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Stocks ended lower on Friday, as early gains were eroded by growing concerns about political uncertainty after the US presidential debate. Moreover, the initial reaction to the lower-than-expected PCE inflation rate was very positive, but became less of a concern later in the day. Federal Reserve members have emphasized on multiple occasions that inflation needs to fall consistently for several months before implementing interest rate cuts. Thus, while a clear deceleration in inflation is a very positive sign, the timing and pace of monetary policy easing remains uncertain.
Strong month, quarter and year to date
S&P 500 (Spocks) fell throughout the week, ending a three-week streak of gains.DJIA) and Nasdaq 100 (Nedix) also recorded a small weekly decline, while the Nasdaq Composite Index (NDAQDespite the turmoil, the major indexes ended June with healthy gains, with the SPX and Nasdaq holding near all-time highs.
Stock indexes also finished the first half of the year on a strong note, with the S&P 500 up 14.5%, the Nasdaq Composite up over 18% and the Dow Jones Industrial Average up nearly 4%. Additionally, the broad market index SPX hit a new monthly record in June, marking its seventh positive finish in the past eight months.
Short term pain, long term gain?
While stocks are overbought and overvalued amid ongoing economic and political uncertainty, the strong first-half performance suggests further gains are possible. Statistically, since 1954, every year in which the S&P 500 has posted double-digit gains in the first half of the year has seen the index finish the year higher. In those years, the SPX has averaged an annual gain of 25%.
However, further disruption is expected in the near term as companies enter a period of no-buyback activity prior to earnings releases. By the end of this week, companies representing more than 70% of the S&P 500’s market capitalization will be required to refrain from discretionary share buybacks ahead of the second-quarter earnings season. A temporary erosion of buyback support could increase market sensitivity to downside risks.
Is this the start of a giant slalom?
Analysts don’t seem surprised by the recent selloff, pointing to profit-taking in stocks that have seen big gains over the past few months, which is why the recent selloff has been mostly concentrated in big technology stocks. Still, despite some of the big and mega-cap tech market leaders stumbling over the past two weeks, the IT sector continued to lead the market in June and topped the quarterly and year-to-date gain charts.
NVIDIA is said to be responsible for 30% of the S&P 500’s gains this year.NVDAAlphabet Inc.’s shares have soared this year, adding more than $1.8 trillion to the AI darling’s market capitalization. Optimism about artificial intelligence is set to continue to boost shares into 2024, despite a declining outlook for Fed interest rate cuts.Google), Meta (Meta), Netflix (NFLX) – has closed in on the Technology sector’s lead this year.MSFT) and Amazon (Amazon), these tech giants have accounted for more than 50% of the SPX’s gains this year.
However, last month saw a notable rotation among some of this year’s laggards, with real estate, energy and financial sectors regaining their luster. This week, we may see more inflows into these sectors as investors realign their positions in the aftermath of the debate between Donald Trump and Joe Biden. Incumbent Biden’s weak performance in the debate increased the likelihood of a Trump victory, making stocks in sectors that stand to gain if he wins the election more attractive. However, this does not necessarily mean that tech stocks will suffer, as they have become an “all-weather” investment theme in recent years.
Markets brace for jobs data
Meanwhile, economic data continues to show mixed signals. Revised GDP figures for the first quarter of 2024 were slightly stronger than expected but still reflected a significant slowdown from the fourth quarter. Consumer spending grew less than expected in May, but personal income grew faster than economists had previously expected, buoyed by stronger-than-expected consumer sentiment in June.
Combined with the slowdown in inflation, this data paints a picture of the economy heading for a “soft landing,” raising the possibility of a rate cut in September. However, this picture is missing a key element due to be released this Friday: a crucial job market report that will also include income growth data. Although consumers are feeling the pressures of inflation and high interest rates, they will continue to spend as long as their incomes are growing. Therefore, some evidence of a softening labor market is needed to support the expectation of a rate cut in September.
Stocks in the news
¤ Tesla (TSLA) shares have risen 7% over the past week, topping $200 for the first time in three months, as investors shore up positions in the electric vehicle maker’s shares ahead of second-quarter delivery results and a forthcoming earnings report.
¤ UnitedHealth (United Nations University) and Humana (ham) was the best performing health care sector, as managed-care companies are seen as some of the biggest beneficiaries of a second term for President Trump.
¤ Citigroup (C) shone last week, even as big financial institutions breezily passed Federal Reserve stress tests, paving the way for higher dividends and increased share buybacks. Citigroup Inc. shares were further boosted by rising investor flows into the stock, which has lagged larger companies over the past year.
¤ Nike (NKEShares in the Dow Jones Industrial Average fell 22%, making it the worst performing stock in the Dow Jones Industrial Average for 2024, after tech giant Ford unexpectedly forecast a decline in fiscal 2025 revenue, citing a tough consumer spending environment. Retailers in the discretionary goods sector have warned about slowing spending. Nike’s weak earnings and guidance are a further warning sign.
¤ FedEx (Falcon) shares soared about 18% this week after the delivery service company reported sales and profits that beat analyst expectations and also reported a bright outlook for fiscal 2025.
Future earnings and dividend announcements
Although the first quarter 2024 earnings season is over, several earnings reports are still scheduled for this week, most of which are from companies whose fiscal years are different from the calendar year. Notable earnings reports this week include Constellation Brands (Steady).
This week is the ex-dividend date for Realty Income (oh), Cardinal Health (C.A.H.), Comcast (CMCSA), Campbell’s Soup (CPBA (US Consumer Product Safety Commission)), Cisco Systems (Central Intelligence Agency), JPMorgan Chase (JPM), and other dividend-paying companies.
For exclusive market insights and content from TipRanks Macro & Markets Research Analyst Yulia Vaiman, click here.
