Sunday, August 19, 2018

Weekly Market Summary

Summary:  US equities have returned to, and in some cases exceeded, their January all-time highs. The trend is clearly higher and several new momentum studies suggest that equities are likely to gain more into year-end.  Recent macro and corporate results data also support the ongoing equity bull market. Despite the gains over the past 5 months, investor sentiment is not frothy.

What's new is that US equities now have a topping pattern in place: the momentum high in January has been followed a price high in August. This is how every major top in the past 40 years has started. On it's own, this doesn't suggest a major top is near. But in January, not even a topping pattern was visible in US stocks. That's no longer true.

Trade war rhetoric continues to provide sharp, interim market volatility. This week, the US and China resume trade talks for the first time in two months.

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Halfway through August, US equities are on pace for a monthly gain of 2-4% (table from  Enlarge any chart by clicking on it.

Tuesday, August 14, 2018

2Q Corporate Results: All-Time High Sales, Profits and Margins

Summary: Overall, corporate results in the second quarter were excellent. S&P sales grew 11%, earnings rose 27% and profit margins expanded to a new all-time high of 11.4%.

Fundamentals are driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself. The strong growth in company profits is not due to the net reduction in shares through, for example, corporate buybacks.

The outlook in 2018 looks solid: the consensus expects earnings to grow 21% this year. Rising energy prices and the tax reform law are tailwinds.

Expectations for 10% earnings growth in 2019 looks too optimistic and will likely be revised downward;  the substantial jump in margins this year is unlikely to be sustained, especially with labor and interest expenses rising.

Valuations are back to their 25-year average. They are not cheap, but the excess from 2017 and early 2018 has been worked off. If investors once again become ebullient, there is room for valuations to expand.

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90% of the companies in the S&P 500 have released their second quarter (2Q18) financial reports. The headline numbers are very good. Here are the details:


Quarterly sales reached a new all-time high, growing 11% over the past year, the best sales growth in 7 years (since 2011). On a trailing 12-month basis (TTM), sales are 9% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.

Friday, August 3, 2018

August Macro Update: Recession Risk Remains Low

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into early 2019 at a minimum. Enlarge any image by clicking on it.

Thursday, July 26, 2018

The Top 5 Stocks Are Big. And They're Outperforming. This Is Normal

Summary:  The 5 largest stocks comprise about 16% of the S&P 500. That's normal. In fact, the importance of the top 5 stocks was far greater in the 1970s than anytime in the past 5 years.

It's true that today's top 5 stocks - known by the acronym FAAMG - have largely outperformed most other stocks. That's how they became today's top 5. Over time, stock indices have typically been driven higher by a small number of stocks. And over time, those leaders have continually changed. This is the story of the stock market. Only one of today's top 5 was also in the top 5 in 2013. At the height of the tech bubble in 2000, the top 5 were companies like GE, Exxon, Pfizer, Citigroup and Cisco.

Right now, most stocks are doing fine: an index in which non-FAAMG stocks have a 99% weighting closed at the second highest level in its history today. It's on pace for a 10% gain in 2018.

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The 5 biggest stocks in the S&P 500 - known by the acronym FAAMG - are equal to the smallest 282 stocks.  Enlarge any chart by clicking on it (from Michael Batnick).

Sunday, July 22, 2018

Weekly Market Summary

Summary:  US equities have gained every month since April, and are up over 3% so far in July. Our long term view remains that SPX will make a new all-time high in the months ahead. That is now just 2.5% away.

The short term is less clear. SPX has gained 3 weeks in a row; most often, these streaks are followed by a higher high without too much interim give back. Sentiment and volatility data mostly supports further gains.

But, while July is typically a strong month, that strength has often been realized by the end of last week. The rest of the month is usually flat, at best, and seasonality is typically a headwind in August and September. Right now, that tendency is further supported by weakening breadth momentum.

Earning data pushes to the forefront this week: 35% of the companies in the S&P will report their 2Q earnings in the next 5 days. The advanced estimate of 2Q GDP will be released Friday.

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US equities rose for a third week in a row this week, although the gains were minor (from  Enlarge any chart by clicking on it.