August 4th - Weekly Commentary

John McHugh |

 

This week, the US equity markets experienced volatility, with the Russell 2000 and Nasdaq indices underperforming compared to their major counterparts. Despite this, the equal-weight S&P 500 index managed to outperform the official S&P 500 index. Concerns over US economic growth significantly impacted recent rotations into small caps and value/cyclical segments of the market.

In the tech sector, notable performances included Amazon (AMZN) down 8.0% and Microsoft (MSFT) down 3.9% due to underwhelming earnings reports. However, Meta Platforms (META) stood out with a 4.8% increase. The semiconductor index (SOX) fell by 9.7%, (which we significantly reduced our positions) with other significant underperformers being tech hardware, auto parts (Goodyear Tire -23.5%), banks, apparel retailers, hotels, transports, machinery, and energy equipment. On the other hand, utilities, REITs, pharmaceuticals, consumer staples (Kellogg +9.6%), quick-service restaurants (McDonald's +9.8%), waste management, gold miners, and insurance brokers showed relative outperformance.

In the bond market, treasuries strengthened with yields declining sharply across the curve, and the 2/10 spread reached its least inverted level in over two years. The Dollar Index fell by 1%, with the yen's strength post-Bank of Japan being the main story in the foreign exchange market. Gold rose by 3.7% over the week, while crude oil declined by 4.7% due to soft demand from China and concerns over US economic growth overshadowing Middle East tensions.

 

WealthTrust Long Term Growth Portfolio Weekly Top 10

 

Market Sentiment and Economic Indicators

Investor sentiment turned negative this week, primarily driven by concerns about growth and a potential recession. This shift was exacerbated by weak employment and manufacturing data, including disappointing nonfarm payrolls report and a spike in unemployment. Despite increased expectations for Federal Reserve rate cuts, growth fears remained. 

However, there were positive developments as well. The Federal Reserve's FOMC decision had dovish undertones, with the blended Q2 S&P 500 earnings growth rate improving to +11.5% year-over-year. Meta's guidance exceeded consensus due to AI tailwinds, and Amazon's AWS results provided positive takeaways.

 

Employment Data

Employment data was a focal point this week amid fears of a growth slowdown. The July nonfarm payrolls increased by 114,000 month-over-month, falling short of the consensus of 175,000 and June's downwardly revised 179,000. The unemployment rate rose to 4.3%, above the consensus of 4.1%, triggering the recession-predicting Sahm Rule. This report came after jobless claims reached their highest level in nearly a year, and the July ISM Manufacturing Survey remained in contraction territory. Despite the weak jobs report, June's JOLTS job openings decreased but still exceeded expectations. July's consumer confidence aligned with expectations, though concerns about inflation persisted.

 

Federal Reserve and Economic Outlook

The Federal Reserve's July FOMC decision left interest rates unchanged, with no explicit indication of a rate cut in September, although it seems likely. The meeting saw dovish changes, with Fed Chair Powell noting increased confidence among policymakers and the possibility of a rate cut as early as September. The FOMC statement described inflation as only "somewhat elevated." Analysts interpreted these changes as the Fed indicating that risks to both inflation and employment have become more balanced. Some analysts, including JPM's Feroli, suggested that the Fed might act before September, although Chicago Fed's Goolsbee emphasized the need for more data before making decisions.

 

Geopolitical Tensions

Middle East tensions resurfaced this week following the assassination of Hamas political leader Ismail Haniyeh by Israel, followed by the killing of a Hezbollah commander in Beirut. Reports suggested that Iran's supreme leader ordered a direct strike on Israel in response. While oil prices initially rose over 5% on the news, gains faded amid the unlikelihood of supply disruptions and new US growth concerns. OPEC+ left its policy unchanged at its latest committee meeting, disappointing some who hoped for a cut extension amid weak demand from China.

 

Corporate Earnings Highlights

With 75% of the S&P 500 companies having reported, the blended EPS growth rate for Q2 stands at 11.5%, up from 9.8% last week. Approximately 78% of companies have reported positive EPS surprises, while 59% have reported positive revenue surprises.

 

Notable earnings this week included:

  • Microsoft (MSFT) down 3.9% with mixed fiscal Q4 results and Q1 guidance below consensus.
  • Meta Platforms (META) up 4.8% with Q2 revenue and EPS beating expectations, driven by healthy ad demand.
  • Apple (AAPL) up 0.8% with slightly better-than-expected results and guidance ahead of the iPhone 16 launch.
  • Amazon (AMZN) down 8.0% with AWS performance beating expectations but Q3 operating income guidance falling short.
  • Intel (INTC) down 31.5% due to a miss, weaker guidance, and dividend suspension.
  • McDonald's (MCD) up 9.8% despite missing Q2 comps, revenue, and EPS, with results better than feared.

Other notable earnings included Procter & Gamble (PG), Pfizer (PFE), Merck (MRK), Stanley Black & Decker (SWK), Advanced Micro Devices (AMD), Boeing (BA), Starbucks (SBUX), Moderna (MRNA), MGM Resorts (MGM), Carvana (CVNA), Shake Shack (SHAK), and Humana (HUM).

 

Looking Ahead

Next week, key macro events to watch include the July PMI Composite, June Consumer Credit, and Jobless Claims. Notable earnings reports include Tyson Foods (TSN), Berkshire Hathaway (BRK.B), CSX, Diamondback Energy (FANG), Palantir Technologies (PLTR), Simon Property Group (SPG), Caterpillar (CAT), Constellation Energy (CEG), GlobalFoundries (GFS), Jacobs Engineering Group (J), Marathon Petroleum (MPC), Uber Technologies (UBER), Kellogg (KLG), Yum! Brands (YUM), Airbnb (ABNB), Amgen (AMGN), International Flavors & Fragrances (IFF), Rivian Automotive (RIVN), Super Micro Computer (SMCI), Toast (TOST), Wynn Resorts (WYNN), CVS Health (CVS), Global Payments (GPN), Hilton Worldwide (HLT), Lyft (LYFT), Ralph Lauren (RL), Rockwell Automation (ROK), Shopify (SHOP), Valvoline (VVV), Walt Disney (DIS), Bumble (BMBL), CACI International (CACI), Duolingo (DUOL), Dutch Bros (BROS), Guardant Health (GH), Marathon Oil (MRO), McKesson (MCK), Occidental Petroleum (OXY), U-Haul (UHAL), Warner Bros. Discovery (WBD), Zillow Group (ZG), Datadog (DDOG), Parker-Hannifin (PH), TKO Group (TKO), Viatris (VTRS), Vistra (VST), e.l.f. Beauty (ELF), Expedia (EXPE), Gilead Sciences (GILD), Monster Beverage (MNST), News Corp (NWSA), Paramount Global (PARA), and Take-Two Interactive (TTWO).

 

Sector Performance

This week, the S&P 500 sector performance was as follows:

  • Outperformers: Utilities +4.29%, Real Estate +2.78%, Communication Services +1.26%, Consumer Staples +1.16%, Healthcare +0.65%, Materials -1.39%
  • Underperformers: Consumer Discretionary -4.28%, Technology -4.03%, Energy -3.75%, Financials -3.03%, Industrials -2.79%

 

Thank you for your continued trust and support. We will keep monitoring these developments closely and provide you with timely updates.