US Macro Strategy Weekly Report – 17 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 primary emphasis is on the release of several significant economic indicators. On Monday, attention will be on the Empire State Manufacturing Index. Tuesday will be dedicated to the release of Retail Sales figures. Building Permits will be the focal point on Wednesday. Finally, Thursday will bring the focus to Unemployment Claims and Existing Home Sales data.
• Several companies will be publishing their financial reports this week:

July 18 (Tuesday): Bank of America, Charles Schwab, Morgan Stanley, Interactive Brokers

July 19 (Wednesday): ASML, Goldman Sachs, Netflix, Tesla, IBM, Las Vegas Sands

July 20 (Thursday): TSMC, American Airlines Group, Johnson & Johnson, United Airlines, Abbott, Intuitive Surgical

July 21 (Friday): American Express

• Last week, the S&P 500 and Nasdaq-100 closed 2.4% and 3.5% higher, respectively. The main reason for this increase was the lower-than-expected inflation data, including the Consumer Price Index (CPI) and the Producer Price Index (PPI). These encouraging inflation reports have led investors to anticipate a final 25 basis point (bp) interest rate hike in the upcoming July FOMC meeting.
• As FOMC officials have entered the blackout period, the market's focus will now primarily be on earnings releases.
• Morgan Stanley strategist Michelle Weaver said last year that every percentage point increase in the dollar on a Y/Y basis provides an approximately 0.5% hit to S&P 500 EPS growth.  The decline in the US dollar index by 12% after it reversed in October 2022 had a significant impact on the S&P 500 (Figure 1). As a result of improved EPS expectations, the S&P 500 experienced a reversal and subsequently saw a sharp rise. Going forward, it is crucial for investors to keep a close watch on the potential recovery of the US dollar, as it may have the potential to reverse the current uptrend in the S&P 500.

Figure 1: S&P 500 vs US Dollar Index

Source: Factset, 17 Jul 2023

• While last year proved to be a challenging one for the S&P 500, with a negative return of 18% in 2022 and multiple drawdowns exceeding 10%, the investment landscape in 2023 has also been quite demanding. Throughout most of 2023, the S&P 500 generally exhibited upward momentum, except for the month of February, which experienced a decline of 2.6%(Figure 2). there were fewer and smaller corrections, making it more difficult for investors to find opportunities to enter the market. Additionally, market breadth has been narrow, with a handful of dominant companies known as the 'Magnificent Seven' (Microsoft, Apple, Alphabet, Nvidia, Meta Platforms, Amazon, and Tesla) contributing to over 80% of the index's overall gain in the S&P 500.
• Tech-related sectors such as consumer discretionary, technology, and communication services have experienced impressive returns of 36%, 42%, and 40%, respectively. These gains can be attributed primarily to optimism surrounding the Federal Reserve's interest rate outlook. A lower discount rate leads to a higher present value.

Figure 2: S&P 500’s Sector Monthly Performance

Source: uSMART, Bloomberg, 17 Jul 2023

• The NAAIM Exposure Index is currently at 93.34 and is showing signs of potentially surpassing 100 in the near future. The last time NAAIM exceeded 100 (27 Oct 2022: 103.35), it took a full two months until the week of 29 Dec 2022 for the S&P 500 to reach its peak and subsequently enter a bear market. While more investors will begin monitoring the future movements of the NAAIM exposure index, it is important to recognize that the S&P 500 may not immediately undergo a correction once the NAAIM index reaches 100.

Figure 3: NAAIM Exposure Index and S&P 500

Source: NAAIM

• Investors should closely monitor the second-quarter earnings season as even a slight disappointment in earnings could potentially trigger a correction in the current bull market. Additionally, there are headwinds to consider, such as persistent inflation and stretched valuations. Despite these factors, there is a prevailing optimism among AI bulls, who remain enthusiastic and continue to push the market higher, seemingly ignoring the associated risks. If second-quarter earnings exceed expectations, it is anticipated that this will further fuel bullish sentiment, with expectations of even better subsequent quarterly earnings, providing additional reasons to maintain a positive outlook.

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