DataTrek's Nick Colas & Jessica Rabe
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1/2 “Dividend Aristocrat” stocks – those with long-term track records of increasing payouts – largely paced the S&P 500 in the 2010s but are lagging badly in the 2020s. Rising interest rates are largely to blame, but these stocks are still worth owning as bond substitutes...
Two-year Treasury yields closed yesterday right on their 2023 – present average (4.19 pct) and were far higher in 2023 (avg 4.8 pct) and 2024 (4.4 pct) without an ensuing recession.
1/2 If it weren’t for the upside revisions to Energy sector earnings expectations (+2.6%), index-level estimate changes for Q3 would almost certainly have their usual negative sign instead of a (slightly) positive one...
1/2 The cap- vs equal-weight S&P 500 debate now comes down to one question: does the AI trade pay off? The equal weight S&P has lagged the cap-weighted version by an average of -7.2 percentage points, and 92% of the time, since 2023...
Fed Funds Futures put the highest odds on one or two rate hikes later this year, and then a pause in 2027. We remain in the more hawkish camp and believe more hikes than expected are coming.
1/2 Q3 earnings expectations for the S&P 500 are slightly higher now than at the start of the quarter (by +0.3 pct). That is unusual; the Street usually cuts their numbers during a given reporting period. Earnings revisions for the Energy sector (+2.6%) explains the anomaly...
July’s US sector performance was essentially one trade, namely out of hyperextended Semis and into everything else, from super cap Tech sector names to cheap groups with a catalyst like Financials (due to earnings) and Energy (from higher oil prices).
Every US small cap sector is up at least +10% YTD. Since the start of the current bull market in 2023, at least one sector has posted a negative calendar year return.
Energy is back in the YTD lead (+33.2%), followed by Tech (+21.8%). The other outperforming sectors YTD are Industrials (+15.9%), Real Estate (+11.7%), Materials (+11.2%), and Consumer Staples by a hair (+9.7%).
US Big Tech was additive to S&P 500 returns last month, to the tune of +1.6 percentage points. The largest contributor was $MSFT, up +24.6% on the month & responsible for +1.1 point of S&P performance.
1/2 Despite higher oil prices, incremental Fed policy uncertainty, and a sudden flush in Semi stocks, the S&P 500 was little changed in July (-0.1%). US small caps and Emerging Markets stocks fared worse (Russell -3.1%, EM -6.3%)...
Bond investors took Warsh’s remarks as yet one more sign that he sees volatility in Treasury market prices as a reasonable price to pay for their value as an input into the Fed’s monetary policy decisions.
Fund investors were net sellers of both US and international stocks last week and seem to be growing impatient with a do-nothing S&P 500 and suddenly volatile EM equity markets.
Fed Chair Warsh thinks the Fed can achieve its 2 pct inflation target without a recession. Fifty-plus years of history say that will be a challenge unless oil prices decline dramatically.
1/2 The relative returns between US large cap Growth & Value styles have whipsawed in the 2020s with 2 – 3x the volatility of the 2010s. Value has now hit a relative performance peak due to growing worries about AI-related CapEx in Growth’s largest holdings...
1/3 Tech's outperformance over Health Care hit a historic extreme in June, and that gap has already started closing, with Health Care up sharply since...
1/2 Average short-term S&P 500 sector correlations to the index just hit a new +8-year low. This is partly due to Health Care (-0.33 correlation), but the mean correlation for other major groups is still +2 sigmas below average...
From 1994 – 2011, when the Fed gave no forward guidance, 80 pct of S&P returns occurred in the 3 days around FOMC meetings. We could be returning to a similar market regime now.
1/2 The MSCI All Country World Index (ETF symbol $ACWI) is worth considering as an alternative to the S&P 500 for investors concerned about the latter’s Tech and AI trade concentration risk...
1/2 The Nasdaq’s June 2nd peak would mark only the 2nd time since 1971 that it topped out this early in a calendar year. An H1 peak is a less common pattern (22% of years) that’s usually come with Fed tightening, a bursting bubble, or both...
Since 1994, the Fed has tended to avoid changing policy rates at the FOMC meeting just before midterm elections. There are exceptions, the most recent one in 2022, when high inflation overrode optics about political neutrality.
The S&P 500’s forward PE multiple is down -10% YTD despite strong corporate earnings growth. That contraction is primarily due to the uncertainties around AI CapEx-related return on capital investment. Tech’s forward PE is -14% on the year.
1/2 Ten-year US Treasury yields made a new 1-year high last week, entirely due to rising real rates, not inflation expectations. This market is slowly accepting that the US economy is highly resistant to recession, so Fed monetary policy will be necessarily tighter...
1/3 Alphabet’s Q2 earnings release showed that $GOOG is now spending more on CapEx than it generates from its businesses, but that’s only half the story...