMA on the initial rally consistent with my “base case” of the rally failing in the short term but then resuming longer term. It seems that may be what we’re seeing now. The rally now has a lot more going for it then two weeks ago. Not only has it cleared resistance, but systematic strategies have been “cleaned out”, technical indicators and sentiment were able to reset, momentum has rebuilt, breadth is improving, rates, the dollar and crude prices are off the highs, earnings remain supportive, etc.
Of course we get a big wild card this week in CPI (and PPI and retail sales to some extent). A hotter than expected print on CPI could upset the apple cart next week, but even then I’m not anticipating a big selloff although of course you never know with these things. Also, by some metrics we are overbought short term, and often breaking old highs after a consolidation, however brief, can be troublesome. So don’t be surprised if we don’t just break right through but perhaps fall back. If we break back under the 50-DMA for more than a day or two, I will have to reconsider if we might not be going back to retest those April lows (which I wouldn’t be surprised if we see at some point this year). It’s not my base case but it’s possible we even see something like we saw last July where we rallied off the first 5% consolidation then ended up coming back down and making lower lows (twice) before we bottomed in October. We’re a long way from worrying about that, but something to keep in the back of your mind.
Longer term, I continue to remain bullish, looking to buy any new correction/consolidation:
Overall this feels like a bull market (the economy is growing, earnings are growing, the Fed is much more likely to be cutting than hiking as its next move, the technical picture and seasonality are strong overall for this year, balance sheets are solid, there’s lots of liquidity, and there’s lots of stocks other than the biggest ones that are performing well (the equal weight SPX hit a new ATH in March, etc.) So if/when we do get that sharp pullback I would think it will likely be an opportunity to buy (like most sharp pullbacks are), not a reason to run for the hills.
And as always just remember these 5-10%+ corrections are just part of the plan.
Portfolio Notes
Had half of WES and MPLX and all of LAZ called away. Also sold out of PM, CHRW, KWEB, trimmed most utility names and/or sold calls and trimmed CTVA, TSLA. No major adds although I did look to pick up shares on companies that I already have which saw big down days on earnings like CVS, XOM, etc. Also started a small position in LULU.
Cash = 18% (held mostly in SGOV and MINT but also TLH (if you exclude the longer duration bonds, cash is around 14%)).
Took off most of those SPX and QQQ shorts.
Positions (after around the top 20 I don’t keep track of their order on a frequent basis as they’re all less than 0.5% of my portfolio).
Core positions (each 5% or more of portfolio total around 20%) Note the core of my portfolio is energy infrastructure, specifically petroleum focused pipelines (weighted towards MLP’s due to the tax advantages). If you want to know more about reasons to own pipeline companies here are a couple of starter articles, but I’m happy to answer questions or steer you in the right direction. https://finance.yahoo.com/news/pipeline-stocks-101-investor-guide-000940473.html; https://www.globalxetfs.com/energy-mlp-insights-u-s-midstream-pipelines-are-still-attractive-and-can-benefit-from-global-catalysts/)
EPD, ET, PAA
Secondary core positions (each at least 0.5% of portfolio, total around 8%)
ENB, GOOGL
For the rest I’ll split based on how I think about them (these are all less than 0.5% of the portfolio each)
High quality, high conviction (long term), roughly in order of sizing
CTRA, DIS, XOM, DVN, KMI, SHEL, CVS, KHC, ADNT, T, K, BWA, TRP, SCHW, TLH, APA, ADNT, O, GSK, EQNR, PFE, CMCSA, SWKS, TPR, OXY, MTB, BAC, VNOM, RHHBY, STLA, BMY, NEM, NTR, E, ING, VZ, SQM, PFF, TFC, DAL, CI, AM, JWN, VSS, ARCC, LAZ, AES, VOD, FSK, ALB, FIS V, GILD, DAL, BAYRY, ING, HBAN, BTI, RRC, FRT, VICI, FANG, DGS, SNOW, WES, INDA, MPLX, VWAPY, BMWYY, FSK, DDAIF, BUD, KEY, CVE, SWN, SOFI, BEP, BIIB, SAN, TEF, SPG, KVUE, CCJ, KT, PLTR, NEE, CRM, F, TSM, KLG, OWL, VNM, AAPL, WCC, MT, MFC, TD, SEE, LYG, ADBE, LVMUY, NKE, ORCC, EMN, ZS, CHTR, ON, BCE, MDT, MCD, BLK, TSLA
High quality, less conviction due to valuation
Higher risk due to business or sector issues; own due to depressed valuation or long term growth potential (secular tailwinds), but at this point I am looking to scale out of these names on strength. These are generally much smaller positions outside of the top few.
ILMN, AGNC, PARA, PYPL, WBA, YUMC, STWD, CFG, ETRN, FXI, ORAN, KSS, CHWY, TIGO, URNM, ACCO, RMD, CLB, LUMN, HBI, TCNNF, TCEHY, EEMV, PK, VNM, CURLF, GTBIF, TPIC, SABR, NSANY, VNQI, VALE, SBH, ST, WBD, LADR, BNS, EWS, VTRS, IJS, NOK, SIL, WVFC, NYCB, ABEV, PEAK, SEE, LBTYK, DOCU, RBGLY, LAC, CMP, TAP, BBWI, GPN, ZM, CAL, EWZ, CZR, LAC, MBUU, TLRY, HRTX
Note: CQP, EPD, ET, MMP, MPLX, PAA, WES all issue K-1s (PAGP is the same as PAA but with a 1099).
Reminder: I am generally a long term investor (12+ month horizon) but about 20% of my portfolio is more short term oriented (just looking for a retracement of a big move for example). This is probably a little more given the current environment. I do like to get paid while I wait though so I am a sucker for a good well supported dividend. I also supplement that with selling calls and puts. When I sell a stock, I almost always use a 1-2% trailstop. If you don’t know what that is, you can look it up on investopedia. But that allows me to continue to participate in a move if it just keeps going. Sometimes those don’t sell for days. When I sell calls or puts I go out 30-60 days and look to buy back at half price. Rather than monitor them I just put in a GTC order at the half price mark.
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