Tech Reclaims Driver’s Seat After Yielding to Other Sectors, Road Ahead Crowded
2023.06.27 10:01
(Tuesday market open) The market begins Tuesday in wait-and-see mode as investors prepare for a flurry of data and earnings. There were encouraging signs yesterday of new breadth on Wall Street as investors embraced sectors other than info tech, but the question is whether that’s the start of a trend or just a one-day event.
The Index (SPX) is down nearly 3% from its June 16 peak after falling again yesterday. However, it wasn’t all black and white. While the major indexes declined as tech slid more than 1%, some of the sectors that missed this year’s rally gained ground Monday, including real estate, materials, and energy. About 70% of the S&P 500® Index (SPX) actually gained yesterday, though the index fell due to weakness among the tech heavyweights. Arguably it was a good day for the market—though this morning’s premarket action suggests the rotation out of tech into other sectors didn’t carry over into Tuesday.
In general, Wall Street appears to remain in consolidation mode after the fierce spring rally and as the end of the quarter looms. There does seem to be cash on the sidelines, but with fixed income offering far higher yields than investors grew used to over the last decade, stocks face plentiful competition, especially with multiples at current levels. Yesterday was a good example as bonds rose while stocks fell. There seems to be some rotation into bonds, which could reflect more of a “risk-off” psychology taking hold.
Get ready for readings on consumer confidence and new home sales shortly after the open. In other news, shares of Walgreens Boots Alliance (NASDAQ:) fell after an earnings report that disappointed investors (see more below).
Morning rush
- The 10-year Treasury note yield (TNX) slipped to 3.71%.
- The ($DXY) dropped to 102.46.
- Cboe Volatility Index® () futures are steady at 14.31.
- WTI (/CL) fell to $68.13.
The VIX, which reflects stock market volatility, is near 3.5-year lows. But volatility indicators for bonds and currencies are also low lately. Could this be a case of summer “malaise?”
Perhaps, because looking at futures contracts farther out on the curve, the market builds in more volatility across the board. The VIX market, for instance, is in strong contango, meaning the market prices an asset higher in the future than in the present. The VIX August value is above 17—compared with 14 currently—and a 20 is built in for December. A 20 reading is near the historic average for the VIX, by the way.
Eye on the Fed
Futures trading indicates a 77% probability that the Federal Open Market Committee (FOMC) will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool. The probability of a July hike has remained steady this week and last.
Tomorrow morning U.S. time, Federal Reserve Chairman Jerome Powell is scheduled to participate in a European Central Bank (ECB) policy panel discussion in Portugal. Speaking of the ECB, its president, Christine Lagarde, said earlier today that inflation remains too high and hinted the central bank could hike rates again next month.
Stateside, the fixed income markets have now priced in two U.S. rate hikes this year, but also a possible rate cut by the end of 2023. The Fed projects two rate hikes but no cuts. Discuss.
What to Watch
Breakfast banquet: Right after today’s opening bell investors will peruse the May New Home Sales and June Consumer Confidence reports. New home sales have been trending upward this year after last year’s steep drop.
New home sales are seen at a seasonally adjusted 670,000 in May, down from 683,000 in April, according to Trading Economics. New home sales have climbed steadily since their lows last fall, and some homebuilders hint that buyers are growing used to elevated mortgage rates.
Consumer Confidence from the Conference Board is expected to come in at 103.5 in June, up from 102.3 in May, Trading Economics says.
Weekly diary: The critical report before the end of the quarter is this Friday’s May reading on Personal Consumption Expenditures (PCE) prices, the inflation metric most closely watched by the Fed. The last PCE update—for April—showed an annual increase of 4.4% in the overall rate and 4.7% in the core rate, which excludes food and energy prices.
For May, monthly headline PCE prices are seen up just 0.1%, according to Briefing.com, but the more important core reading is expected to rise 0.3%. Analysts predict year-over-year increase for core at 4.7%, unchanged from April and implying that “sticky” inflation remains an issue.
Stocks in the Spotlight
Earnings disappoint: It’s a tough morning at the pharmacy counter as shares of Walgreens Boots Alliance (WBA) plunged 6% in premarket trading after the company posted weak earnings. The company missed analysts’ bottom-line expectations, though revenue surpassed Wall Street’s average estimate. Guidance for the fiscal year also came in well below analysts’ thinking. The company said it’s taking actions to improve profitability, including cost cuts.
Flying high: The news was better over at the airport as Delta (DAL) announced it anticipates Q2 earnings per share and revenues to top consensus views. The summer travel season is stronger than expected, the company’s CEO told CNBC this morning. Shares of the airline climbed nearly 2% in premarket trading.
Semiconductor giant Micron (NASDAQ:) is next on the earnings list when it reports Wednesday afternoon.
Act Four this week is Nike (NYSE:), with results expected Thursday afternoon.
Micron was in the news recently when China effectively banned purchases of memory chips from the company, drawing U.S. protest. Micron is the biggest U.S. maker of memory chips used in devices like laptops and mobile phones. Last week, Micron announced plans to build a manufacturing facility in India, so geopolitics could be high on the list of things to watch when Micron reports. The more pressing issue, however, could be Micron’s ongoing supply struggles amid weak laptop and smartphone demand. Investors may want to get the latest updates on inventory reduction.
CHART OF THE DAY: WORRIES SHIFT: While not a perfect correlation, it’s significant that lately we’ve seen weakness in Treasury yields (TNX—candlesticks) accompanied by weakness in the S&P 500 Index (SPX—purple line). This could imply that worries have shifted from inflation to recession. It’s also markedly different from last year at this time. Data sources: Cboe Group, S&P Dow Jones Indices.
Thinking cap
Ideas to mull as you trade or invest
No bull: When the S&P 500® Index (SPX) formally entered a new bull market earlier this month, rising 20% from last October’s lows, the milestone didn’t enjoy much follow-up in terms of strength on Wall Street. There was a brief burst of “animal spirits” that lifted the SPX to 14-month highs, but now the index sits barely changed from when it pushed into bull territory. A couple of speed bumps may be to blame, including worries about potential economic recession after last week’s poor global manufacturing data and ideas that perhaps the market is overvalued on a price-to-earnings basis.
Sentiment shift: Concerns about the economy could reflect a shift in thinking that isn’t necessarily in the market’s favor. If inflation fears dissipate, that might help from an interest rate standpoint (if central banks cooperate) but hurt companies from a margin standpoint. Many firms enjoyed a tailwind over the last two years from rising prices, which they’ve passed along to consumers amid relatively elastic demand—especially on the services side. If inflation fades, companies could lose pricing power and see margins compressed. A recession would likely put consumers on the sidelines, too. On the other hand, wholesale price growth has slowed faster than consumer prices, perhaps giving companies some margin room. Any signs of creeping recession, either here or abroad, obviously work against the market, and last week’s Leading Economic Indicators (LEI) again pointed lower. Watch the June University of Michigan Consumer Sentiment report on Friday to see if consumers wavered. And while next Monday is a shortened trading day ahead of the holiday, two important data points—Chicago PMI and June ISM Manufacturing—could be worth sacrificing a possible four-day weekend to monitor. Wall Street may be sensitive to poor showings in these reports, judging from recent market behavior.
Earnings equation: Another concern appeared to be that major indexes might have come too far too fast. Many analysts called the recent pullback a “healthy” one for that reason. The SPX, for instance, saw its forward price-earnings (P/E) ratio climb above 19 earlier this month, from around 17 earlier this year. A 17 P/E is near the historic average, while 19 is arguably stretched. With analysts expecting another quarter of sliding earnings, it’s harder to argue for more upside based on earnings alone, some analysts say.
Calendar
June 28: Expected earnings from Micron (MU) and General Mills (NYSE:)
June 29: Q1 Gross Domestic Product (third estimate), May Pending Home Sales, and expected earnings from Nike (NKE), McCormick (NYSE:), and Rite Aid (NYSE:)
June 30: May Personal Consumption Expenditures (PCE) prices, May Personal Income and Personal Spending, and Final June University of Michigan Consumer Sentiment
July 3: June Chicago PMI, June ISM Manufacturing Index, and May Construction Spending, and markets close early ahead of the holiday.
July 4: Independence Day holiday, no U.S. trading.
July 5: May Factory Orders
Happy trading,
Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
