Can stocks receive a lift in September? This week’s economic releases may provide some clues
ANTHONY SAGLIMBENE – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL
WEEKLY MARKET PERSPECTIVES — August 28, 2023
The S&P 500 Index and NASDAQ Composite each posted gains last week, snapping their three-week losing streaks. The Dow Jones Industrials Average, however, finished the week marginally lower. NVIDIA’s blowout second quarter earnings report and stronger-than-expected Q3 guidance, along with Fed Chair Powell’s speech at Jackson Hole on Friday, were the week’s main events. Information Technology (+2.6%) and Consumer Discretionary (+1.1%) helped stocks float higher during the week, while Energy (lower by 1.4%) acted as an anchor.
Contributing to the pressure on Energy stocks last week was the almost 2.0% decline in West Texas Intermediate (WTI) oil, which capped off a second straight week of losses and following seven-straight weeks of gains prior to the downdraft in crude. Concerns regarding China’s recovery and slowing global growth trends have recently weighed on energy and commodity prices. That said, crude prices are currently less than $4 per barrel above the year-to-date average of roughly $75 per barrel. WTI has traded all year within a range of approximately $80 on the high side and the mid-$60s on the low side. The U.S. Dollar Index moved higher on the week and is up by roughly +2.0% month-to-date. Gold rose +1.3% last week.
Within fixed income, U.S. Treasury prices were generally mixed across the curve, with the 10-year Treasury yield ending the week down one basis point to 4.25% and the 2-year yield rising 11 basis points to 5.03%. Notably, the 10-year yield has hit some of its highest levels since 2007. And with the 2-year yield sitting above 5.0% today and yields across short-term bonds, money markets, and cash-like investments offering competitive return opportunities, the competition between stocks and bonds for investors’ new dollars is fierce. Undoubtedly, the backup in yields this month has put pressure on stock prices and dampened risk-taking, particularly when stock seasonality factors are weak.
On the corporate front, NVIDIA crushed Q2 earnings per share (EPS) estimates on revenue of $13.5 billion, far exceeding the $11.2 billion the street expected. Sales across data centers driven by artificial intelligence and the semiconductors NVIDIA designs tripled year-over-year. The chipmaker also raised its sales guidance for the current quarter by +25%, which would put revenue for Q3 higher by an eyepopping +170% year-over-year. Bottom line: NVIDIA’s most recent profit outlook shows the AI story is real, growth for the company continues to accelerate at a rapid pace, and investors continue to search for the right valuation level for a company that is exerting its first-mover advantage in the AI revolution.
“In our view, several crosscurrents are currently moving through the market. Earnings trends, inflation dynamics, interest rate policy, and evolving economic conditions are all signaling a mix of factors that, in our view, warrant a balanced portfolio approach heading into a seasonally weak period for stocks.”
Anthony Saglimbene - Chief Market Strategist, Ameriprise Financial
Investors refrain enthusiasm around strong NVDIA earnings results
Interestingly, most investors would assume such positive results would be greeted warmly by investors and help lift sentiment not only in NVIDIA’s stock but also in the other mega-cap tech stocks that have fueled this year’s stock rally. However, after an initial pop higher, the stock finished the week well off its best levels, while the other big tech stocks in this year’s rally failed to see any meaningful tailwind from the positive AI takeaways. Profit-taking in NVIDIA, stretched valuations across the mega-caps, weak seasonality factors heading into September, anxiety over Fed Chair Powell’s speech, or elevated interest rates — whatever the reason — investors refrained from becoming too enthusiastic about NVIDIA’s results last week.
Also helping to mute stock momentum more broadly last week were the overall messages from a batch of retail earnings reports, which weren’t necessarily favorable for growth. Foot Locker and Williams-Sonoma said consumer trends remain uncertain in the second half, while Dick’s Sporting Goods cut its annual profit forecast. Although Macy’s beat profit estimates for the second quarter, it warned weakening demand and faster-than-expected delays in credit card payments were a concern. Notably, holiday sales in the back half of the year could see more pressure from cost-conscious consumers, particularly among higher-income shoppers, which could pressure profit margins. Although Retail is a fickle, case-by-case industry that’s hard to tie overall macro trends to, some of last week's commentary from the industry group was less than inspiring regarding the consumer.
Powell drives home Fed's message of a higher-for-longer rate environment
On the Fed front, Fed Chair Jerome Powell delivered an on-point, as-expected speech at this year’s Kansas City Fed’s Jackson Hole Economic Symposium. Mr. Powell said the Fed is prepared to raise rates further if necessary and intends to hold rates at a restrictive level until the committee is confident inflation will be sustained at its 2% target. But while the Fed Chair essentially reiterated messages from the July FOMC meeting and warned persistently above-trend growth could risk further tightening, Mr. Powell also did not push back on the market’s assessment that rates could be lower by mid-2024. Bottom line: Powell’s speech did not change the market’s view that the Fed will likely hold rates steady in September. Further, most of the market believes rates will be lower than they stand today by June 2024. Here, too, Powell’s Jackson Hole speech did little to change that view. That said, Mr. Powell’s comments last week did temper expectations for how much lower rates could be next year while driving home the Fed’s consistent message of a higher-for-longer rate environment. Yet, investors were broadly comfortable with that messaging, which helped stocks close Friday on a high note.
Finally, on the review front, mortgage rates hit a 23-year high, purchase applications hit a 28-year low, and preliminary looks at August manufacturing and services activity showed levels weakened more than expected from July.
The week ahead
With the calendar shifting to September later this week, investors will begin to contend with one of the S&P 500’s weakest months of the year. Over the last ten years, the S&P 500 has averaged a decline of 1.5% in September and has finished the month lower 60% of the time. According to Bespoke Investment Group, in the post-World War II era, the S&P 500 has averaged a September decline of 0.7% and finished higher just 44% of the time. However, in years where the S&P 500 was higher by over +10% year-to-date heading into September (like this year), the Index has averaged a September gain of +0.7%, finishing positive 56% of the time. Importantly, while seasonality factors tend to be weak in the September and early-October period, longer-term investors should look through the potential volatility. In our view, several crosscurrents are currently moving through the market. Earnings trends, inflation dynamics, interest rate policy, and evolving economic conditions are all signaling a mix of factors that, in our view, warrant a balanced portfolio approach heading into a seasonally weak period for stocks. Yet, if the S&P 500 were to move down to its 200-day moving average at some point over the coming weeks, such a decline would mark a roughly 10% drawdown from the July peak. We believe such a correction would actually be healthy and normal, especially given the Index rose for five consecutive months through July and is only down about 4.0% in August.
Importantly, this week will bring several key economic releases that could help signal if growth and inflation is cooling enough to keep the Fed on pause next month or if the central bank may need to pump the brakes a little more by lifting its target rate. On Tuesday, August Consumer Confidence and the July Job Openings and Labor Turnover Survey (JOLTS) will provide updates on consumer attitudes about their financial situation and the overall number of available jobs in the U.S. economy. Both measures are expected to modestly soften from prior levels, which could be a market positive, as it would help add more evidence of a Fed pause in September.
July pending home sales, July PCE inflation, August ADP employment, August ISM manufacturing, and a second look at Q2 GDP will provide a heavy slate of economic data to help build the case for or against another Fed rate hike in September. But it will be Friday’s August nonfarm payrolls report that may carry the most influence on building that case. FactSet estimates call for nonfarm payrolls to grow by +175,000 in August, down from +187,000 in July. The unemployment rate is expected to hold steady at 3.5% or near the 54-year low of 3.43% hit in January. Bottom line: Investors want to see economic releases this week that suggest activity is slowing enough to keep further rate hikes at bay but not too slow to indicate the economy is headed for a recession. Considering the Q2 earnings season is in the rearview mirror, and the next Fed meeting is weeks away, incoming data on the economy will likely take center stage for a while.
Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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