US Macro Strategy Weekly Report

James Ooi/ uSMART Market Strategist

Over 13 years of experience in buy-side and sell-side of capital markets

Former Fund Manager of renowned asset management firm
Focus on fundamental analysis and macro-outlook for US & Singapore markets
SGX Academy trainer

This Week’s Market Outlook

• This week, significant economic data and events in the United States includes the release of the New Home Sales on Tuesday, GDP data on Thursday, May PCE inflation data on Friday. Additionally, Powell will be speaking at a European Central Bank forum on central banking on Wednesday.
• 7 big tech stocks accounted for nearly 87% of the year-to-date gains of the S&P 500, suggesting that the market rally lacks breadth (Figure 1).

Figure 1: These 7 Tech Stocks Command Almost 87% Of The S&P 500’s Gains.

Source：uSMART, Bloomberg, 26 June 2023

• The NYSE FANG+ Index has reached its target price based on the inverted head and shoulders pattern, and it is currently experiencing profit-taking activities (Figure 2). This suggests that US stocks might undergo corrections, as traders may lack bullish signals to continue driving up stock prices of big tech names.

Figure 2: NYSE FANG+ Index

Source: uSMART, Tradingview, 26 June 2023

• The S&P 500 has recorded a year-to-date increase of 12.74% (Figure 3), primarily driven by the strong performance of tech-related stocks. However, in June, we are starting to witness a broader market rally across different sectors. Nevertheless, AI optimism seems largely priced in and AI trade seems too crowded at the moment. Tech-related sectors may only have limited upside potential, and a correction seems long

Figure 3: Monthly performance of the S&P 500

Source: Bloomberg, 26 June 2023

• Looking ahead, the probability of a July correction based on seasonality is not high (Figure 4), as observed over the past 20 years. During this period, the average return in July for the S&P 500 has been 2.21%. Additionally, the probability of experiencing a negative return in July is 25%, as the S&P 500 had negative returns in 5 out of the past 20 years.

Figure 4: Monthly performance of the S&P 500 over the past 20 years.

Source: uSMART, Bloomberg, 26 June 2023

• Core CPI, which excludes volatile food and energy prices, experienced a year-over-year increase of 5.3% in May (Figure 5), down from 6.6% in September 2022. However, the core CPI remains at a level that is considered too high for the Federal Reserve's comfort, reinforcing the narrative of higher rates for a longer period.

Figure 5: U.S. consumer price index (Year-over-year percent change through May 2023)

Source: Bloomberg, 26 June 2023

Conclusion:

• Investors should pay close attention to news headlines to gauge whether market participants are becoming concerned about the “higher rates for longer” narrative again. The year-to-date equity market rally was partly driven by dovish monetary policy predictions. In early Jan, market participants expected the terminal rates is close, projected to be around 4.75% to 5%, and subsequently reduce rates by 50 basis points in the November and December 2023 FOMC meetings. However, according to the latest CME FedWatch (Figure 6), market expectations have shifted. The current projection is for the FOMC to raise rates by 25 basis points in the July FOMC meeting, resulting in a terminal rate range of 5.25% to 5.5%, with no rate cuts anticipated for the remainder of the year. Despite this renewed narrative of "higher rates for a longer," the equity market has not yet undergone a correction in response. We still think that the risk of steep correction is high.

Figure 6: FOMC Meeting Probabilities

Source: CME Fedwatch, 26 June 2023

• Earnings are not experiencing a collapse, but there is a need to lower forward profit expectations as they are still unrealistically high.
• We maintain our short-term bearish view and mid-to-long-term bullish outlook. Therefore, it is unwise to completely exit the market. We anticipate that big tech names, which have significantly contributed to the year-to-date rally, will likely play a role in the decline of the S&P 500 in near term. However, we also expect an expansion of market breadth, meaning that while big tech may exert downward pressure on the overall market, other stocks could help cushion the market decline.
• Currently, there are several high-quality companies, such as Apple, Amazon, Visa, Tesla, Costco, and Microsoft, that continue to demonstrate strong long-term EPS growth potential. Investors may consider gradually establishing long-term positions in these companies. Additionally, investors can also explore ETFs like SPY, QQQ, and SUSA to capture some market returns.

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