Weekly Market Update

US equities presented a mixed performance this week. The S&P 500 and Nasdaq experienced declines, while the equal-weight S&P 500 (RSP +0.8%) and the small-cap Russell 2000 outperformed the large-cap index for the third consecutive week. The technology sector, especially the "Magnificent Seven" (MAGS -3.8%) and semiconductor stocks (SOX -3.1%), were the primary drag on the market. Other underperforming sectors included autos and EVs (F -20%), parcels and logistics, travel and leisure, quick-service restaurants (QSRs), payment rails, and entertainment. Conversely, homebuilders, investment banks, regional banks, insurance, life sciences, hospitals, toys, and aerospace and defense (A&D) sectors saw notable gains.

Treasuries mostly firmed, with a steepening yield curve. The dollar index edged down by 0.1%, with yen strength being the significant FX story of the week. Gold dropped 0.8%, while Bitcoin futures rose 1.2%. West Texas Intermediate (WTI) crude for October delivery fell by 2%.

 

WealthTrust Long Term Growth Portfolio Weekly Top 10 | ETF: WLTG

 

 

What Happened?

This week continued the rotation trend seen in recent weeks, with small caps and cyclicals outperforming relative to technology and AI-linked stocks, which saw continued selloffs. The tech sector's decline was fueled by cautious earnings reports from Tesla (TSLA -8.1%) and Alphabet (GOOGL -6%), raising concerns about AI capital expenditures and profitability. Additionally, earnings from Visa (V -2.3%) and Lamb Weston (LW -26.8%) pressured the resilient consumer narrative. The Magnificent Seven have collectively dropped around 13% since peaking on July 10, while the Russell 2000 has gained nearly 10% in the same period. 

The yield curve steepened further, with the 2-year yield falling below 4.40% for the first time since February, and the 2Y/10Y spread narrowing to -13 basis points, the least inverted since July 2022. This steepening has been interpreted bearishly, suggesting market expectations of Fed rate cuts to counteract growing economic headwinds. The latest AAII Bullish Sentiment fell 9.5 percentage points week-over-week to 43.2%, the largest weekly decline since February 2023.

High earnings expectations, seasonal factors, political uncertainty, and cracks in the consumer narrative also contributed to the bearish sentiment.

However, the outlook for Fed rate cuts remains a key component of the bullish narrative. The market increased the odds of rate cuts this week due to disinflation and growth concerns, with the median year-end Fed funds rate down approximately 5 basis points week-over-week to 4.78%, indicating 59 basis points of cuts from the current midpoint. Goldman Sachs economists see a potential for a July rate cut but maintain a September base case, while former NY Fed President Dudley suggested a July cut might already be too late to avoid a recession. BofA analysts, however, cite solid spending growth and strong GDP as reasons for the Fed to be patient, maintaining their call for cuts to start in December.

Other bullish elements include optimism for a soft landing, a fourth consecutive week of US equity inflows, the reopening of the buyback window near month-end, and positive earnings reports highlighting margin improvements from cost-cutting and operational efficiencies. Additionally, the political landscape shifted with President Biden stepping down from reelection and VP Harris gaining traction as the nominee, though a GOP sweep in November remains the most likely outcome, considered bullish by some.

 

Economic Data:

Economic data this week raised growth concerns. The July flash manufacturing PMI unexpectedly fell into contraction territory, though flash services PMI improved slightly. June existing home sales fell to their slowest pace since December, and new home sales since November, despite falling mortgage rates, indicating lower borrowing costs may not be enough to offset weakening demand. The July Richmond Fed Index fell to its lowest level since May 2020. Initial jobless claims and continuing claims improved week-over-week, but initial claims remained at their highest level in nearly a year, and continuing claims since November 2021.

 

Corporate/Earnings Updates:

As the earnings season peaks, with 41% of the S&P 500 having reported, the blended EPS growth rate for Q2 stands at 9.8%, up 0.2 percentage points week-over-week and above the 8.9% expected at the end of the quarter. Around 78% of companies have beaten expectations, slightly above the four-quarter average of 77%. However, earnings beats are averaging 4.4% above expectations, below the 6.5% average over the past year, while the revenue surprise rate is in line with the one-year average but nearly half the five-year average.

 Alphabet's Search and Cloud segment results were a bright spot, causing us to believe the sell off was unwarranted, despite weaker YouTube ad spending and increased focus on capex ramp and depreciation. Tesla's revenue beat was attributed to unexpectedly large regulatory credit sales but weakening auto margins and AI scrutiny disappointed investors. Visa missed expectations, citing a July spending slowdown and moderating lower-end consumer spending. Lamb Weston blamed weak frozen potato demand on menu price inflation impacting global restaurant traffic. Chipotle (CMG -6.9%) noted weaker trends into Q3 due to holiday timing and Texas storms, while higher protein costs, a positive for Tyson Foods, weighed on margins. Luxury goods companies LVMH and Kering results raised fears of a consumer slowdown spreading to wealthier households.

Other key themes included positive AI takeaways (IBM +4.6%), airline capacity headwinds (AAL +0.4%, LUV +0.2%), big-ticket spending (BC +2.6%, WHR -5.8%), cost efficiencies (SPOT +9.1%), and cautious takeaways from some industrial bellwethers (UPS -11.3%, PCAR -8%, HON -5.5%). GLP-1 makers (LLY -6.2%, NVO -3.7%) faced pressure after Viking Therapeutics (VKTX +29.6%) announced its weight-loss drug advanced into Phase 3 development.

 

Week Ahead:

The July FOMC meeting concludes Wednesday (31-Jul) with the release of the policy statement and Chair Powell's press conference. Previews suggest the policy statement may no longer mention "elevated" inflation, with Chair Powell potentially signaling that inflation is sustainably moving toward the Fed's target, indicating cuts might begin in September.

 Labor market data will be in focus next week. The June JOLTS report on Tuesday is expected to show job openings down to 8.0 million, the lowest since April and the second lowest since February 2021. Wednesday's data includes July ADP private payrolls, expected to rise by 4,000 month-over-month to 154,000. Friday's July nonfarm payrolls report is expected to show a deceleration from June's 206,000 to 177,000, with the unemployment rate expected to hold at 4.1%, and average hourly earnings expected to remain at 0.3% month-over-month and 3.9% year-over-year.

 Other data includes Tuesday's July Consumer Confidence, expected to slip to the lowest level since April, and Wednesday's June pending home sales report, expected to show a 5% rebound from May's series low. Thursday's July ISM Manufacturing report is expected to hold at 48.5.

 

S&P 500 Sector Performance:

• Outperformers: Utilities +1.47%, Materials +1.37%, Healthcare +1.35%, Financials +1.28%, Industrials +1.14%, Consumer Staples +0.54%, Real Estate +0.54%, Energy +0.24%
• Underperformers: Communication Services -3.76%, Technology -2.44%, Consumer Discretionary -2.32%

 

As we navigate this complex investment landscape, we will continue to leverage our diversified portfolio strategy to manage risks and capitalize on emerging opportunities.