This past week, going into the long weekend seemed somewhat disjointed to me. It was not a heavy week, when looked at from a macroeconomic perspective, that is until one got to Friday when the Bureau of Economic Analysis published its April numbers for personal income and outlays along with PCE and Core PCE inflation data for that very same month.
Aside from that, it appeared that the first half of the week was overshadowed by on-again, then stalled-again debt-ceiling negotiations between the staffs of President Biden and Speaker McCarthy. The major equity indexes stumbled into midweek as keyword-reading algorithms picked up on pessimistic-sounding headlines that had followed what both men had referred to as "productive" meetings.
Then came Nvidia's (NVDA) quarterly earnings report Wednesday evening. The financial results reported by Nvidia for its fiscal first quarter were decisively better than expected, but there was much more to it than that. Current-quarter guidance just blew the doors off even the most optimistic of expectations, and absolutely crushed what had been the consensus view.
Suddenly Nvidia was hot, I mean "center of the solar system" type hot... adding over $200B in market cap in under 24 hours. While price discovery across broader markets remained unspectacular, anything and everything even remotely connected to artificial intelligence, or better yet, generative artificial intelligence, caught a bid.
The major equity indexes, especially those more tech-centric, moved in a northerly direction that only gained upside momentum as word spread that the president and the speaker were getting close to a deal that would suspend the debt ceiling and permit the federal government to avoid possibly entering into a default of its sovereign debt. That is, as long as both bodies of the Congress can pass this deal in the form of a bill. Personally, from what I have seen of this deal, this is strictly opinion... it looks like a big flop if one was truly concerned with reigning in spending, or even if one favored the ever-expanding fiscal recklessness of the past few years.
I guess that's what compromises do -- leave everyone at least somewhat dissatisfied. The problem with that is that there are extremists that will hold out on both sides, just trying to get that one last item. Remember, these people are almost all professional politicians. They are about counting votes and either maintaining or regaining power. It's not like there are good guys and bad guys here. There are just two sets of elected officials that use the issues of the day to manipulate their bases and vilify their opponents.
In the end, "they" will likely pass this compromise or something very similar, because neither side will be willing to risk being cast as the cause of a U.S. default and potentially any subsequent public economic misery. The House is trying to vote on a bill by Wednesday. The lead-in and potentially a day of two after, could be volatile as these folks play games with political victory and defeat. Just remember -- and I do not care if you are a Democrat or a Republican, I am neither -- these folks (on both sides) will almost always put their best interests ahead of yours. Count on it.
I did get away from where I meant to, with this early morning piece there, but some things do need to be said, and said by someone with a voice that is not affiliated either way politically.
On the surface, last week was not too bad, economically. First-quarter GDP growth was revised upwards to growth of 1.3% q/q SAAR from the originally released 1.1% growth. April New Home Sales were surprisingly up 4.1%. April Consumer Spending was strong. April Personal Income held up. April Durable Goods Orders and, more importantly, April Core Capital Goods Orders, both surprised to the upside.
This forced markets to cope with higher bond yields (lower prices), and not just for the very short term in anticipation for a possible default, but going out toward the deep end of the yield curve as well in consideration of the fact that the Federal Reserve Bank may have to be more hawkish in its forward-looking monetary posture than previously hoped for. The FOMC is being put in the position of contending with upward pressure on consumer-level inflation that does not seem to be abating further at this time.
Very interestingly, on Friday, the Atlanta Fed, in reaction to all of that "positive" or "inflationary" looking data that had been released, revised its GDPNow model for the second quarter, down to 1.9% q/q, SAAR growth from growth of 2.9%. It appears that though the Atlanta Fed had increased inputs for real personal consumption expenditures and real government spending, that these increases were well more than offset by decreased inputs for real net exports, and real gross private domestic investment. Atlanta will not have to revise this model again until midday this Thursday after April Construction Spending and the May ISM Manufacturing survey are both published ahead of the employment survey results on Friday.
For those with an interest, the Cleveland Fed's Nowcasting model for May CPI is tracking at month-over-month growth of 0.19% and 0.45% m/m at the headline and the core, respectively. That would compare in mixed fashion to m/m growth of 0.4% at both the headline and the core for April. On a year-over-year basis, Cleveland is tracking May at headline growth of 4.12% and core growth of 5.34%. That would indeed be lower than April's 4.9% and 5.5% results, but perhaps progress at the core is coming along just too slowly.
The Next Industrial Revolution
As mentioned in this morning's first paragraph, Nvidia ran wild late last week. This took the stocks of Advanced Micro Devices (AMD) , and Marvell Technology (MRVL) , which was boosted by its own results as well, along with it on the chip/GPU side.
The "pin action" also included the big data center cloud services providers, which all have the dough required to truly invest in this next new technology. Microsoft (MSFT) , Amazon (AMZN) , Alphabet (GOOGL) and Oracle (ORCL) all traded higher with Nvidia as well.
If AI is not the most focused upon driver for American/global business today, it certainly has become that driver from a market perspective. How to use AI? How to make it work for business? These are the questions, but there is no doubt that American corporations are lining up to engage primarily with Nvidia for the provision of the elite level (and expensive) GPUs necessary to create an artificial brain. Almost all recognize this to be a potential tip of the iceberg in the creation of increased productivity at greatly reduced expense.
Yes, that last sentence reads exactly how I wanted it to read. Generative artificial intelligence is going to ultimately find out for corporations just what positions and even which individuals are worth investing in and/or retaining and at what price (wage). Business has always been cut-throat. This will take the cut-throat nature of business to a whole new level as high earners will be replaced by a faster, more accurate competitor that does not need to take breaks, eat, sleep or go on vacation, and worse... will not show any compassion for individual employees who due to one reason or another, fall outside of its defined parameters for efficiency at an acceptable cost.
Yes, there will be a tremendous market for what these firms see as a potential future timeline for this technology. It's not going away. It's not going to hang around at the margins of technological advancement like artificial reality or the Metaverse. This is it. In my opinion, this is the game changer.
The only way to compete with a lightning-fast, incredibly accurate artificial brain will be to have been on the right side of the investment thesis. Your boss won't be able to save you, because your boss will not be able to save him or herself.
As late Sunday hours have passed into early Monday morning hours, Fed Funds Futures trading in Chicago are showing a 61% likelihood of there being a 25 basis point increase made to the target range for the Fed Funds Rate when the FOMC next meets on June 14. Remember that this market has been extremely volatile, and these probabilities are changing almost by the moment. Even at zero dark-thirty. There is currently a 39% probability no rate hike will be implemented at that meeting.
The Fed Funds Rate now stands at 5% to 5.25%. The hike now being priced in for June 14 would take the Fed Funds Rate to 5.25% to 5.5%, which now appears to be the likely terminal rate. Markets are now pricing in a pause at this level that lasts until November 1, when the first rate cut of this cycle is now projected.
Jackson Hole, which is held annually in late August, is always an economic dog and pony show. This year, they may also have to call in the jugglers and the plate spinners to complete the act.
Futures are no longer projecting a probability for a series of rate cuts at consecutive meetings over the last quarter of this year into next. A Fed Funds Rate of 5% to 5.25% is priced in at this point for year's end, which is 50 basis points higher than where it was when I wrote this weekly lead-off piece a week ago. Eighteen months down the road, markets see an FFR of 3.25% to 3.5%. That's up 25 basis points from a week ago.
First-quarter earnings season has practically come to its conclusion. Still, a number of important names this week are still releasing their data.
Last week, we saw the retailers for the most part, finish reporting their quarters. Then of course, Palo Alto Networks (PANW) , Nvidia and Marvell Technology simply stole the show.
According to FactSet, 97% of the S&P 500 has now reported their first-quarter results. That's up from 95% a week ago. Of those, 78% have beaten expectations for earnings (flat from last week) and 76% (also flat) have beaten revenue projections. For the quarter, the blended (results & projections) rate of earnings "growth" now stands at -2.1% (up from -2.2% last week) from the year-ago comp. Q1 revenue growth currently stands at 4.1% (flat from last week).
Taking a look at the current quarter, still using data provided by FactSet, consensus is for earnings "growth" of -6.3% (improved from -6.4%) on revenue "growth" of -0.3% (flat). For the full year, consensus view is for earnings growth of 1.3% (up almost significantly from 1.0%) on revenue growth of 2.4% (flat). Implication? Margins will still stink, but less so than previously expected.
Among sectors, the strongest earnings growth this season has been shown by Consumer Discretionaries (+54.8%), with Industrials placing at a very distant second place (+22.5%). Six of the 11 sectors are still showing year-over-year earnings contractions, with just Materials (-25.3%), Utilities (-22.3%), Health Care (-16.3%), Communication Services (-12.9%), contracting by double digits in percentage terms. Last week's barrage of solid tech earnings took that sector from earnings growth of -10.4% a week ago all the way up to -9.8%.
More key tech firms, especially from the software/cybersecurity space, report this week.
Last week, equity markets, for the most part, on the surface, were stronger again. Even as breadth remained quite narrow. This has been a persistent concern. Obviously, among the major indexes, the Nasdaq Composite has been the leader, though it has been outperformed by its higher tech-focused cousin, the Nasdaq 100. The S&P 500 barely had a winning week over the past five sessions, while the Dow Industrials posted a third losing week in the past four. Not everyone is winning. Not even close to everyone.
Remember, last week we spoke about the Nasdaq Composite appearing to have broken out after taking down its long-term line of resistance the prior week. Our doubts expressed now three weeks ago proved unnecessary as this breakout has not only held, it has accelerated.
Readers will note that the S&P 500, though trading close to the top of its long-term range, has not yet broken out. The S&P 500 still has something to prove this week.
Will the broader large-cap index catch up to the Nasdaq Composite as it has done in the past? What I mean is, with a federal debt deal on the table does the S&P 500 break out past resistance in participation with some kind of relief rally, or do we see a "sell-the-news" event?
For the week past, the S&P 500 gained a mere 0.32%, after being bailed out for the week by a 1.3% rally on Friday. The S&P 500 closed last week up 9.53% year to date. The Nasdaq Composite again soared into the win column for the week (+2.51%) thanks to a rally of 2.19% on Friday. This put the index up 23.97% for 2023.
The Philadelphia Semiconductor Index went on an absolute tear last week. The "SOX" screamed 6.26% higher on Friday, closing out an incredible week with a gain of 10.68%. This index now stands up a stunning 40.03% for the year.
This leaves us with the Russell 2000. The small-cap index rallied 1.05% on Friday, but that still was not enough to avoid a slight loss (-0.04%) for the week. The Russell is now up 0.67% for 2023.
Readers know that we have had to keep a close eye on the KBW Bank Index for the past few months. The KBW popped 0.87% on Friday, boosting a 1.29% upside move for the week. The KBW is now off "just" 22.8% this year.
I had mentioned that breadth was poor. Eight of the 11 S&P sector-select SPDR ETFs shaded red for the week. This despite eight of the 11 going green on Friday. For the week, performance was truly less trifurcated than it had been the week prior. That said, Technology (XLK) and Communication Services (XLC) again led the way, gaining 4.64% and 1.22%, respectively as investors continued to move capital into "growth." Staples (XLP) and Materials (XLB) each gave up more than 3% for the week, as all eight sectors that posted weekly losses surrendered a minimum of 1%. Both defensive and cyclical sectors in general, underperformed leadership, but performed in line with one another.
According to FactSet, the S&P 500 now trades at 17.8 times forward-looking earnings, down from 18.3 times a week ago. This is partially due to an improving 12-month margin outlook. This ratio has now fallen back toward the middle of its two key moving averages. The S&P 500's five-year average valuation stands at 18.5 times forward-looking earnings (down from 18.6 times last week), while its 10-year average still stands at 17.3 times.
This week is going to be another wild one.
First up, we'll be watching Congress. It's unfortunate, but if these numbskulls screw this up, we'll have a major problem... and it won't "just" be reflected on Wall Street, it will be broader than that.
Second, this is May "jobs week." The ADP Employment Report on Wednesday and the results of the twin BLS surveys on Friday, will surely impact how those above mentioned futures markets interpret and extrapolate forward-looking monetary policy.
Speaking of the Fed, there are a lot less speakers on my radar this week, though that could change. However, the Beige Book, which is the book of anecdotal economic information across the Fed's 12 regional districts, is due this Wednesday afternoon. That's always good for an algorithmic blip upon release that could move markets in either direction.
Regarding earnings, on Tuesday, Box (BOX) , Hewlett Packard (HPE) and HP Inc. (HPQ) will report. Wednesday will bring us results from Chewy (CHWY) , CrowdStrike (CRWD) , Salesforce (CRM) , and Veeva Systems (VEEV) . Thursday will be the busiest earnings day of the week again this week with Dollar General (DG) , Hormel (HRL) , Macy's (M) releasing their numbers ahead of the opening bell, and Broadcom (AVGO) , Lululemon Athletica (LULU) . MongoDB (MDB) , SentinelOne (S) , and Zscaler (ZS) reporting after the close.
Expect CrowdStrike, Salesforce, Veeva, MongoDB, SentinelOne and Zscaler to all try to inform investors during their earnings calls, on how AI or generative AI is transforming those businesses.
Economics (All Times Eastern)
09:00 - Case-Shiller HPI (Mar): Expecting -1.6% y/y, Last 0.4% y/y.
09:00 - FHFA HPI (Mar): Expecting 0.3% m/m, Last 0.5% m/m.
10:00 - Consumer Confidence (May): Expecting 99.1, Last 101.3.
10:30 - Dallas Fed Manufacturing Index (May): Expecting -25, Last -23.4.
The Fed (All Times Eastern)
No public appearances scheduled.