US Macro Strategy Weekly Report – 11 July 2023
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, the key focus is on the release of Consumer Price Index (CPI) on Wednesday, Producer Price Index (PPI) data and initial jobless claims on Thursday. The market's attention is firmly fixed on inflation data, with expectations that the year-on-year inflation rate will continue to moderate. Currently, there is little doubt about the 25 basis points interest rate hike scheduled for July 26th, and the focus will shift towards the interest rate trajectory after September.
- Earnings season officially begins this week. Banking stocks, including JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and BlackRock (BLK), are set to release their quarterly earnings reports. In addition, other notable companies such as UnitedHealth Group (UNH), PepsiCo (PEP), and Delta Air Lines (DAL) will also be reporting their important financial results.
- S&P 500 faces moment of truth. According to FactSet (Figure 1), earnings are expected to decrease by 7.2% in Q2 compared to the same period last year. If this 7.2% year-on-year decline indeed materializes, it will mark the largest drop in earnings reported by the S&P 500 index since Q2 of 2020, which experienced a decline of 31.6%. Interestingly, the estimated earnings decline for the S&P 500 in Q2 2023 has increased to -7.2% from -6.9% during the past week. This increase lends support to our earlier argument that the expectations for corporate profits remain excessively high.
Figure 1: S&P 500 Earnings Growth: Q2 2023
Source: Factset, 7 Jul 2023
- S&P 500’s year-to-date return is 14.85% (Figure 2), but it has experienced a negative return of -0.92% in July thus far. The strong performance of the index has been primarily driven by technology-related stocks. The final week of July poses a significant test as major tech giants such as Microsoft, Google, Meta, and Intel are scheduled to announce their earnings during that period.
Figure 2: S&P 500 Sector Performance
Source: uSMART, Bloomberg, 10 Jul 2023
- The NASDAQ-100 and S&P 500 have maintained their outperformance this year, but they have diverged from the movement of the inverted US 10-year bond yield (Figure 3). Typically, higher yields will hurt equity valuations, leading to a decline in equity prices. However, investors remain optimistic about AI, resulting in a bullish market sentiment. Nevertheless, we anticipate a correction as we believe that the optimistic outlook for AI and earnings expectation has already been excessively priced in.
Figure 3: Nasdaq-100 Vs S&P 500 Vs 10-year Bond Yield
Source: Bloomberg, 11 Jul 2023
- Recently, the bears have been retreating, as evidenced by E-Mini S&P 500 Net Non-Commercial Futures Positions (Figure 4). It indicates a rapid unwinding of short positions in S&P 500 index futures. If the bears switch to bulls, it will provide upward momentum for the US stock market in the second half of the year.
Figure 4: E-Mini S&P 500 Net Non-Commercial Futures Positions
Source: Bloomberg, 11 Jul 2023
- The Nasdaq 100 has announced plans for a special rebalance in order to reduce the dominance of the 'Magnificent Seven' - Microsoft, Apple, Alphabet Inc., Nvidia Corp., Meta Platforms, Amazon.com Inc., and Tesla Inc. - which currently account for over half of the index's weight. According to the Nasdaq methodology paper, a rebalancing will be implemented to decrease the group's influence to 40%. The specific changes in weighting will be announced on Friday, July 14. The special rebalance of the Nasdaq 100 will be carried out before the market opens on Monday, July 24. The mentioned plan may trigger some selling of the mentioned stocks.
- I remain short term bearish as both the S&P 500 and Nasdaq-100 have recorded year-to-date gains primarily driven by PE expansion.
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