Published July 26, 2024
The high-flying Magnificent Seven (Mag 7) stocks came under pressure again this week as earnings from Alphabet (aka Google/YouTube) and Meta (aka Facebook/Instagram) failed to delight investors. That earnings disappointment dragged down technology stocks broadly as shown in the chart below. However, to this point, the pullback in technology stocks has found support at a logical level ($210 = the line drawn), while the Relative Strength Index (RSI on the lower part of the chart) remained in “bullish” territory above 50. We will see if earnings from the other Mag 7 companies keeps support intact or provides further disappointment.
The pullback in tech stocks is part of a broader rotation. This should ultimately be quite positive for the stock market, despite the near-term jitters. Here’s how our friends at Delta Research summarize the recent market shift:
“Large capitalization technology stocks have led the market higher year-to-date. The S&P 500 index is a market cap weighted index with the 10 largest stocks representing 35% of the total index. As of about two weeks ago, the S&P 500 was up roughly 16% versus the equal-weighted S&P 500 index (RSP) and small capitalization Russell 2000 index (IWM) up 5% and 1%, respectively.
Since July 11 when CPI inflation data was reported lower than expected, the “rest-of-the-market” made a significant catch-up move relative to the S&P 500. The RSP and IWM are now up high single-digits and the S&P 500 has pulled back to a low teens level of appreciation.
Although lower inflation and interest rates disproportionately benefit the average company rather than the mega-cap company (average companies have larger borrowing needs than cash-rich, large-cap technology companies), it may not be the only reason the average stock is beginning to catch up.
Year-over-year earnings growth rates of the S&P 500 ex-Magnificent 7 (Apple, Microsoft, Google/Alphabet, Amazon, Nvidia, Meta and Tesla) have substantially lagged the earnings growth rates of the Mag 7 over the past five quarters. By the end of this year, the growth rates are expected to be equal.
Investment firm, Guggenheim, is estimating that S&P 500 earnings rise from about $244 in 2024 to above $300 in 2026. For the average company, earnings are accelerating. For the market, earnings are broadening out. Accelerating and broadening earnings should allow the bull market to continue over time.
BEA Reports Q2 GDP +2.8%
Thursday morning, the Bureau of Economic Analysis reported “real gross domestic product (GDP) increased at an annual rate of 2.8 percent in the second quarter of 2024, according to the “advance” estimate. In the first quarter, real GDP increased 1.4 percent. The increase in the second quarter primarily reflected increases in consumer spending, inventory investment, and business investment.”
Once again, the Atlanta Fed’s GDPNow Q2 forecast at 2.6% was closer to the advance estimate than the Blue Chip consensus 1.8% – see below:
Market Update
Market volatility continued this week. The VIX volatility index has soared from 12 to 19 over the past two weeks. The week began with a rebound, however, as investors stepped in to buy the prior week’s dip. The S&P 500 left Monday with a +1% bounce, recouping half of the prior week’s tumble. At the index level, stocks were flat Tuesday. However, reactions to individual company earnings reports were substantial. Spotify showed continued strength rising +11% after releasing its earnings. Industrial names GE Aerospace and Lockheed Martin found their shares lifted by earnings reports. But Paccar, UPS and car maker GM suffered. Wednesday saw earnings from Tesla and Alphabet (aka Google) fail to deliver to the heightened expectations. The Nasdaq 100 (QQQ) was slammed -3.6% in a broad selloff of all the market darlings from the first half of the year. The S&P and Dow fared better though still gave back 1-2% on the day. It wasn’t all bad news though as defensive utility, healthcare, and staples sectors joined energy in closing higher. Cyclical stocks did well Thursday with the second quarter GDP report showing a +2.8% growth in the economy, well above expectations. The positive report lifted shares in small and midsize companies, in particular while the Nasdaq continued its swoon. Friday found cyclical stocks higher again with +1% gains in all indexes. Double digit gains in a wide range of companies from pharmaceutical Bristol-Myers Squibb to materials maker 3M, flooring company Mohawk to cable TV operator Charter Communications and railroad Norfolk Southern; all rose sharply after their earnings updates.
The great sector rotation continued this week with volatility remaining quite high. The S&P 500 dipped -0.83% while the Nasdaq 100 plunged -2.58%. Smallcap stocks continue to be the beneficiaries of the market shift gaining +3.40% this week.
Warm wishes and until next week.