FS Insight Weekly Roadmap

Tom Lee, CFA FS Insight Head of Research The upside breakout in equities puts the S&P 500 near 4,300, a key round number and near the August 2022 highs (4,325). Our base remains that S&P 500 will gain >20% in 2023, so the 4,300 level is a just a waypoint but will eventually give way to the idea that equity markets will make new highs this year. The caveat, however, is that next week will see two events that are arguably the most critical to 2H23: -- June 13: May CPI and the key is a Core MoM inflation <0.4% (Street 0.4% and prior 0.4%). A 0.3% or lower reading would be seen as a positive surprise. -- June 14: June FOMC and a pause is consensus. Oddly, the Fed futures sees 28% chance of a June hike and ~80% of a July hike (cum prob). If May Core CPI <0.4%, then we see these odds dropping to zero for each month. -- So one can see why next week might be the most consequential week for the rest of 2023. Our view remains that inflation is tracking lower than consensus/Fed see and it is just a matter of time before the lagged CPI/PCE reports reflect this reality. We are not the only ones with this view and Professor Jeremy Seigel of Wharton has talked about this many times. Using real-time measures of CPI, inflation is already nearing target (even see Truflation.com). -- And if this plays out, the Fed's pause will morph into a data-dependent mode, where the bar is raised for further hikes. Implicitly, we expect investors to see this as a green light for risky assets, which means equity investors will not be fighting the Fed. There has been a lot of talk about the drop in the VIX which fell to 13.65, the lowest close since before the pandemic. In our view, the VIX drop from 25 (average in 2022) to 13.65 explains a large share of the 12% rise in equities. What we mean is this: The fact that it is now 13.65 does not suggest this will be a future driver of gains. We do not necessarily see the VIX at 13.65 a buy signal on its own, but we still see upside drivers for the S&P 500 over the next 6 months. ---- Mark L. Newton, CMT FS Insight Head of Technical Strategy -- SPX rally to 4325 and QQQ rally to 361 expected before any stalling out -- Transportation strength has helped Industrials begin to rally sharply -- Mid-cap 400 ETF (MDY) has now joined IWM in breaking out to two-month highs ---- Brian Rauscher, CFA FS Insight Head of Global Portfolio Strategy and Asset Allocation The headline S&P cap-weighted continues to try and grind higher and this past week beginning with a lot of help from TSLA and the CD sector, which I have upgraded (sector pub link here). Interestingly, the Russell 2000 finally outperformed and was significant. -- With the non-Tech/AI related trade underperforming this past week, there was a lot of talk about the market's breadth broadening and a resurgence in Smid cap. Based on my work, this is not supported, and I am viewing this week's performance as a relative oversold bounce that is NOT the beginning of a new sustained trend. Thus, I am still recommending Large cap over Small and Secular Growth over Cyclicals. -- I also released my monthly Sector update, and the main changes were an upgrade of the cap-weighted Consumer Discretionary sector/XLY ( AMZN and TSLA dominated) while the equal-weighted sector still looks quite weak. I also downgrade the Utilities sector. All else stayed the same. I continue to advise a barbell approach of some Large Cap, Higher Quality, Secular Growth (mainly Tech and non-legacy Comm Services) and traditional defensive areas. -- This past week I also did my monthly deep dive in the 4,000 U.S. single stock universe looking at the earnings revisions (ASMs). The key takeaway for me was WEAKNESS. Granted, earnings are not collapsing, but they are soft and still looking too high for the forward quarter. Hence, I am still expecting numbers to be cut for 2H23 and 1H24. -- Some areas that stood out favorably were: Construction Materials, Building Products, Airlines, Cruise lines, Rails, and Financial Exchanges. -- At the single stock level, a handful of names that looked interesting are as follows: EQT , EFX , RTX , TYL , FTNT , EXAS , ISRG , ZBH , COST , SPGI , NFLX , and PLD . ---- Sean Farrell FS Insight Head of Crypto Strategy -- This SEC's lawsuits against crypto firms were anticipated, with Coinbase having received a Wells Notice months prior. If Congress doesn't create crypto market oversight legislation soon, we should expect these lawsuits to provide much-needed regulatory clarity. -- The SEC's asset listings as securities seem arbitrary, with notable omissions like XRP and ETH, potentially indicating the SEC's strategic considerations and views on decentralization. -- While not foolproof, prices often reach a bottom (long-term or tactical) when they fail to react to negative news, a phenomenon known as bottoming on bad news. This week, we have witnessed the growing momentum of the SEC crackdown, yet crypto prices are shrugging these developments off. -- Our short-term outlook on market liquidity impacts from the TGA rebuild is incrementally less bearish than a month ago. If short-term rates remain competitive with SOFR (Secured Overnight Financing Rate), bill issuance should have a minimal effect on liquidity. Moreover, a pause from the Federal Reserve might stimulate a capital shift from money market funds into riskier assets. -- As humans, we have a natural tendency to recognize patterns, which explains why adjusting allocations based on reliable seasonal trends is understandable. However, it's worth noting that the historical performance of BTC during the months of June and July has been surprisingly impressive, contrary to popular belief. -- Core Strategy - Since our last rebalance, the Core Strategy outperformed BTC by a small margin. ETH and RPL were winners, while MATIC weighed down performance. Changes to the strategy include reducing exposure to SOL and MATIC due to legal concerns, decreasing stablecoin allocation, increasing BTC allocation, maintaining ETH weighting, and keeping RPL allocation unchanged based on ongoing growth and regulatory developments. ---- L . Thomas Block FS Insight Washington Policy Strategist -- President Trump was indicted, but there should be no immediate impact on policy. -- The far-right Freedom Caucus is angry at the debt-ceiling deal Speaker McCarthy negotiated with President Biden - and showing its displeasure. -- In the coming months, the legislative priority will shift to passing 12 different pieces of budgetary legislation and avoiding a government shutdown. ---- Wall Street Debrief - Weekly Roundup Key Takeaways -- The S&P 500 rose slightly this week to 4,298.86. The Nasdaq climbed to 13,259.14, and bitcoin fell slightly to about $26,460. -- Tom Lee explains his continued bullish outlook, commercial real estate, and artificial intelligence stock picks. -- Mark Newton's technical outlook shows a continued move upward through June. A lot of people, when they get negative on the market, put 50% in cash, but unfortunately a lot of times when you get to that position, it's just about when the market's going to rally. -- Peter Lynch At the end of 2022, Head of Research Tom Lee forecast that the S&P 500 would rise more than 900 points to end 2023 at 4,750. This week, the S&P 500 briefly broke past the 4,325 mark, putting us ahead of schedule as we head toward the year's midpoint. Pundits have admitted that Lee has been right for months: We believe a bull market has been underway for months, and now it's official, with the benchmark index up about 20% since the Oct. 12, 2022 low. In his 2023 Outlook, Lee called for Tech to lead the way, just as it has through the first five months of the year. Yet some, including our Head of Global Portfolio Strategy and Asset Allocation Brian Rauscher, have noted that although FAANG stocks have done well, the rest of the market had not shown similar strength in 2023. That has changed. As Head of Technical Strategy Mark Newton noted at our weekly huddle, The key takeaway for this week is that the market has started to broaden out in terms of its rally. In recent months, it was largely just technology that had been participating off the March lows, and that is now changing. He asserted, That's actually a good thing. Breadth has improved, Newton observed. The percentage of stocks above their 20-, 50- and 200-day moving averages have all shown really nice pickups in the last couple of weeks so that's also a good sign. Along with this has been a noticeable - if not extreme - change in sentiment. This rally hasn't gone unnoticed. For the first time literally almost all year we now see more bulls than bears on AAII. But when you look at CFTC data, when you look at the hedge funds, they're still shorting into this at the highest levels we've seen in two decades, so they still don't believe, Newton added. This reinforces Lee's continued bullish conviction. The hedge-fund short positions, along with more than $5 trillion in cash investors have parked on the sidelines, make for a lot of dry tinder that can fuel an explosive response upwards once the data makes a clear, positive shift - as Lee predicts it will. When speaking of specific sectors, Newton noted that Materials, Industrials, Consumer Discretionary, and Energy have picked up the pace in the last week. Newton said, Energy is a work in progress but XOP -0.87%, which is the oil exploration and production part of Energy, has broken out as of Wednesday. So this is interesting because crude is trying to stabilize after the news about the Saudi output cut. This is the area you want to be in, if you want to be in energy. Rauscher was not quite as sanguine about the overall sector. Based on his work, Energy continues to look weak, he told us at our weekly huddle. Yet he was not completely bearish on it, either: I still think before year-end it will kick in and be a full buy. But it does not look ready now. Industrials, another sector Lee has highlighted for this year, also did well this week. With global PMIs looking like they are bottoming, Lee believes that the sector is getting new traction. Newton and Rauscher both agree that the sector has rebounded. Even Rauscher had doubts about the sector's fundamentals, he conceded that Industrials are looking like they're acting well. One Industrials company that stood out for all three: Boeing (BA -0.37%). Boeing has had some great moves in recent days, Newton observed. Rauscher agreed: I've liked Boeing all year. Tom Lee also highlighted Boeing as one of the strongest Industrial stocks in the S&P 500 this week. Apple's Latest Apple (AAPL 0.15%) comprises 7% of the S&P, so it's little surprise that the market paid close attention to the company's Worldwide Developers Conference (WWDC) in Cupertino on Monday. Amidst the iterative improvements to iOS, Macbook, and watchOS, the star of the show was definitely Vision Pro, a headset/visor meant to spark wider adoption of what it calls spatial computing, with shades of augmented and virtual reality mixed in. The Street was not immediately excited (perhaps because the device's $3,500 price tag will likely limit mass adoption). As Newton noted, Apple made a new weekly and monthly all-time high, close as of the end of May, and now thus far has been last couple days have been churning. Still, Newton noted, I don't make much of that. I think Apple goes to $190. That should be good for the S&P obviously if that continues to move up. My cycle on Apple shows a move up into the latter part of June before a pullback. Coinbase and Binance Although bitcoin and other cryptocurrencies fell sharply after the SEC announced it was taking enforcement action against Binance and Coinbase in the first half of the week, they subsequently recouped much of that. Both moves were pretty well-telegraphed, explained Head of Crypto Strategy Sean Farrell. The SEC is going to do what they can to stifle the onramps for crypto, but ultimately, it's up to the courts to decide whether there is legitimacy or constitutionality behind these lawsuits. One way or another - whether it's through Congress or by litigating these lawsuits - the good news is we'll finally have clear rules of engagement around crypto, and I think the markets will really like that. Other observations from Lee this week: What companies will benefit from AI in the next decade? Lee says, It's a challenging question. It's not as easy as you'd think. Right now, people need GPUs, and that's why Nvidia is doing so well. But let's think back to 1999, 2000 and we said what companies are poised to benefit from the internet? I think a lot of people would have said, oh, well, it's the companies that make the plumbing for the Internet that would do well. And they did well for a while, but then a lot fell to the wayside. .. the companies that made money were the ones that made the internet a lot more accessible. They were essentially on-ramps, companies like Amazon, which provided e-commerce. So, in an AI world, there are going to be many winners. For now, I would stick with FAANG, and that's been our recommendation. On the looming commercial real estate crisis: I think there is going to be a crisis in commercial real estate, but I don't think it's as clear that there's a crisis for banks. We already have too many empty office buildings. Values have dropped. Banks have been somewhat protected [this time] because a lot of these loans haven't been necessarily done by banks, but by private lending. So we think stocks can still do well. The most important things: The most important thing for the next month, in our view, is the Fed's June FOMC rate decision on June 14. Their next most important economic data point is the June CPI. That's what we're going to be watching. As you get toward August 2023, you might see outright deflation coming out of Europe. That just underscores our view that inflation is tracking softer than expected...Also, consensus is starting to become more constructive. I think people are coming around to our view that we have a soft landing. Volatility is coming down. And you're not fighting the Fed if the Fed's on pause. The Fed may have completed its hikes for the year. Our Chart of the Week shows the extent of the recent decline in volatility: Our top picks as we approach summer: We still like FAANG, but we want to look at the FAANG laggards. Tesla, Netflix, Amazon, and Meta. That's going to make sense. I think there's still going to be a lot of leadership and heavy lifting done by large-cap FAANG, but we look at the laggards there as ones that will provide incremental returns: These have just started to outperform and shine. We also like industrials. They're acting better this week as part of the market breadth expansion story. The elevator pitch for more gains ahead: Is there still a case for markets to build on these gains? I do believe that's the case. Breadth is expanding. I think there's a case for multiple expansion as well and the earnings outlook is improving...If we talk about earnings growth improving when the Fed could be pausing, and we know short interest rose 7% last week when we look at futures contracts, it's all-time high short positions by institutions. I think that's fuel for the big stocks to stay where they are and the rest of the group to catch up, and I think that's why markets can actually advance another 10%. Battle-tested: Companies have really proven themselves pretty battle-tested. They survived Covid and the global shutdown. They survived a bullwhip effect in the supply chain. They survived a massive inflation wave. And yet investors are saying, these companies didn't go bankrupt in any of those cycles. To me, I think we should re-rate these companies higher.

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