Weekly Recap:

by Michael P. Reinking, CFA - Sr. Market Strategist

     Patricia Medina - Market Strategy Analyst

Last Friday we started the note with “To say it has been an interesting week would be an understatement as some volatility has returned to markets.” We could start the same way today, but the understatement would be saying “some volatility” as it came back with a vengeance, especially in the back half of the week. Last week was mostly a continuation of the “Great Rotation” following the better-than-expected CPI report but at the end of the week there were some signs of strain beginning to show up and that turned into some broader de-risking to close the week. The VIX moved above 15 for the first time since April and the fact that it was options expiration did seem to add to the volatility.

Politics once again dominated the weekend headlines with President Biden officially withdrawing from the election, but markets took that in stride. The macro backdrop was also a bit quieter with Fed officials muzzled until next week’s FOMC rate decision and a lack of key economic data until later in the week. This left the focus squarely on earnings.

As the pace of earnings began to ramp up early in the week there was a modest bounce  which was not terribly surprising given the very steep declines in the mega-cap tech stocks/semis last week (NYSE FANG -4.6%, ICE Semiconductor -9%). That bounce did not come at the expense of the rotation which continued to occur just a little more quietly.

That is until the first two of the mega-cap tech names, Alphabet and Tesla, reported earnings on Tuesday night. In our Q2 Earnings Preview we highlighted the bifurcation within earnings expectations with the bar being set very high for the mega-cap tech names given the YTD strength. Well, the companies failed to live up to those High Hopes which caused a bit of a Panic! At the Disco (sorry to re-use my joke but I liked it so much the first time).

The tech earnings set a negative tone for Wednesday but the weakness accelerated overnight as the Yen rallied over 1% verse the USD, a continuation of the unwind of another very crowded trade, and earnings in Europe didn’t help the situation. On Wednesday the S&P 500 fell 2.3% the biggest decline since 2022 closing right around the 50d moving average. The selloff broke the longest streak without a 2% single session decline since before the GFC. Initially the weakness was contained to tech but that spread into the close as the VIX pushed above 17. The NYSE FANG+ and ICE Semis both fell >5% on the day.

Wednesday night led to more Yen strength which then seemed to bleed into other assets like commodities and cryptocurrencies overnight. Better than expected GDP and capital goods orders along with a tick down in claims data helped the USD firm up and futures recouped the modest overnight losses ahead of the open. However, shortly after the open there was another very violent wave of tech selling. The S&P 500 briefly broke below 5,400 and the VIX almost hit 20 before a bid showed up and there was an aggressive reversal in tech names. At the lows, the NYSE FANG+ index was down nearly 2.5% while Nvidia was down 7% bringing its high-to-low drawdown to just under 25%. The rebound was equally as aggressive with NYSE FANG+ moving into positive territory while the S&P 500 rallied ~100pts (1.8%) off the lows. It looked like it could be a solid reversal day however, markets peaked ~1:00 and faded into the close reversing pretty much all of that rebound.

Which brings us to today and the most important piece of economic data of the week. Overnight Asian markets and the Yen were tame by recent standards and US futures rallied along with European indices recouping about half of the late day selloff. All-in-all the data came in pretty much in line with estimates with PCE up 0.1% and core-PCE up 0.2% on a monthly basis and with the annual readings at 2.5% and 2.6%, respectively. The latter was flat on a m/m basis but a tenth ahead of estimates. Coming in, there was some concern that the numbers could be a touch hot after PCE within the Q2 GDP data came in ahead of expectations yesterday. Yields moved modestly lower on the data while equities held the pre-market bid. During the day the S&P 500 rallied to test yesterday’s high around 5,490 but couldn’t clear that level and pulled back modestly. There were broad based gains today with every sector ending higher.

There was volatility this week, but it was mostly about the rotation and unwinding of crowded positions. The VIX ended the week ~16.5, it is still elevated but not screaming stress. We’re also not seeing any strain in credit markets or Treasury volatility.

For the week the S&P 500 ended down 0.8% while the equal-weight version of the index was up a similar amount. The NYSE FANG+ and ICE Semis were both down 3% for the week while the Russell 2k was up 3.4%. 

A couple quick notes on earnings. As per usual broadly companies are beating the bottom line. According to FactSet with 41% of companies in the S&P 500 having reported 78% have beat EPS estimates by an average of 4.4% which is below 5/10yr averages.  The reporting season has been solid there seems to be an overall cautious tone to commentary suggesting a moderation in activity. A couple of theme -

Global Markets: mixed trading

Commodities - China impacts seen here 

The economic data this week suggests the economy remains resilient but activity is moderating. PMIs were mixed with manufacturing slowing but offset by strength in services. Pricing received remained contained increasing at “one of the slowest rates seen over the past four years”. However, input costs jumped which points to potential margin compression going forward.

Real Q2 GDP came in at 2.8% ahead of the 2% estimate. Consumption numbers were solid up 2.3% while inventory builds were also a driver of the strength. Claims moderated from last week but some of last week’s jump may have been hurricane related. Not surprisingly homes sales data remained weak. Today’s personal income was a touch light, spending was in line with positive revisions. The PCE data was essentially in line as noted above.

This week’s data doesn’t really do much to shift the Fed narrative. Markets widely expect the Fed to further set the stage for a cut in September next week. There was some focus on the former NY Fed President Dudley Op-Ed in Bloomberg this week as he shifted from the higher for longer camp to calling for the Fed to cut rates next week.

Yields at the front end of the curve moved lower this week but there was continued re-steepening. The 2-10 spread briefly moved to the least inverted level since the initial inversion in 2022 <15bps. There has been some speculation the Fed could try to surprise markets next week by cutting but that seems pretty out of character. Futures markets are starting to price in an outside shot of a 50bps cut in September (~12% probability). 

S&P 500 -  the index traded right into the key technical levels laid out last week. After breaking below the 50d yesterday it closed back above today and is trying to hold the trend line off the November low. If those levels give way the next level is ~5,300 where we broke out from in May and the 100d ma.

Last week

the market cap weighted index essentially had an outside week closing pretty much on the lows, so not how I would have preferred to see a pullback. Today the index index ended the week just above 5,500 but closed below its 20d (5,540) for the first time since late May. There is a little bit of a congestion zone between 5,450 - 5,500 with the rising 50d ~5,410. Just below that there is a gap ~5,375 from mid-June when CPI was released. This area also coincides with where the trend line off the Q4 low is so would be an important level.

Equal Weight - Only including weekly. There was no downside follow through on the break of 6,800 last week's low and this week was solid counteracting the big topping tail consolidating at the highs.

Last week

The equal weight version did hit a new all-time high this week but as mentioned above didn't really hold those gains. Big weekly topping tail.

This will be the busiest and most important week of the summer. On Monday Jensen Huang and Mark Zuckerberg will be speaking at SIGGRAPH. It is the peak of earnings season with multiple mega-caps reporting. There are a bunch of key central bank rate decisions including the BOE, BOJ and the Fed. The economic calendar includes PMIs in China, inflation in Europe and the labor market data in the US. Buckle up it should be another interesting week.  Have a great weekend!

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