Carlsquare Weekly Market Letter: Christmas has come early for stock traders this year
9 okt 2024
- With US equities still at all-time highs, even as China falls over, there is a lot of rotation going on below the surface.
- We stick to our view that China is still a valid play, but if we could have one wish it would be for the market to pause and make way for the real Santa Claus rally
- In the US, the third quarter-reports have already started to come in. They have generally been better than expected, with 79% of the US companies beating analysts’ forecasts. Typically, the rhythm of the earnings season is a bit of weakness at the start and volatility as financials report. With tech leading the way in recent years, the market tends to shake off and regain lost momentum as tech stocks start to deliver. Nvidia, Apple and Microsoft may still be the most important to follow
- It remains a trader’s market!
- We will be taking a break from the market due to travel and will be back in a couple of weeks
Since we wrote our weekly letter on 25 September and talked about the opportunity in China, the Chinese stock market, as measured by the Shanghai Stock Exchange, has risen by 25%. However, there has been a lot of turbulence in the last two days, with both indices giving up a lot of returns.
The fall came when the Chinese government held another press conference, preceded by speculation about the size of the second package. The disappointment was huge when the result was zip, zero, no news.
China still has some lessons to learn about how to nurture the market. It is not good for stability if you launch a big stimulus package and then let the market go a-hoc and over-speculate on your next move, you will create a lot of volatility.
But as Jack Nicholson learns in Chinatown, you never know what is really going on in Chinatown. “Forget it, Jake, it’s Chinatown,” as a famous line from the film goes.
Anyway, with China back on the Silk Road with increased stimuli, they must follow the path. Otherwise, it would cause internal unrest in China, which is the last thing the government wants. The whole market will then get positive energy from China.
We are still in the weakest period of the year if you look at seasonality. As the chart above shows, the S&P 500 usually goes down in September. If the decline does not occur in September, it usually occurs in October. October tends to be the low point of the year, before the traditional Christmas rally can begin.
The big exception can be a US presidential election year, when the market does not have this setback. So we have to take it one day at a time. Usually the market gets some weakness in the days before the election, but then the market goes up, whoever wins as a big risk factor goes out of the market.
Looking at this year’s election from a strict stock market perspective, there is not much difference between the two candidates. They are both very interested in spending, so whoever wins, we expect liquidity to increase and the US budget deficit to continue to rise.
The reports for the third quarter has also started to come.
For Q3 2024 (with 21 S&P500 companies reporting), 16 companies have reported positive earnings surprises, and 14 companies have reported a positive sales surprise. This corresponds to 76% positive earnings surprises and 67% positive sales surprises so far.
Wall Street analysts expect earnings growth of 4.2% for S&P500 companies in Q3 2024, down from 7.8% on 30 June 2024, but still the fifth consecutive quarter of positive earnings growth. In addition, earnings growth of 14.6% is expected for Q4 2024.
Percentage of S&P500 Q3 2024 earnings and revenues vs expectations as of 4 October
The following table shows 16 major US companies that have reported quarterly results since 24 September, along with the actual and expected EPS, the percentage deviation and the post-announcement price movement. The average EPS surprise for these 16 companies is 4.7%, while the median is 2.6%.
The average post-announcement price movement for these companies was 1.2% and the median was 0.5%. The market was particularly enthusiastic following the interim reports from Micron (semiconductor manufacturing) and Jabil Circuit (electronics manufacturing). The biggest disappointment, both in terms of earnings versus forecasts and price reaction, was Conagra Brands (food processing) according to Zacks Research.
Although very few results have been released so far, both the S&P500 Financials and Information Technology sectors have had 100% of their Q3 reports beat expectations through 4 October, according to Earnings Insight. The S&P500 Consumer Discretionary sector has been the worst performer so far, with only 50% of Q3 reports beating expectations and 33% missing.
The stock market is trading in different wedges, building up energy to be released.
The tech-heavy and leading Nasdaq is trading in a wedge. Usually, wedges break out in the same direction as the trend. In this case, it would be to the upside. But you never know.
The most important stock on the market right now is NVDA. The stock has broken out of its wedge on the back of continued demand for the company’s chips, making it a very interesting development to watch. If the breakout is for real, we are likely to see a new all-time high in NVDA.
Oil has bounced off support and is heading back towards resistance. The turmoil between Iran and Israel is making the market nervous. But without any fundamental reason to raise demand forecasts, we expect the price to remain within the current trading range.
We will be taking a few weeks off for internal reasons.
Happy trading!
Disclaimer
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