Carlsquare weekly market letter: Two-sided market with internal rotations, but trend still positive

• The sudden fall in the stock market two weeks ago made people aware of the risk in the market. There were a lot of analysts out there talking about the market continuing to fall. But as is often the case, the market goes where the most people are hurt
• The overall trend is up but be aware that we are entering the seasonally weakest part of the year. A further pullback in the September-October period is on the cards, but this could also provide another buying opportunity
• A rapid fall in the USD and interest rates is driving the market, giving a further boost to precious metals and rate sensitive stocks such as property

The magnificent seven continued to lead the market until two weeks ago when the Bank of Japan decided to raise interest rates. This led to a sell-off in the global market, with the magnificent seven taking most of the brunt. It seems easy to conclude that investors are borrowing money in Japan at ultra-low rates and investing it in high-growth US companies. The reality is probably much more complex, but the result has been a sell-off in the market. Positioning in the Japanese yen has now melted away. Looking at the broader charts, we are back to where we were before the turmoil.

In the monthly chart of the S&P 500 above, the recent pullback is difficult to see.

If we take a step back, we can see that the market has moved from being driven by fear of higher interest rates. To a market where people are speculating on lower interest rates, particularly in the US. That is driving the US dollar down. It is very important to understand that we may now be moving into a USD-driven market. This is good news for investors in the equity market. The only thing you must look at is the USD. When the USD goes up, the stock market goes down. And when the USD goes down, the stock market goes up.

Keep an eye on the 100 level in USD!

From this perspective, it is easy to see that the US presidential election may not have any impact on the stock market. Both Donald Trump and Kamela Harris talk about increased spending. Trump even talks about taking more control of the Fed (implying that he himself would be better at managing monetary policy than the Fed).

Lower interest rates and more spending in the US means a weaker USD as the US must borrow more money. To balance this equation, we expect the Fed to be more accommodative as well.

What we see now is that the Fed is reducing liquidity in the market (blue line). This must be corrected somehow. We expect the Fed to pick up the tab at some point and start buying US bonds again. For now, interest rates are moving in the right direction, which is supportive of the equity market.

The Fed is still in the spotlight and will remain so for the foreseeable future. The next big event will be Fed Chairman Jerome Powell’s speech in Jackson Hole on 25 August. Historically, Fed chairmen have used this opportunity to massage the market. This has been less the case in recent years, so we don’t expect too much this year. Powell may play the low ball until the next US president is elected. (There will also be some interesting FOMC minutes today from the last Fed meeting).

There is plenty of room for turbulence in the months ahead. Remember, for example, that September is usually the worst month of the stock market year.

But there is a lot of rotation in the market, which shows that the risks are still there – and so are the opportunities.

It is very unusual for performance to vary so much between global markets.

The market continues to be driven by the big cap names, leaving smaller companies behind.

Property companies are benefiting from a shift in the bond market, where people are speculating that interest rates will fall rather than rise. Above is Vanguard’s ETF on the property market.

It is also positive to see that the life sciences sector continues to perform well in a presidential election year. Normally this is a headwind for the sector as presidents usually talk about cutting costs in the pharmaceutical sector. The two candidates currently in the race seem to be focusing on spending instead.

Both real estate and pharmaceutical companies have reported positively. Read more below.

Gold continues to climb to new all-time highs. We have been positive on the sector for a very long time.

GDX is also on the rise.

Note that the leading companies are the pharmaceutical companies, not the companies that sell large instruments to hospitals.

Happy trading!

Solid Q2 2024 earnings growth for S&P500 companies

As of Friday 16 August 2024, approximately 465 S&P 500 companies (93% of all companies) have reported their Q2 2024 results, according to Earnings Insight. 79% have reported positive earnings surprises, while 60% have reported positive revenue surprises. On average, the equity market has rewarded positive earnings surprises from S&P 500 companies in Q2 2024. Meanwhile, the market has punished negative earnings surprises more than average.

The best-performing S&P500 sectors in terms of Q2 2024 earnings have been Health Care with 86%, Real Estate with 84% and Industrials with 81% beating the earnings estimates. Meanwhile, Communication Services, Consumer Staples and Consumer Discretionary are the worst performers, with only 73%, 71% and 70% of Q2 2024 earnings surpassing expectations.

The average earnings growth rate for S&P 500 companies in Q2 2024 is 10.9% as of 16 August, which is a solid figure far from a recession scenario for the US economy. This is since an average S&P500 company attain around 60% of its revenues from North America. For Q3 2024, the analysts project a 5.2% earnings growth and a 4.9% revenue growth for all S&P50 companies.

Healthcare temperature rising

The Health Care sector performed better than any other S&P500 sector in terms of Q2 2024 earnings outcome versus expectations. As you can see from the charts below, there are several Big Pharma companies where the stock performed strong following good Q2 2024 reports. We have plotted the percentage return in the month before the report compared to the percentage return after the report to date.

Eli Lilly is benefiting from strong growth, and advances in clinical development, for its portfolio of diabetes and obesity drugs. We think Eli Lilly looks attractive as the stock has risen strongly since the report and there has been negative news flow from BioArctic, BioGen and Eisai. Merck fell on an unexpectedly weak outlook for one of their vaccines in the China market. Bristol Myers was more of a better-than-expected character as they have a relatively mature portfolio of pharmaceuticals with rather low growth.

Nvidia will report its Q2 2024/2025 results on 28 August. This is likely to be a key determinant of investor sentiment in the near term. In 2024, Nvidia’s roughly 150% gain explains about half of the Nasdaq 100’s year-to-date gain, underscoring the importance of this single name for the technology sector and the broader stock market.  Extraordinary demand for Nvidia’s GPU computing equipment has led to rapid growth, with sales expected to have more than doubled in the May-July quarter. Nvidia also has a history of beating consensus earnings estimates.

Disclaimer:

The information in this presentation is based on what the publisher, Carlsquare, believes to be reliable sources. However, we cannot guarantee its content. Nothing in the presentation should be construed as a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the presentation are for the recipient’s use only. The contents may not be copied, reproduced, quoted, or distributed to anyone else. Carlsquare shall not be liable for any loss arising from any decision taken based on the information contained in this presentation. Past performance should not be taken as an indication of future results. Changes in foreign exchange rates may affect the value, price or income of an investment made abroad or in a foreign currency.

The analysis is not directed at U.S. Persons (as that term is defined in Regulation S under the United States Securities Act and interpreted in the United States Investment Companies Act of 1940), nor may it be distributed to such persons. The analysis is not intended for natural or legal persons where the distribution of the analysis to such persons would involve or entail a risk of violation of Swedish or foreign laws or regulations.