Things you need to know
- Today is the first day of trading for the Trump Accts – the opening bell is to be rung from the WH. Each acct now has $1k – complements of the FED gov’t.
- SPCX will be added to the QQQ tonight.
- Earnings are just a week away – the bar has been raised.
- OPEC+ will raise production – oil falls.
- Lots of eco data in the weeks ahead – next FED meeting on the 29th.
- Try the Caciocavallo all’Argentiera
Good morning, the 4th is behind us, and we are now well into summertime. The mid-terms are getting closer, earnings season is about to start, and the FED meeting is only 23 days away – leaving so many to take sides on what the next move will be…..Lot’s to discuss – so let’s get going…
Thursday may have been one of the most important trading days of the summer—not because of where the market finished, but because of what was happening underneath the surface.
Now remember – it was a holiday shortened week – volumes were subdued and that always means that moves can be exaggerated. The Dow surged by 585 pts, the S&P ended the day flat, the Nasdaq got taken out to the woodshed again – shedding 207 pts as investors, traders and even the algos continue to take money off the table in the big, sexy names, the Russell lost 16 pts, the Transports gained 55 pts the Equal Weight S&P gained 65 pts while the Mag 7 ended the day down 390 pts or 1.1%…by far the worst performer of the day…..again – think big growth, expensive valuations.
If you’ve been reading my notes over the past several weeks, we’ve been discussing the difference between rotation and liquidation. Thursday was just another example of that theme.
This wasn’t investors abandoning the market. This was about taking profits in some of the year’s biggest winners and putting that capital to work in sectors that had been left behind. That’s rotation.
Here are the sectors that got hit – Tech, Consumer Discretionary, Communications, Semiconductors, Cybersecurity, Quantum names fell 4%. But the real damage was in the memory stocks. The DRAM ETF (memory stocks) sank 8%, with MU down 5.5%, WDC off 9.9%, and STX tumbling 10%.
None of this should come as a surprise. These stocks have been among the market’s hottest performers, so some profit-taking after an extraordinary run is perfectly normal. At this point, it looks more like a valuation reset than a change in the long-term AI story. Technically, STX has already broken below its trendline, while MU and WDC are now testing theirs. The next few sessions will tell us whether those levels hold—or whether there’s another leg lower before buyers step back in.
So where did the money go? It rotated into the more defensive and economically sensitive parts of the market. Utilities, Consumer Staples, Healthcare, Basic Materials, Real Estate, Industrials, Software, Metals & Mining, and value stocks outperformed growth, with the value trade up about 1%.
What’s important is what didn’t happen. The VIX did not rise – it fell 2.7%, remaining firmly in the complacency zone, while the bond market was essentially unchanged, leaving the 2-year yielding 4.13%, the 10-year at 4.48%, and the 30-year at 4.98%. In other words, there was no flight to safety—just a rotation out of some of the extended winners and into other areas of the market. This morning, Treasuries are catching a bid, nudging yields about 2 bps lower in the 2-year and 10-year, while the 30-year yield is off roughly 1 bp.
The catalyst for the move in stocks on Thursday was the June NFP report. And it was not terrible, it was just ‘not as good as expected’ – for June we created 57,000 new jobs – half of what we expected, Avg hourly earnings m/m & y/y came in right on target, but the unemployment rate unexpectedly fell from 4.3% to 4.2% – which sounds confusing, no? How can it fall when we created half the number of jobs?
And here is the answer – The government only counts someone as unemployed if they don’t have a job AND are actively looking for one. When people stop looking for work and they LEAVE the labor force altogether, they are no longer counted as unemployed. So, even though job growth was weaker – enough people exited the workforce so the unemployment rate actually declined.
The market understood that immediately and so investors focused on slowing job growth—not the lower unemployment rate. That reinforced the belief that inflation pressures are easing and that Fed Chair Kevy Warsh has less reason to tighten (raise rates) – which doesn’t mean that he has the green light to cut rates either…It just means more holding and waiting and assessing. The next FOMC meeting takes place on July 28/29th…. between now and then, we will get a boatload of eco data as well as about 50% of S&P earnings….so sit tight – there’s a lot going on.
Next up- the start of second-quarter earnings season and this matters as this earnings season may prove to be one of the most important we’ve seen in years.
Why? Because Wall Street analysts have raised the bar – creating a much higher hurdle for companies. According to FactSet – Earnings growth expectations are now about 23% on revenue growth of about 11%.
If it all ‘clicks’ and companies hit those numbers it would mark a second consecutive quarter of better-than-20% profit growth, if it doesn’t – then watch out below.
And here is the part that you need to consider…..Analysts don’t simply wake up one morning and decide to raise estimates. Those revisions usually reflect conversations with management teams and guidance coming out of CFO offices. Companies (CFO’s) understand exactly where expectations are, and if those numbers were unrealistic, management would push back.
MU was the latest example of that…recall how many people thought the estimates were too ‘robust’, almost impossible to hit, yet management said nothing, they kept quiet and why? Because they knew they were going to crush it, they kept their mouths shut. If they thought the numbers were too high – they would have steered the analysts lower because the last thing any CEO or CFO wants to see is their stock get smashed on earnings day because expectations were too high. Especially in the tech space….. I mean come on – who’s kidding who?
So again, this earnings season isn’t just about beating estimates, it’s about the guidance and the need to raise guidance and convince investors that the enormous capital being poured into AI infrastructure is beginning to generate sustainable profits.
The season ‘unofficially’ kicks off next week with PEP (Consumer demand) on the 9th, DAL (Travel demand) on the 10th and then it becomes official when the BIG banks hit the tape – JPM, C, GS, WFC all reporting on the 14th.
Now – while Technology will once again command most of the headlines, this earnings season is shaping up to be much broader than just AI and the Mag 7. Analysts expect strength across many of the economically sensitive sectors, including Energy, Industrials, and Materials, reflecting continued investment in infrastructure, manufacturing, and the buildout of the AI ecosystem.
Financials will offer an important read on the health of the economy through loan growth, credit quality, and capital markets activity, (think sales & trading and Investment banking). Recall one of my key metrics is the growth (or not) of the ‘Loan Loss Portfolio’ because that gives you insight into what the C-suite really thinks about the economy and consumer.
Consumer Discretionary and Consumer Staples will provide insight into whether Americans are still willing—and able—to keep spending. Taken all together, these reports should give us one of the clearest pictures yet of whether the economy is merely slowing to a more sustainable pace or continuing to support the market’s optimistic outlook.
Remember – Investors do not want “good enough”, they will demand excellence and btw the market has no choice either…. stocks are priced to near perfection…….so any sense of weakness, no matter how small – could produce outsized selling in the name. When expectations are elevated, the margin for error becomes razor thin. Companies that beat expectations and raise guidance should be rewarded, while those that miss lower forecasts, or suggest that AI spending, consumer demand, or margins are beginning to soften could face real selling pressure.
Oil is trading lower this morning down 0.75% at $68.20 – this on news that OPEC + has decided to up production beginning in August. This continues to support the story of lower oil prices in the weeks and months ahead and if that happens – it takes more pressure off of inflation.
Gold is trading at $4,150 after finding support at the $4000 level. The idea that the FED will not raise rates is helping to support the story and in fact – gold bugs continue to bet that rates will drop and if that happens gold should trade higher. The chart says we are in the $4,000/$4400 trading range. My sense is that rates remain unchanged so gold will continue to churn in here.
Eco data includes S&P Services PMI and ISM Services PMI – both expected to remain in the expansion zone. ISM Prices Paid component is expected to come in at 67.5 – that would be down from 71 – suggesting prices for services are coming down and that is a positive and one that further supports the idea of no rate HIKE. (Recall that last week’s Manufacturing PMI Prices Paid component saw a substantial decline as well.)
European markets are mixed – not up or down big at all – just continuing to digest the recent moves as investors there await the start of earnings season.
US futures are UP this morning…. Dow futures up 36, S&P’s up 35, the Nasdaq up 315 pts (that makes sense after the beating last week) while the Russell is up 4. None of the indexes are either overbot or oversold on the RSI scale – so we can expect more churn here as well as the new week begins.
SPCX will be added to the QQQ Index tonight – all that means is more buying by the indexes and passive funds.
Remember – markets do not move in straight lines, trees do not grow to the sky, new narratives evolve and leadership changes, but disciplined investing never goes out of style.
Give me a call at 561-931-0190 to discuss your goals and your timeline. Let’s assess the risk in your portfolio and your tolerance for volatility – happy to do a complimentary portfolio review and risk assessment.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Caciocavallo all’Argentiera
Serves 4 as an appetizer.
Listen Sweethaht! There are few dishes in Sicily more satisfying than this. Thick slices of semi-aged Caciocavallo Ragusano are seared until the outside becomes beautifully crisp while the center melts into creamy perfection. A splash of vinegar, fragrant oregano, and good olive oil transform a humble piece of cheese into something unforgettable.
Serve it straight from the pan with warm, crusty bread.
For this you need: 14 oz (400 g) semi-aged Caciocavallo Ragusano, cut into ½-inch slices, olive oil, 1–2 garlic cloves, peeled and cut in half, 2 tbsp white wine vinegar, pinch of sugar, 1 tbsp dried oregano, pepper, Optional: a light dusting of cornstarch for an extra-crisp crust, warm Italian bread for serving.
Begin by preparing the cheese. Slice the Caciocavallo into even ½-inch pieces. If using cornstarch, lightly dust both flat sides and shake off any excess.
Heat the olive oil in a large skillet over medium heat. Add the garlic and cook until lightly golden, for about 2 minutes. Remove the garlic and discard.
Create the crust. Increase the heat to medium-high. Carefully lay the cheese slices into the hot oil. Resist the temptation to move them. Let them cook ‘undisturbed’ for 1 to 2 minutes until a deep golden crust forms.
The Argentiera moment. Turn each slice over. Immediately pour the vinegar mixed with a pinch of sugar around the cheese. The pan will hiss and steam as the vinegar rapidly evaporates. Let it cook for another 30 seconds to a minute until the second side browns while the center becomes soft and molten.
Finish. Sprinkle generously with dried oregano and a bit of black pepper.
Serve immediately with thick slices of warm Italian style ‘country bread’.
Buon Appetito