07/22/2024 Market Strategy
Don’t Change Horses in Midstream
Investors took profits last week in high-flying tech stocks
Key Takeaways
- With 70 or 14% of the firms in the S&P 500 index having reported, earnings are up about 8.9% from Q2:2023 on revenue growth of 4.3%.
- Six of the ten sectors that have reported are showing positive earnings growth, with four at double-digit rates. Four sectors show earnings declining from a year earlier, two at double-digit rates.
- We discuss last week’s sell-off in tech stocks and are of the view that investors “not change horses” but rather diversify their holdings into other issues, sectors and styles.
- Another 136 companies of the S&P 500 are due to report this week with 180 the week following. This week also brings the first estimate of GDP growth for the June quarter; a 1.9% advance is expected, which would be a modest quickening from Q1’s 1.4% annualized pace.
Last week’s stateside market activity appeared to us to be not so much a rout in stocks that had dominated much of the S&P 500’s performance year to date but rather investors’ increasing realization, need, and desire for further diversification away from concentration in relatively few names.
We see last week’s market action as some prudent consideration by investors in addressing a need to redistribute the weighting of opportunity and risks across more than a few sectors, styles and market capitalizations.
Good Horse Sense
That said, we remain positive on technology stocks suggesting that investors “don’t change horses in the middle of a stream” but rather that they consider distributing the load of risk and opportunity across more than a few “horses” better known in equity investing as: companies, sectors, market capitalizations and styles.
In our view, two catalysts in particular prompted last week’s rotational and rebalancing activity away from technology and into large cap sectors that have lagged in relative performance year to date and into small cap stocks.
Stocks in the technology sector came under pressure as market participants took some profits among the “magnificent seven” and particularly prominent semi-conductor names after former President Trump made comments which put into question what his degree of support for Taiwan might be if he is elected. Considering Taiwan’s highly sensitive position geopolitically and its importance to the US and the rest of the world as a manufacturer and supplier of semi-conductors some volatility ensued in technology stocks.
Then in an unrelated development a flawed software update by a cybersecurity company disrupted airline flights, retail businesses, financial services, health care services, 911 emergency response centers, along with challenges to a host of other sectors across the US and around the world.
While the disruption was quickly sourced and acknowledged to be from a company specific source (and not from hacker activity) the occurrence reminded governments, businesses (services and manufacturing), consumers and investors worldwide of their dependence and subsequent vulnerabilities related to technology.
Earnings Season Continues
In the week ahead the markets will likely focus on economic data, Q2 S&P 500 earnings results and guidance along with the recovery from last week’s cyber security disruption, the differences between election rhetoric and actual policy implementation post-election outcome as well as prospects for a rate cut as early as September by the Fed that’s anticipated by futures contracts.
We remain positive on equities and continue to see fixed income securities as complimentary to stocks in providing portfolio diversification.
Some near-term profit-taking in the day to day action of the market particularly in segments of the market that have had exceptional run-ups since last year into this year should be expected and continues to appear to us quite normal.
Such activity combined with a process of rebalancing and rotation into other segments of the stock market in our view can be healthy and should contribute to the broadening of the markets’ progress that began last year and became more evident in the second half of this year.
Economic and market transitions require patience and conviction of investors during periods when markets can churn from day to day as short-term traders move in and out of positions and asset classes seeking short-term gains.
Near-term volatility could, in our view, continue to present opportunity for investors to “catch babies that get thrown out with the bath water” in periods of market down drafts as the market digests levels of uncertainty that are not uncommon to times of transition in monetary policy like these and in periods of elevated geopolitical risk.
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