Throughout 2024 we’ve cited four factors that have propelled the S&P 500 higher: Solid economic data, impending Fed rate cuts, falling inflation and AI enthusiasm. And this upcoming week will provide tests for each of them, but especially AI enthusiasm. The reason the S&P 500 has pulled back is tech related, specifically the rotation out of tech that started as investors re-balanced ahead of September rate cuts. But it intensified last week as AI-related tech earnings (ASML and GOOGL in particular) disappointed and that caused the sharp Nasdaq decline on Wednesday and weighed on the S&P 500.
Put simply, last week’s soft earnings are challenging the AI enthusiasm that has been responsible for the S&P 500 rallying into the mid 5,000’s. That makes this week very important for AI and tech because MSFT, AAPL, AMZN and META, all AI darlings, report earnings and if they post disappointing guidance, it will further erode AI enthusiasm and we could see this pullback continue.
However, AI Enthusiasm isn’t the only challenge to the bullish mantra this week. Starting with economic growth, the three big monthly economic reports will either re-affirm a Goldilocks environment (which we’ve seen over the past two weeks) or spike slowdown concerns, while the Fed decision on Wednesday can confirm (or not) that September rate cuts are coming (the only question will be 25 bps of 50 bps).
Bottom line, this week has the potential to alter the year-to-date bullish set up for stocks (that doesn’t mean it becomes bearish, but it easily could become less bullish). Realistically, it’s unlikely economic data provides a material surprise or that the Fed doesn’t point to a September rate cut. So, barring any major surprises, we should exit the week still expecting 1) Solid growth and 2) September Fed rate cuts.
However, whether the market exits the week with strong AI enthusiasm is much more up for debate. The recent disappointing guidance and rumblings of exactly how much profit growth AI integration will provide are new headwinds on this space and if we see underwhelming guidance from the big four tech firms reporting this week, worries about the viability of AI as a profit optimizer will grow. The practical impact of that will be to keep the “out of tech” and “into the rest of the market” unwind going and as we saw last week, that can pull the S&P 500 solidly lower.
Bottom line, the outlook for tech remains somewhat uncertain, even with the pullback. If MSFT, AMZN, AAPL and META guidance are solid, we can see a solid, stock positive rebound. But if they are not, expect more intense tech weakness and the outperformance of the “rest” of the market including defensive sectors, value and minimum volatility ETFs.
If you remember what happened last year at this time, the markets were weak through September and then began the rally that only resonantly has slowed. My prediction is that we will see the same this year albeit not as strong. Stay the course as the next couple of months will be a bumpy road.
Through last week, according to FactSet Research, 41 percent of the component companies in the S&P 500 posted results for the second quarter of 2024. Of the companies that have reported results, 78 percent (two percent decline from last week) have been surprises to the upside when looking at earnings while 60 percent (two percent decline from last week) have beaten revenue expectations. As of last week, the overall blended earnings growth rate for the S&P 500 stood at 9.8 percent (one tenth of a percent higher than last week), the figure remains higher than the expected Q2 earnings growth rate of 8.9 percent. The strongest sectors of the markets so far have been Industrials and Communications Services while the weakest sectors of the markets have been healthcare related
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