Market Snapshot
briefing.com
| Dow | 35019.98 | -287.56 | (-0.81%) | | Nasdaq | 13679.49 | -109.23 | (-0.79%) | | SP 500 | 4451.51 | -39.48 | (-0.88%) | | 10-yr Note | -2/32 | 4.22 |
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| | NYSE | Adv 449 | Dec 2413 | Vol 823 mln | | Nasdaq | Adv 1196 | Dec 3171 | Vol 4.5 bln |
Industry Watch
| Strong: Health Care, Information Technology |
| | Weak: Energy, Materials, Financials, Utilities, Real Estate |
Moving the Market
-- Growth concerns stoked by a number of factors, including a batch of weaker than expected data for July out of China
-- Bank stocks selling off after Fitch Ratings warning that it might be forced to downgrade the ratings of dozens of additional banks
-- Digesting stronger than expected US retail sales data for July
-- Broad selling interest bringing many stocks down
-- S&P 500 closing below its 50-day moving average (4,447)
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Closing Summary
15-Aug-23 16:30 ET
Dow -360.64 at 34946.90, Nasdaq -157.28 at 13631.44, S&P -51.93 at 4439.06
[BRIEFING.COM] Stocks had a weak showing today in another lightly traded session. The major indices had been holding steady with somewhat modest losses after the S&P 500 found support near its 50-day moving average (4,447) in the early going. Selling picked up in the last half hour of trading, however, when the S&P 500 breached its 50-day moving average. The major indices ultimately settled near their worst levels of the day and the S&P 500 closed below its 50-day moving average for the first time since March.
Market participants are still contending with the notion that the market is due for a pullback after its hot run, which created valuation concerns. Growth worries, which were piqued by a batch of weaker than expected retail sales, industrial production, and fixed asset investment data for July out of China, and a warning from Fitch Ratings that it might be forced to downgrade the ratings of dozens of additional banks, gave investors an excuse to take more money off the table.
Lagging bank stocks were a notable pocket of weakness. The Fitch Ratings warning came just a week after Moody's cut the ratings of ten small to mid-sized U.S. banks. The SPDR S&P Regional Banking ETF (KRE) fell 3.3% and the SPDR S&P Bank ETF (KBE) fell 3.1%. Also weighing on the group was Minneapolis Fed President Kashkari's view that banks may need to face tougher capital regulatory standards.
The slowdown concerns led to the underperformance of cyclically-oriented sectors and the relative outperformance of growth stocks compared to value stocks. The Russell 3000 Growth Index fell 1.0% while the Russell 3000 Value Index fell 1.4%.
The energy sector (-2.4%) logged the biggest decline, falling alongside oil prices ($81.11/bbl, -1.41, -1.7%), followed by the financials (-1.8%) sector. Meanwhile, the health care sector (-0.4%) registered the slimmest loss.
On the earnings front, Dow component Home Depot (HD 332.14, +2.19, +0.7%) logged a modest gain after reporting better than expected earnings despite negative sales growth in its Pro segment.
The Treasury market had a rollercoaster session today. The 2-yr Treasury note yield, rose as high as 5.01% immediately after the Retail Sales report, but settled the session down three basis points at 4.94%. The 10-yr note yield, which jumped to 4.26% after the Retail Sales report, settled the session up four basis points to 4.22%.
In other news, the People's Bank of China, in response to weakening economic activity, lowered its one-year medium-term lending facility rate to 2.50% from 2.65% and lowered the seven-day reverse repurchase rate by ten basis points to 1.80%.
- Nasdaq Composite: +30.4% YTD
- S&P 500: +15.6% YTD
- S&P Midcap 400: +8.2% YTD
- Russell 2000: +7.6% YTD
- Dow Jones Industrial Average: +5.4% YTD
Reviewing today's economic data:
- Total retail sales increased 0.7% month-over-month in July (Briefing.com consensus 0.4%) following an upwardly revised 0.3% increase (from 0.2%) in June. Excluding autos, retail sales were up 1.0% month-over-month (Briefing.com consensus 0.4%) after increasing an unrevised 0.2% in June.
- The key takeaway from the report is that discretionary spending on goods remained healthy in July, providing another cue that the tight labor market continues to fend off a hard landing scenario for the U.S. economy.
- The August Empire State Manufacturing Survey dropped to -19.0 (Briefing.com consensus 2.4) from 1.1 in July. A reading below 0.0 for this report is indicative of a contraction in manufacturing activity.
- Import prices increased 0.4% month-over-month in July and export prices rose 0.7%. Nonfuel import prices were flat and export prices, excluding agricultural products, jumped 0.6%. These monthly gains notwithstanding, import and export prices were still down 4.4% and 7.9%, respectively, on a year-over-year basis.
- Business inventories were flat in June (Briefing.com consensus 0.1%) following a prior 0.2% increase.
- The NAHB Housing Market Index fell to 50 in August (Briefing.com consensus 56) from 56 in July.
The following economic data will be released tomorrow:
- 7:00 ET: Weekly MBA Mortgage Index (prior -3.1%)
- 8:30 ET: July Housing Starts (Briefing.com consensus 1.446 mln; prior 1.434 mln) and Building Permits (Briefing.com consensus 1.460 mln; prior 1.440 mln)
- 9:15 ET: July Industrial Production (Briefing.com consensus 0.3%; prior -0.5%) and Capacity Utilization (Briefing.com consensus 79.0%; prior 78.9%)
- 10:30 ET: Weekly crude oil inventories (prior +5.85 mln)
Stocks pullback ahead of the close
15-Aug-23 15:35 ET
Dow -361.23 at 34946.31, Nasdaq -157.18 at 13631.54, S&P -51.54 at 4439.45
[BRIEFING.COM] Stocks turned sharply lower recently. The major indices all trade near their lows of the session.
The S&P 500 is down 1.2%; the Invesco S&P 500 Equal Weight ETF (RSP) is down 1.4%; and the Vanguard Mega Cap Growth ETF (MGK) is down 1.1%.
The 2-yr Treasury note yield fell three basis points to 4.94%. The 10-yr note yield rose four basis points to 4.22%.
Energy complex settles lower
15-Aug-23 15:00 ET
Dow -287.56 at 35019.98, Nasdaq -109.23 at 13679.49, S&P -39.48 at 4451.51
[BRIEFING.COM] The S&P 500 (-0.8%) shows the steepest loss at this point on Tuesday.
Energy complex futures settled the session lower, reflecting concerns about economic prospects. WTI crude oil futures fell 1.7% to $81.11/bbl while natural gas futures fell 5.0% to $2.66/mmbtu.
On a related note, the S&P 500 energy sector (-2.1%) trades at the bottom of the pack by a decent margin. The fellow cyclically-oriented financials (-1.6%) and materials (-1.4%) sectors are the next worst performers.
Market sticks to narrow range ahead of the close
15-Aug-23 14:30 ET
Dow -302.08 at 35005.46, Nasdaq -112.56 at 13676.16, S&P -40.96 at 4450.03
[BRIEFING.COM] The market is sticking to a narrow trading range.
JD.com (JD), Target (TGT), and TJX (TJX) headline the earnings reports in front of tomorrow's open.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -3.1%)
- 8:30 a.m. ET: July Housing Starts (Briefing.com consensus 1.446 million; prior 1.434 million) and Building Permits (Briefing.com consensus 1.460 million; prior 1.440 million)
- 9:15 a.m. ET: July Industrial Production (Briefing.com consensus 0.3%; prior -0.5%) and Capacity Utilization (Brieing.com consensus 79.0%; prior 78.9%)
Semiconductor underperform
15-Aug-23 14:10 ET
Dow -296.56 at 35010.98, Nasdaq -107.55 at 13681.17, S&P -40.05 at 4450.94
[BRIEFING.COM] The major indices are little changed at the index level.
Semiconductor stocks are underperforming the broader market. The PHLX Semiconductor Index is down 1.1%.
Gold futures fell 0.4% to $1,936.00/oz and copper futures fell 1.7% to $3.67/lb.
Growth uncertainty leads to more selling interest
Coming in this morning, there was a distinctly negative bias in the equity futures trade related to growth concerns after China reported a batch of weaker than expected retail sales, industrial production, and fixed asset investment data for July.
It seemed to be a break point for the People's Bank of China (PBOC), which has been staring at disappointing economic data for too long now. The PBOC cut its one-year medium-term lending facility to 2.50% from 2.65% and lowered the rates on its short-term overnight, seven-day, and one-year standing lending facility by 10 basis points each to 2.65%, 2.80%, and 3.15%, respectively.
Some lackluster sales at Home Depot (HD) in the second quarter and a tepid sales outlook from the Dow component, along with Fitch Ratings warning that it might be forced to downgrade the ratings of dozens of additional banks, added to the growth worries, which were also apparent in weaker oil and copper prices.
Interestingly, they weren't so apparent in the Treasury market. In fact, the yield on the 10-yr note drifted higher in overnight action. It did so in front of a July Retail Sales report out of the U.S. that was much stronger than expected.
Total retail sales increased 0.7% month-over-month in July (Briefing.com consensus 0.4%) following an upwardly revised 0.3% increase (from 0.2%) in June. Excluding autos, retail sales were up 1.0% month-over-month (Briefing.com consensus 0.4%) after increasing an unrevised 0.2% in June.
The results were powered by a big month of gains in nonstore retailer sales (+1.9%) and food services and drinking places (+1.4%).
The key takeaway from the report is that discretionary spending on goods remained healthy in July, providing another cue that the tight labor market continues to fend off a hard landing scenario for the U.S. economy.
This hard data has overshadowed the soft survey data seen in the August Empire State Manufacturing Survey, which dropped to -19.0 (Briefing.com consensus 2.4) from 1.1 in July. A reading below 0.0 for this report is indicative of a contraction in manufacturing activity.
Separately, there was an expansion so to speak in import and export prices in July. Import prices increased 0.4% month-over-month and export prices rose 0.7%. Nonfuel import prices were flat and export prices, excluding agricultural products, jumped 0.6%. These monthly gains notwithstanding, import and export prices were still down 4.4% and 7.9%, respectively, on a year-over-year basis.
There was some knee-jerk selling interest in the Treasury market following these reports, but it was the retail sales report that was acting as the primary catalyst. The 2-yr note yield climbed above 5.00% and the 10-yr note yield kissed 4.26%. They have since settled back some to 4.99% and 4.23%.
Rising market rates have been a headwind blowing back stock prices in August and today is no different.
Currently, the S&P 500 futures are down 32 points and are trading 0.7% below fair value, the Nasdaq 100 futures are down 88 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 279 points and are trading 0.8% below fair value.
That trade is wrapped up in worries about growth, only it isn't a uniform trade. There isn't enough growth in China right now and, in the market's mind, there is perhaps too much growth in the U.S. for the Fed's liking. Combined it is adding to the uncertainty of what comes next, and that uncertainty is adding to the August inclination to take some money off the table.
-- Patrick J. O'Hare, Briefing.com
Cardinal Health heads lower following smaller EPS beat and weak overall market (CAH)
Cardinal Health (CAH -2.4%) is heading lower following Q4 (Jun) results last night. The stock initially traded higher and set a new 52-week high but has pulled off its highs. This distributor of pharmaceuticals and medical supplies reported upside for both EPS and revenue. However, the EPS upside was smaller than recent quarters as CAH broke its string of three double-digit EPS beats.
- Its Pharma segment is by far the larger of CAH's two segments. It was also what drove the strong results. JunQ segment revenue increased 15% to $49.7 bln driven by brand and specialty pharmaceutical sales growth from existing customers. CAH said it continued to see broad-based strength in pharmaceutical demand spanning across product categories, brand, specialty, consumer health and generics and from its largest customers.
- Medical segment sales were flat yr/yr at $3.8 bln. That's not great, but it's an improvement from a -5% yr/yr decline in Q3 (Mar). This segment was impacted by lower PP&E volumes and pricing, partially offset by inflationary impacts. This decrease within Products and Distribution was offset by growth in at-Home Solutions.
- Looking ahead to FY24, CAH expects Pharma segment revenue growth of +10-12%, down from +15% growth in FY23. CAH expects growth from its generics program with volume growth and consistent market dynamics. CAH expects the year to follow typical seasonality patterns for Pharma with Q3 (Mar) being the largest segment profit dollar quarter due to the usual timing of branded manufacturer price increases.
- On the Medical side, CAH concedes that it still has blocking and tackling to do against the turnaround to both drive demand and improve cost performance. For FY24, CAH expects to return to growth as the company reaffirmed its view of +3% revenue growth for Medical. The growth outlook is modest but that follows a -5% decline in FY23.
Overall, this was a decent quarter for Cardinal Health. Its Pharma segment continues to perform well. However, FY23 was a rough year for its Medical segment. The silver lining is that it sounds like there will be some progress in FY24. As for the weakness in the share price today, we think it's a combination of a smaller EPS beat and a weak overall market.
Sea Limited changes course, returns to focusing on growth much to investors' disappointment (SE)
Sea Limited (SE -28%) has run aground, flirting with 2023 lows after falling short of analysts' earnings and sales forecasts in Q2. The e-commerce, gaming, and digital payments giant operating primarily in the Asia Pacific (Indonesia, Thailand, Vietnam, etc.) decided to shift back to growth after achieving profitability over the past three quarters, much to the chagrin of investors.
Management was confident that the company is in a much more fortified position than it was during 2022 to refocus on growth, citing several factors, including a resilient local economy, ongoing cost-leadership efforts, and positive gaming trends. However, following some disappointing numbers from Q2, investors are worried that perhaps SE is jumping the gun.
- While earnings stayed positive, going from $(1.03) per share in the year-ago period to $0.54 in Q2, they still missed the mark. Meanwhile, revenue growth remained light, expanding by just 5.2% yr/yr to $3.1 bln, a continuation of the single-digit growth from the past two quarters and less than analysts anticipated.
- SE's headline results look particularly weak when stacked against other e-commerce giants from around the world, including Amazon (AMZN), MercadoLibre (MELI), and Coupang (CPNG), all of which registered upbeat Q2 numbers.
- E-commerce platform Shopee still saw gross orders expand by 10% sequentially with decent GMV growth, contributing to a 20.6% jump in revs yr/yr to $2.1 bln. However, SE's value-added services (VAS) revenue was less appealing, edging 6.6% lower sequentially, mainly due to SE offering free shipping across more products, part of its renewed growth strategy.
- Digital Entertainment, comprised primarily of gaming revenue, continued to lag, sinking by 41.2% yr/yr to $529.4 mln. Meanwhile, bookings dropped by 38.2%. On a lighter note, quarterly active users (QAU) expanded by 10.8% sequentially, signaling potential stabilization. Although, management was hesitant to get too excited, noting that it will continue to monitor whether the positive qtr/qtr trends point to broader long-term stabilization.
- Conversely, Digital Financial Services remained a positive standout, expanding revs by 53.4% yr/yr to $427.9 mln, driven by SE's credit business. Like MELI's markets, many individuals across SE's markets are either unbanked or have few opportunities to utilize banking services, providing a sustained tailwind to SE's digital payment offerings. Encouragingly, non-performing loans past due by over 90 days stayed at around just 2% of SE's total gross loan receivables.
After two consecutive quarters missing earnings estimates and delivering revenue growth in line with or below expectations, investors were not looking for SE to shift into growth mode, leading to a significant sell-off today. While there were still bright spots from the quarter, including resilient e-commerce trends and potential stabilization within SE's gaming division, macroeconomic pressures remain a key concern, especially given the heightened volatility associated with SE's core markets. If SE can reignite growth, its shares could see considerable upside. However, another quarter of disappointing headline results will likely keep selling pressure active.
On gets tripped up following surprise EPS miss; demand strong but FX headwinds hurt results (ONON)
On Holding (ONON -13%) is heading sharply lower following its Q2 report this morning. The Switzerland-based footwear company beat handily on revenue and raised FY23 revenue guidance. While not providing specific Q3 guidance, On is seeing continued very strong demand in the first few weeks of Q3. However, adjusted EPS was below analyst expectations.
- Let's start with the good news. Sales jumped 52.3% yr/yr to CHF 444.3 mln, which was well above analyst expectations. Its fastest growing channel in Q2 was direct to consumer (DTC), which rose 54.7% yr/yr. At CHF 163.5 mln, Q2 DTC sales set a quarterly record and even significantly exceeded the very strong results during the holiday season in 4Q22. ONON is also benefitting from an all-time record in online traffic, up 75% yr/yr.
- Its wholesale channel also grew nicely in Q2, up 51% yr/yr to CHF 280.8 mln. This channel saw strong sell-out numbers at its wholesale partners which then drove strong reorders in Q2. For example, its top five key account partners in the US combined grew 92% in 1H23. And that does not even include the new established business with DICK'S Sporting Goods (DKS).
- A key to ONON's success is innovation. The company has launched six all new performance shoes within a short 24 months, with four transforming into major franchises. Its Cloudmonsters, Cloudrunners, Cloudghosts and Cloudsurfers are very popular with runners. Also, its Cloudboom Echo 3 is a long distance running shoe worn by athletes to win some of the biggest races around the globe, including the Ironman World Championship. On is not just for runners. Its new kids shoe line is a nascent franchise that On sees as a major building block in the making.
- So why is the stock lower? We think the adjusted EPS miss is the main reason. It fell to CHF 0.04 from 0.14 last year. Some of the shortfall appears to be FX-related. On cited the persistent strength of the Swiss franc vs nearly every other currency around the globe over the past month. On also cited slightly elevated distribution expenses resulting from a ramp-up of its warehouse automation project alongside some temporary expenses for additional warehouse space needed in the quarter.
- Another reason we think the stock is lower is because, despite the strong upside revenue, the company only slightly raised its FY23 revenue outlook to CHF 1.76 bln from CHF 1.74 bln. However, again, FX seems to be the culprit. Not only is On building in a higher FX headwind in 2H23, but FX rates were much more favorable when On gave the CHF 1.74 bln guidance. So the limited upside guidance is not as bad as it seems at first glance.
Overall, investors are reacting pretty harshly to ONON's EPS miss. This company has enjoyed a bit of a halo effect, it's a new footwear brand that is becoming very popular with runners around the world. But it did stumble here. With that said, we think this may be a bit of an overreaction. Demand does not seem to be a problem, sales are strong, adjusted EBITDA nearly doubled, margins are up and Q3 sounds like it's off to a good start. FX looks to be playing a big role here, which bothers us less. As we have said before, given the jolt that Hoka brand has given to Deckers Outdoor (DECK), we think ONON is worth keeping on the radar after the dust settles following this report.
Home Depot patches an earlier leak, constructs decent gains on solid headline JulQ results (HD)
After patching a leak during pre-market trading, shares of Home Depot (HD) are constructing decent gains today after the home improvement retailer registered solid upside on its top and bottom lines in Q2 (Jul). HD also reiterated its FY24 (Jan) targets. Meanwhile, the Board authorized a new $15.0 bln share repurchase program, replacing its previous authorization of $15.0 bln announced in August 2022.
Why did investors initially react negatively?
- Like last quarter, HD's Pro segment endured negative sales growth. At around half of total revenue, lagging Pro sales weigh meaningfully on HD's overall performance. With inflationary pressures remaining sticky, consumers are shying away from more substantial home improvement projects, a lucrative slice of the market for professionals.
- However, Pro still outpaced DIY sales, with positive comp performance across several categories, a possible warning sign ahead of rival Lowe's (LOW) JulQ earnings next week. LOW derives around three-quarters of sales from the DIY customer.
- HD also mentioned that Pro backlogs are healthy and elevated relative to historical norms.
- Another carry-over from Q1 (Apr) was falling lumber prices and unfavorable weather conditions, particularly on the West Coast. The lumber deflation partly contributed to HD's 110 bp contraction yr/yr in operating margins to 15.4%. Meanwhile, bad weather delays important selling seasons, such as grills and patio furniture during the summer.
- Additionally, the demand for big-ticket items like grills and appliances stayed soft in JulQ, with big-ticket comp transactions (those over $1,000) slipping -5.5%. On the flip side, this trend was likely already anticipated following several retailers' and OEMs' recent quarterly reports. For example, Whirlpool (WHR) pointed out that the challenging macro environment particularly hit major appliances during JunQ. Furthermore, HD's project-related categories saw pockets of strength in the quarter.
However, the headwinds HD faced during JulQ were largely anticipated ahead of earnings. At the same time, HD delivered solid results despite the lackluster economy.
- Headline numbers were better than feared, with EPS contracting just 7.9% yr/yr, far better than analysts expected on a minor 2.0% drop in revenue to $42.92 bln. Comps of -2% tracked toward the more optimistic end of HD's FY24 forecast of down 2-5%.
- HD kept its FY24 guidance unchanged, projecting EPS to decline 7-13% and revs to edge 2-5% lower yr/yr. Although the near term remains highly uncertain, management remained bullish on the medium-to-long-term outlook for the home improvement industry.
Overall, it was another challenging quarter for HD. Consumers continued flocking toward small projects, while outside forces dampened demand among seasonal assortments. Large housing projects can sit on the back burner for some time as consumers wait out the inflationary environment, which could lead to persistent headwinds within HD's Pro business. Elevated interest rates will also likely suppress the supply of used homes on the market, putting further downward pressure on repairs to get a house ready for sale. Nevertheless, there were encouraging developments from JulQ, particularly surrounding a potential recovery in the Pro line.
Tesla encounters a speed bump today after reportedly implementing further price cuts in China (TSLA)
Tesla (TSLA -1%) hits a speed bump after reportedly slashing prices in China today. The company cut the cost of the Long Range and Performance Model Y by around $1,900 while extending an insurance subsidy for the base Model 3 through the end of September. The price cuts reflect stalling recovery efforts in the region.
It is not the first time Tesla has trimmed its pricing in China. Last month, Tesla reduced the prices of its Model S and X vehicles in the region by roughly $4,825, following its decision a month earlier to provide cash subsidies to particular Model 3 buyers. Meanwhile, throughout 2022, Tesla was lowering prices across the board, a move that worried investors as it reflected growing competitive risks in the country.
Speaking of the competition, Tesla's price cuts today follow in the footsteps of competing China-based electric vehicle (EV) manufacturers. Li Auto (LI) lowered its average selling price in Q2 to spur more robust delivery growth. Nio (NIO) reduced prices by over $4,000 despite actively trying to avoid a price war in June. XPeng (XPEV), which reports Q2 results on Friday, slashed prices of its base models earlier this year to better contend with a challenging demand environment.
The price war among EV makers in China does not bode well for Tesla -- or its rivals, for that matter -- which is already in hot water regarding the price cuts it announced across many other markets, including the U.S. and Europe, and their negative effect on margins.
- Last month, shares sunk by 10% on a disappointing Q2 report, headlined by GAAP gross margins tumbling over 680 bps yr/yr to 18.2%. The market was likely anticipating margin stabilization ahead of Tesla's Q2 results. However, even after a significant yr/yr contraction, CEO Elon Musk signaled continual margin pressure over the near term.
- Without Tesla breaking down its deliveries by geography, it is unclear how much the price cuts in China affected the company's record delivery figures in Q2. However, given that its China-based rivals, including XPEV and BYD, as well as other global OEMs, like Volkswagen Group, saw a spike in deliveries during Q2, the cuts likely provided a meaningful boost to Q2 deliveries for Tesla.
- If Mr. Musk's comments last quarter are any indication, stating that he would rather sacrifice margin for volume, price cuts will likely continue as long as global economic conditions remain relatively weak to continue fueling upbeat delivery reports. Adding further evidence, Mr. Musk also noted during the Q2 earnings call that the company adjusts course according to the public's mood.
As the price war remains active in China, Tesla will struggle to carve out a bottom regarding margins. It helps that commodity costs, including nickel, cobalt, and graphite, have declined across the board, translating to thousands of dollars of positive impact per vehicle. Nevertheless, Tesla shares could have trouble breaking above levels before Q2 earnings until prices, and thus margins, stabilize.
The Big Picture
Last Updated: 11-Aug-23 07:01 ET | Archive
Your typical consolidation period
The stock market has gone up in a nearly straight line since the end of March. It has hit some bumps in early August, though, primarily because it has gone up in a nearly straight line, inviting calls that it is overbought on a short-term basis and overvalued relative to its long-term average.
Said another way, it is thought that the stock market is due for a pullback or, in more technical terms, a consolidation period.
The latter appears to be unfolding here in early August. The major indices have all pulled back some; most S&P 500 sectors have pulled back some; and the Russell 3000 Value Index and the Russell 3000 Growth Index have pulled back some.
The retreat has been orderly and broad based, which is what one typically sees in a consolidation phase. Something else one typically sees at the end of a consolidation phase -- and even within one -- is a willingness to buy on the weakness.
That willingness should be apparent again during this consolidation period since there hasn't been anything in the fundamental news flow to derail the basis for why the stock market rose in a nearly straight line since the end of March.
Put a Ring on It
To begin, the mini banking crisis in early March got ringfenced with a joint declaration from the Department of the Treasury, the Federal Reserve, and the FDIC that was designed to strengthen public confidence in the banking system. That was done in part with an implicit guarantee of bank deposits and additional funding for banks to make sure they could meet the needs of all their depositors.
Some took these actions to mean that the so-called Fed put had been restored. No matter the spin on those actions, there is no denying that the stock market liked what it heard then, and in subsequent weeks, which effectively showed the fallout from the banking crisis wasn't as bad as feared.
Beyond that, a string of economic data made it clear that the economy was not doing as badly as feared on account of the rate hikes that preceded the banking crisis.
What's more is that there have been three more rate hikes by the Fed since the March banking crisis and the economic data, as a whole, have continued to surprise in a positive way.
Note: a number above zero implies economic data have generally beaten consensus estimates
The employment data and the inflation data have been the most encouraging for the stock market. That's because the employment data continues to reveal a tight labor market, evidenced by an unemployment rate of 3.5% that is hovering near a 50-year low, while the inflation data has been revealing a trend of disinflation.
Core inflation is still well above the Fed's target, but incoming inflation data showing disinflation have bolstered the market's thinking that the Fed is done, or close to being done, raising rates.
Earnings Estimates Are Rising
The second quarter reporting period is nearly complete. It was better than expected (per usual), but it still did not compute to any earnings growth overall. According to FactSet, the blended second quarter earnings growth estimate is -5.0% versus -7.4% in early July.
What happened with earnings in the second quarter, though, isn't as important for investor sentiment as what is expected to happen with earnings in coming quarters -- and that's where the good news lays.
During the second quarter earnings reporting period, consensus earnings estimates for the forward 12-months, calendar 2023, and calendar 2024 have all risen, lending some confidence to the notion that earnings have troughed. That thinking will remain a point of debate in the coming months, but for now, it can be said that earnings estimates are rising.
On June 30, the forward 12-month estimate stood at $231.52, the calendar 2023 estimate stood at $218.63, and the calendar 2024 estimate stood at $244.63. Today they stand at $234.87, $219.39, and $244.96, respectively.
The upward revision to consensus earnings estimates may not seem like much, but when a market is anxious to identify an earnings trough, every little bit helps. That is especially true for a market that was trading at a premium to its 10-year historical average going into the reporting season.
On June 30, the forward 12-month P/E for the market-cap weighted S&P 500 was 19.3x. The 10-yr average is 17.3x, according to FactSet, so the S&P 500 was trading at a nearly 12% premium to the long-term average. It sits at 19.1x today with stock prices sputtering in early August and earnings estimates rising.
Still, that's not a bad tradeoff to see some consolidation in stock prices as consensus earnings estimates get revised higher. Of course, the "premium multiple" has a lot to do with the premium returns logged by the "Magnificent Seven" mega-cap stocks.
Things look more enticing from a valuation standpoint for the equal-weighted S&P 500, which trades at 15.7x forward 12-month earnings versus a 10-year historical average of 17.6x. In brief, there is more value in the stock market than meets the eye when looking at the market-cap weighted S&P 500.
What It All Means
The pullback seen so far in August should not be surprising. If anything, it is a welcome development for a bull market that was getting long on complacency, long on a select few stocks, and long in the tooth with a rally effort that ran mostly unabated since late March.
It did so because the narrative switch was flipped from hard landing to soft landing, from multiple rate hikes to potentially no more rate hikes, and from downward earnings revisions to upward earnings revisions.
It was a fundamental change that triggered a repositioning of portfolios that had been constructed for a more challenging period. Additionally, it drove performance chasing by underperforming money managers, short covering by short sellers, and the deployment of cash back into equities.
So, what comes next? Presumably, there will be continued selling interest since this pullback is just getting started. In the absence of a fundamental news driver that shakes the foundation of this year's rebound effort, though, there will be a willingness to buy on weakness.
That doesn't mean it will be a rebound to new highs for the stock market, which will still be contending with valuation angst and the specter of the lag effect from the Fed's rate hikes kicking in, but it should mean this pullback will look like a typical consolidation period so long as the fundamental switch isn't turned off.
-- Patrick J. O'Hare, Briefing.com
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