08/19/2024 Market Strategy
Old Town Road
As of Last Friday, Aug. 16, the S&P 500 Was Just 2% Below its Prior All-Time High.
Key Takeaways
- Fed Chairman Powell’s remarks on Friday will be a key focus for markets this week as expectations are running high for a 50bp rate cut. We argue a 25bp move is more likely.
- With 463 or 93% of the firms in the S&P 500 index having reported, earnings are up 8.5% from Q2:2023 on revenue growth of 4.8%.
- Nine of the 11 sectors show positive earnings growth with four at double-digit rates. Just two sectors show earnings declining from a year earlier.
- This week brings another 15 firms reporting including companies in the technology and consumer discretionary sectors.
The rebound in the S&P 500 after its 8.49% downdraft between July 16 and August 6 reminds us of the lyric by Lil Nas X and Billy Cyrus. “I’m gonna take my horse to the old town road; I’m gonna ride ‘til I can’t no more.” In our view this quick recovery was based on improved fundamentals and the possibility of a Fed rate cut as early as the September FOMC meeting.
Market performance day to day and on the week is likely to be defined by a brace of economic data, earnings of a number of widely followed names in the S&P 500 (in technology and consumer discretionary) as Q2 earnings season winds down, and Fed Chairman Jerome Powell’s remarks on Friday from the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming.
Market expectations are high for the Fed Chair to utilize his presentation in Jackson Hole on Friday morning to provide a message that says the Fed has the confidence to provide Wall Street and Main Street with the first cut in rates since the Fed rate hike cycle began in March of 2022. With many folks now looking for a cut of as much as 50 bps in September, a degree of hesitancy in the Chair’s remarks could reintroduce some volatility into the market ahead of next weekend.
In our view a 25 basis point cut would be more likely as last week’s initial jobless claims and continuing claims numbers along with the advance retail sales number suggested economic resilience. The data looked to us to exhibit enough momentum in the economy to elicit greater confidence from the Fed in the economy’s vigor to favor a 25bps cut in September while saving a realistic potential for a further cut of 25 bps for either in November or December.
With the Fed’s expanded focus beyond inflation to likely include employment with July’s unemployment rate at 4.3% vs. 4.1% in the month prior, considerations of the other component of its dual mandate (to provide sustainable economic growth without high inflation and support full employment) any intimation by the Fed Chair that no rate cut is forthcoming in September could reintroduce a tantrum reaction particularly from highly leveraged players in the market.
That said, a cut of 50bps in September might also raise concern that the Fed feels it has waited too long to cut rates and now will need to “catch up” in cutting rates to avoid tilting the economy into recession.
In our view a high level of sensitivity in practicing its mandate throughout the current Fed funds hike cycle will likely carry the Fed’s message in Jackson Hole this week and at its FOMC meeting in September, making the Fed Chair’s commentary digestible to markets even if it’s not exactly what they’d like to hear
Q2 Earnings Season Winding Down
With 463 or 93% of the firms in the S&P 500 index having reported as of last Friday, results overall have surprised to the upside with earnings up 8.5% from Q2:2023 on back of revenue growth of 4.8%. Nine of the 11 sectors are showing positive earnings growth, with four at double-digit rates. Just two sectors show earnings declining from a year earlier.
Sectors seeing double-digit earnings growth include health care (+17%), consumer discretionary (+16%), utilities (+15%), and financials (+13%).
The materials (-7%) and industrials (-3%) sectors were the sectors seeing earnings declines.
Economic data released last week saw further evidence of the Federal Reserve’s progress in curbing inflation growth even as its 2% inflation rate target remains somewhat elusive.
Retail sales showed resilience even as the economy showed slowing–quite normal we’d say now 29 months (and 20 FOMC policy meetings) into a Fed tightening cycle.
We remain overweight US equities while maintaining some meaningful exposure to international developed and emerging markets as the US Central Bank moves towards easier policy on greater confidence that its efforts to put untoward levels of inflation in check have been or are growing closer to being met. Volatility should be expected as the economy and the markets navigate the transitions taking place in the economy and monetary policy in a move towards greater normalization.
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