S&P 500 (SPX) gained 0.7% last week although the bulls weren’t able to secure a strong weekly close after printing a fresh 15-month-high. Still, the last week marked the eighth green weekly candle for the S&P 500 in the last 10 weeks as the generative AI frenzy keeps fueling the equities bull run.
Nasdaq (IXIC) lost 0.6% despite a strong rally in the opening days of the last week, ultimately resulting in a shooting star candle – which is a bearish near-term signal for tech-heavy IXIC. A short-term pullback could push the index to revisit important support around 13200, suggesting a pullback of around 6%.
On the other hand, Dow Jones Industrial Average (DJI) surged 2.1% to finally break out of the tight trading range. Last week’s high marks the highest the DJI index traded since April 2022.
This week is packed with U.S. economic data, starting with preliminary Global Manufacturing and Services PMI results for July. The Fed interest rate decision is out on Wednesday with the market fully expecting another – and possibly final – 25 bps rate hike.
"The key question is how strongly [Fed] Chair [Jerome] Powell will nod toward the 'careful pace' of tightening he advocated in June, which we and others have taken to imply an every-other-meeting approach," Goldman Sachs strategists said last week.
On Thursday, we will see the preliminary GDP numbers for the second quarter, coupled with the Durable Goods Orders for July. Finally, the Core Personal Consumption Expenditures - Price Index report is out on Friday.
Mega-caps take the stage
The Q2 earnings season is in full swing after several mega-caps, including Tesla (NASDAQ:TSLA) and Netflix (NASDAQ:NFLX), reported last week. So far, 18% of the S&P 500 companies reported actual results with 75% of those reported topping EPS estimates, according to FactSet.
“It’s still too early to determine how the Q2 earnings season will turn out. That said, in our view “so far so good” with five sectors showing positive double digit earnings growth (energy, industrials, consumer discretionary, communications services and real estate), three sectors posting positive single digit earnings growth (consumer staples, health care and financials), and two sectors delivering double digit negative earnings growth (materials and information technology),” Oppenheimer strategists said.
For Q2 2023, the blended earnings decline for the S&P 500 is -9.0%, which is higher than the expected earnings decline of 7%.
“The (blended) net profit margin for the S&P 500 for Q2 2023 is 11.1%, which is below the previous quarter’s net profit margin (11.5%), below the year-ago net profit margin (12.2%), and below the 5-year average (11.4%). If 11.1% is the actual net profit margin for the quarter, it will mark the sixth straight quarter in which the net profit margin for the index has declined year-over-year,” FactSet analysts wrote in a blog post on Friday.
Some of the most notable companies to report this week include General Electric (NYSE:GE), General Motors (NYSE:GM), Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), AT&T (NYSE:T), Boeing (NYSE:BA), Meta Platforms (NASDAQ:META), Intel (NASDAQ:INTC), and Amazon (NASDAQ:AMZN).
Wedbush analysts argue that Street’s focus is on Microsoft.
“The entire Street will be laser focused on one print this week: Microsoft. While this is a massive week for Big Tech earnings season there is no better barometer of the overall cloud and enterprise spending environment than Redmond and all eyes will be glued to the screens Tuesday after the bell,” they said in a client note.
What analysts are saying about U.S. stocks
Morgan Stanley analysts: “2023 has been a story of higher valuations than we expected amid falling inflation and cost-cutting. However, disinflation is now eating into sales growth, which means investor focus is likely to shift toward top line growers rather than just companies exhibiting cost efficiencies.”
Oppenheimer analysts: “We remain highly constructive on equities on expectations that economic fundamentals are likely to remain resilient if not robust in this period of significant transition tied to monetary policy. Corporations, the consumer and labor continue to reflect in our view resilience characteristic with a recovery process from a period of crisis and great uncertainty into a period of sustainable economic growth.”
Barclays analysts: “Valuations are up and earnings are in the hot seat as we enter the busiest weeks of summer reporting season. Estimates are heading lower for most sectors, while uncertainty is high for Big Tech. Two potential sources of downside: negative operating leverage worsened by faster disinflation, and China exposure.”
Berenberg analysts: “US equities look expensive in both absolute and relative terms compared to non-US equities. Equity bond yield gaps (excluding Japan) have compressed or even reversed in the last 12- 18 months. However, the gap between the US equity-bond yield gap and non-US yield gaps is near historical highs – this suggests more relative support for non-US equities versus local bonds than in the US. In absolute terms, US equities trade above a 12-month forward P/E of 20x for only the third time in the last 50 years; the last two times that US equities have been this expensive were both liquidity-fuelled bubbles.”
Goldman Sachs analysts: “We believe recent valuation expansion despite higher rates is reasonable considering the longer-term relationship between rates and equities, the improvement in expected growth, and the high market concentration in stocks benefiting from AI optimism. While our baseline forecast assumes a slight contraction in the S&P 500 P/E multiple to 19x by year-end, we believe risks to valuations are tilted to the upside if the multiples of laggards “catch up” or yields fall.”