Everything to Know about Macro and Markets
Stocks ended lower on Friday as an early rally broke down under the weight of increased concerns regarding political uncertainty following the U.S. presidential debate. In addition, while the initial reaction to weaker-than-expected PCE inflation numbers was very positive, it became a non-issue later in the day. The Federal Reserve members have stressed numerous times that they need to see several months of consistently falling inflation before implementing an interest-rate reduction. Therefore, while the apparent slowdown in inflation is a very positive sign, the timing and the pace of monetary policy easing is still far from certain.
Solid Month, Quarter, and Year-to-Date
The S&P 500 (SPX) declined on the week, snapping a three-week winning run. The Dow Jones Industrial Average (DJIA) and the Nasdaq-100 (NDX) also logged small weekly losses, while the Nasdaq Composite (NDAQ) eked out a minute gain. Despite the turbulence, the benchmark indexes ended June with healthy increases, with the SPX and the Nasdaq remaining near their all-time highs.
Stock indexes also wrapped up a banner first half of the year, with a rise of 14.5% for the S&P 500, over 18% for the Nasdaq Composite, and almost 4% for DJIA. In addition, the broad market index – the SPX – clocked in a new monthly high in June, ending in the green for the seventh time in the past eight months.
Short-Term Pain, Long-Term Gain?
While stocks display overbought conditions and carry stretched valuations amid continued economic and rising political uncertainty, the strong first-half performance signals more gains may be ahead. Statistically, since 1954, in every occurrence when the S&P 500 had a double-digit increase in the first half of the year, the index ended the year up. In these years, the SPX registered an average annual gain of 25%.
However, there may be more turbulence ahead in the short term, as companies are entering a pre-earnings buyback blackout. By the end of this week, firms representing over 70% of the S&P 500’s market cap will have to refrain from discretionary buybacks ahead of the Q2 reporting season. The temporary pullback in support from share repurchases is poised to lead to increased market susceptibility to downside risks.
Is this the Beginning of the Great Rotation?
Analysts don’t seem to be surprised by the recent stock declines, flagging them as profit-taking among those that have had significant run-ups in the past few months. That’s why the recent declines were mostly concentrated within the big-tech names. Still, despite some large- and megacap tech market leaders stumbling in the past two weeks, the IT sector continued to lead the market in June, also topping the gains chart for the quarter and the year-to-date.
As much as 30% of this year’s gain in the S&P 500 can be attributed to NVIDIA (NVDA), whose blistering rally added over $1.8 trillion to the AI darling’s market cap this year. Optimism regarding artificial intelligence has continued to propel stocks higher in 2024 despite reduced prospects for Fed rate cuts. The Communications sector – home to Alphabet (GOOGL), Meta (META), and Netflix (NFLX) – closely followed the Technology sector’s lead this year. Together with Microsoft (MSFT) and Amazon (AMZN), these tech megacaps are responsible for over 50% of the SPX’s rally this year.
However, in the past month, there was a notable rotation to some of this year’s laggards, with the Real Estate, Energy, and Financials sectors regaining their luster. This week, we may see more inflows into these sectors as investors rearrange their positions in the aftermath of the debate between Donald Trump and Joe Biden. The incumbent’s weak performance in the debate boosted Trump’s odds, increasing the attractiveness of stocks in the sectors expected to profit if he wins the election. However, this doesn’t necessarily mean that tech stocks will suffer since in recent years they have become an “all-weather” investment theme.
Markets are Bracing for Jobs Data
Meanwhile, economic data continues to send mixed clues. The revised Q1 2024 GDP came in slightly stronger than was expected, though still reflecting a significant slowdown from Q4. Consumer spending increased less than was expected in May, but personal income rose more than economists had previously estimated, propped by strong consumer sentiment that beat expectations in June.
Coupled with a deceleration in inflation, this data paints a picture of an economy headed for a “soft landing”, increasing the odds of an interest-rate cut coming in September. However, the picture is missing a key component that will be released this Friday: the all-important job market report, which also includes earnings growth data. Although consumers are feeling pressure from inflation and high interest rates, they will keep spending as long as their income is increasing. Therefore, some evidence of labor-market softening is needed to support September’s rate-cut expectations.
Stocks That Made the News
¤ Tesla (TSLA) jumped by 7% over the past week, with its stock price breaking past $200 for the first time in three months. Traders are strengthening positions in the EV maker’s stock ahead of its upcoming second-quarter delivery results followed by an earnings report.
¤ UnitedHealth (UNH) and Humana (HUM) were the best performers in Healthcare, as the managed-care firms are seen as some of the biggest beneficiaries of Trump’s second term.
¤ Citigroup (C) shone this past week even against the backdrop of strong performance in large financials that passed the Federal Reserve’s stress tests with ease, paving the way to dividend hikes and increased buybacks. Citigroup’s shares received an additional boost from increased investor inflows to the stock, which lagged behind its large-cap peers in the past year.
¤ Nike (NKE) became the DJIA’s worst performer in 2024 after it sunk by 22% after the sports footwear and apparel retailer unexpectedly forecasted a drop in fiscal 2025 revenue, citing a challenging consumer-spending environment. Retailers in the consumer discretionary subsector have warned about slowing spending. Nike’s weak results and guidance have added warning signs.
¤ FedEx (FDX) surged around 18% this week after the delivery service company beat analysts’ expectations for revenue and earnings and produced an upbeat guidance for fiscal 2025.
Upcoming Earnings and Dividend Announcements
The Q1 2024 earnings season has ended, but some earnings releases are still scheduled for this week, mostly from firms whose fiscal year differs from the calendar year. This week, the only notable earnings report is that of Constellation Brands (STZ).
Ex-dividend dates are coming this week for Realty Income (O), Cardinal Health (CAH), Comcast (CMCSA), Campbell Soup (CPB), Cisco Systems (CSCO), JPMorgan Chase & Co. (JPM), and other dividend-paying firms.
For more exclusive market insights and content from TipRanks Macro & Markets research analyst Yulia Vaiman, click here.
