The Weekend Edition # 141 - US Earnings - Early, and a Mixed Picture

Welcome to another issue of the Weekend Edition!

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Here's what we cover

• Market Recap - Caution Ahead

• Earnings - Early, and a Mixed Picture

• Closing Thoughts - Hedging and De-risking

• Calendars

Market Recap - Caution Ahead

July 15 - July 19, 2024

We certainly had a busy week, mixed with politics, central bankers, and de-risking.

Coming into the week, there was an assassination attempt on Former President Trump. This actually led to increased odds of his winning the presidential elections (now at about 66%).

President Biden made an announcement of his own - getting Covid, yet again. Nevertheless, he’s determined to return to the campaign trail next week. There was some chatter about VP Harris being a potential candidate if health issues prevent the President from running.

We also had the Republican National Convention, where Trump was confirmed as the party’s nominee and he chose Senator JD Vance as his VP nominee. The market seemed to like this announcement and the earlier part of the week was dominated by the Trump 2.0 trades - Higher Industrials, Small Caps, and Bitcoin. We questioned the small cap rally, earlier in the week on Breakfast Bites and it wasn’t long before they showed their true colors.

We also mentioned July 17 as being an interim top for the market as we enter the window of weakness. This was also Vix expiration and right on cue, the market started selling off. It was also OpEx week, a time when the supportive flows can often get dicey.

On a technical basis, the Nasdaq is now closest to the 50-day moving average. Moving below this level, could see price action move a fair bit lower.

Goldman’s Prime Book tells us that this week we saw the largest notional net selling in US Single Stocks since March 2022. 9 of the 11 S&P 500 sectors were “(sans Consumer Disc and Comm Svcs), led by Info Tech, Health Care, Financials, and Energy.

Commodities

Commodity Prices have been largely supported throughout the week, although Friday brought us some intense selling in oil and precious metals, two sectors that have been doing quite well in the last couple of weeks.

We don’t think this is necessarily a rotation out of these, but rather a breather from the intense price action.

For Crude Oil, we continue to see price being supported throughout the summer as supplies remain relatively weak and backwardation 12 months out shows contracts widening, i.e., a tightening market balance. Long positions also continue to increase while short positions are being covered. And in terms of equities, we’re seeing a rotation out of tech and into energy.

Earnings - Early, and a Mixed Picture

Earnings season is seemingly off to a great start with blended YoY EPS growth of 9.7%, after 14% of the S&P 500 has reported. The blended growth takes what’s been reported and blends it with estimates for companies that have not reported as yet.

We got some major Large Cap earnings this week with more to come next week. I wanted to cover some of the lesser followed companies though and what they had to say about the economy.

PPG, a global supplier of paints, coatings, and specialty materials, delivered disappointing guidance.

• Global industrial activity remained subdued in the second quarter, and despite entering the peak buying season, the actual growth did not meet expectations.

• Sluggish global auto OEM production was another significant factor. The situation in the automotive sector, combined with other factors, can be seen as an indicator of weaker economic conditions but, the CEO didn’t think a recession was imminent.

We heard from Cintas, a company that provides uniforms, cleaning and safety supplies.

• The company delivered great results and the market took it positively. Cintas' results serve as a barometer for business confidence among small and medium-sized enterprises.

• High retention rates and robust new business suggest SMEs are maintaining or expanding their workforce and operational needs.

• Even though they talked about challenging economic conditions, it would seem that many small businesses are navigating the environment thus far.

We then heard from the major integrated trucking company, J.B. Hunt.

• They missed earnings for the 7th consecutive quarter, with negative revenue growth since 4Q22 due to weak demand. It’s no secret that goods demand has been retreating - we can see it in the inflation numbers.

• The truckload market suffered from unsustainable pricing and excess supply, significantly impacting performance.

• CEO Shelley Simpson noted significant economic challenges, with increased competition and ongoing cost pressures from long-term investments affecting margins and overall performance.

And finally, we heard from the biggest homebuilder in the US, D.R. Horton, who delivered a double beat and announced a $4B buyback program.

• Limited supply and favorable demographics continue to support housing demand despite high inflation and mortgage rates

• High interest rates have made home affordability a challenge, leading D.R. Horton to use incentives like mortgage rate buydowns and price adjustments

• Homebuyer demand remained strong during the spring, with D.R. Horton well-positioned with 42,600 homes in inventory and a $380,000 average selling price

Earnings Next Week

After Netflix and some of the industrials, we are seeing some profit taking ahead of earnings. Revenue growth for the Mag 6 is set to slow on a rate of change basis and according to GS, so is earnings.

We have a huge number of Dow components reporting earnings next week. Last week, we saw JPM, GS, JNJ and UNH pull up the DJIA - with many asking if this was the great rotation that we were looking at. I suspect most of it was earnings and we’ll see some of the rebalance next week.

Closing Thoughts - Hedging and De-risking

A few issues hit tech hard this week. Firstly, the announcement that there would be more restrictions on chips, particularly in China. Taiwan Semi’s earnings results managed to lift the sector a little bit, but we saw selling resume on Friday. Secondly, we saw the global outage on Friday because of a Crowstrike update that interfered with Microsoft-based computers. Finally, we also saw Netflix earnings, which seemingly failed to impress investors too much.

All in all, we’re seeing risk unwinding and some of the risk-off trades dominate now. We also have this window of weakness in the second two weeks of July and the first two weeks of August. Last year, we saw an extended period of this weakness into October.

Yesterday I got a call from a friend telling me she’s exiting some her positions because of the intense selling in chip stocks. Her picks were up significantly and she didn’t want to lose the profit she had. So starts the panic. The moral of the story: Selling begets selling.

It’s not the same across the board but when you have a significant proportion of retail traders who are buying on catalysts and hunches (think, links to AI), this is what happens. Goldman’s Prime Book has also quoted a lightening in AI trades and some profit-taking there.

We’re also likely to start seeing hedges come on in portfolios. Something to think about!

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

Calendars

US Earnings Calendar - Above under earnings

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.