Stocks Sink as Volatility Triggers Sell-Off

Right out of the gates on Monday, both the Equal Weighted S&P 500 & Russell 2000 ripped higher, making new 52-Week Highs through Wednesday before ultimately fading to end the week lower. The early-week rally signaled a continuation of the ongoing breadth thrust and broadening in the market. This broadening has been powered primarily by strong sector rotation out of the upper end of the market into smaller stocks that have not participated as much yet this year but stand to perform well as rates begin to come down. Now, while this broadening in the markets was a welcome sign, given how quickly the smaller stocks ran up once the rotation got underway, they quickly found themselves in deeply short-term overbought status, so the end of week decline was not unexpected. Pivoting to the major averages, as I mentioned last week, the headline S&P 500 index had risen 5 out of the past 6 weeks, which is quite extended, and it was due for at least a down week or two to allow for the inevitable profit taking. After setting two new all-time highs to begin the week, the S&P 500 itself also drifted down to end the week in the red by nearly 2.0%. Looking at where the S&P closed on Friday, it is approaching a key support level around 5475. In late June, the S&P was briefly rangebound at roughly this level before breaking out earlier this month. At present, the S&P is down 2.9% from its recent intra-day high. A drop down to this first key support level would only be a decline of 3.4% so if this period of choppiness continues, do not be surprised if the S&P 500 falls a bit further before finding a floor. Despite last week’s volatility, the health of the bull market is still strong. At the close on Friday, nearly 73% of S&P stocks were trading above their 200-Day moving average, confirming their long term uptrend. This is a bullish sign for the market’s longer term outlook. Once volatility shakes itself out of the market and the indexes find their footing, we expect stocks to continue climbing higher.

Investors have a crucial slate of macroeconomic reports due this week that will certainly elicit some response from the markets. The three main economic reports that we are watching for will be released in the back half of the week starting with the Q2 U.S. GDP first estimate & weekly Initial Jobless Claims. Then on Friday, undoubtedly the biggest report that markets will be tuned into will be Friday’s June PCE report. Each of these three reports will likely bear some significance for the market this week as we are heading into the July Fed meeting. In addition to this lineup of fresh economic data, there are some very notable companies that will report their second quarter earnings this week as well. Now that we are squarely in the heart of earnings season, many of the top large-cap stocks will begin to publish their quarterly numbers. Of the companies that are set to report this week, there are numerous ones that we would like to highlight including two ‘Mag-7’ companies in Alphabet Inc. & Tesla Inc.

Gross Domestic Product (GDP) – Thursday morning will bring us the BEA’s ‘first estimate’ report of U.S. second quarter GDP growth. GDP of course is a measure to track the total value of the goods and services produced in the country. The previous two quarter’s reports for Q4 of ’23 and Q1 of ‘24 showed that the U.S. economy had grown Q/Q 3.4% & 1.4% respectively.
- Initial forecasts project on average that U.S. GDP in the second quarter will have increased by 2.0%.

Initial Jobless Claims – The Department of Labor provides a weekly report that records new Initial Jobless Claims in the U.S. Over the past six months initial jobless claims have slowly continued to trend higher, however, still remaining below the recent high made last year in June. A key level to watch here is 240K, because when initial claims stay above this number for an extended period of time it can signal weakness in the labor market. Last week, initial claims came in a 243K, which was the highest number since last August.
- Thursday’s report is expected to show 238K new initial claims, which is in the range of the previous month’s reports. Should this number continue to trend higher and stay elevated above 240K and approach 300K, expect this to upset some investors.

Personal Consumption Expenditures Price Index (PCE) – To close out the trading week, on Friday, the new PCE & Core PCE data for the month of June will be released. The PCE price index data is gathered to track the costs that U.S. consumers are paying for goods and services and to document the change in these costs over time. Core PCE is a pared down measure that excludes more volatile categories like Food & Energy and this is the index the Fed watches the most closely.
- June’s YoY Core PCE number is expected to come in at 2.5%, which would mark a consecutive monthly decline. This would be a welcome result for investors as it would signal further progress on taming inflation.

Federal Reserve Watch

The past week was a relatively quiet week regarding news from the Fed as members were quickly approaching their pre-meeting ‘quiet period’ (this week). There were a handful of speaking engagements for various Fed officials, however, not much new was gleaned from their comments. The comment that grabbed the most headlines was when Fed Governor Waller stated that the FOMC is ‘getting closer’ to cutting rates. This comment and messaging from other Fed officials last week are largely in line with what Fed Chair Powell has been signaling for a few weeks now. That the committee acknowledges that there has been significant progress on bringing inflation back down to the FOMC’s goal of 2.0% and also that the committee is well aware of the double sided risks related to leaving the Fed Funds rate at an elevated level. This acknowledgement has been perceived by investors that Powell and the committee are aware of the downside risk of leaving rates too high for too long and that this is in the forefront of their minds, and it now is a greater concern for them than inflation creeping back up. Powell stated that he and FOMC members want to see a few more positive inflation reports before enacting the first rate cut. Essentially, Powell was telegraphing that if the next two PCE inflation reports continue to show strong progress on inflation, that the committee is prepared to cut at the September meeting.

The next Fed meeting is scheduled for roughly a week and a half from now, at the end of July. Investors have little expectation that the Fed will opt to reduce rates at this meeting. Now, with recent economic data beginning to show some mild weakness and inflation reports consistently coming in cooler than expected, markets are all but convinced that the ‘Soft Landing’ narrative is going to come to fruition and the first rate cut is coming soon. Since there is little expectation that the cutting cycle will begin later this month at the July meeting, let’s look beyond this meeting, on to the final three meetings of the year. After the market close on Friday, the CME FedWatch tool shows that investors are now placing a 98.1% probability of a rate cut occurring in September, kicking off the rate cutting cycle. Looking at current Fed Funds futures, investors feel we will end the year with the Fed’s policy rate in the range of 4.75%-5.00% which would be 50 basis points lower than status quo. This indicates that at present the market is anticipating two rate cuts this year, however, with recent developments, Fed Funds futures are not far from indicating that investors are betting on three rates cuts before years end. Only a slight movement in the futures markets and this would be the case. So, three rate cuts this year is beginning to look like it may be back in play. At market close on Friday, Fed Futures odds for the November & December meetings show that markets are pricing in the likelihood of a rate cut at 99.2% & 99.9% respectively.

This Week’s Notable Earnings

Now that we are a few weeks into Q2 earnings season, companies’ earnings have come in well thus far with 80% of S&P 500 companies reporting EPS upside beats. Investors should be quite pleased if this trend continues. This week we have another busy week of earnings as many notable large-cap companies are scheduled to report their Q2 results. The companies that we feel are worth highlighting are two ‘Mag-7’ names in Alphabet Inc. & Tesla Inc. Additionally, two major pharmaceutical companies in AbbVie & AstraZeneca PLC are set to report this week. Finally, a major industrial aerospace player, GE Aerospace is also expected to report this week.

This week investors will get their first taste of ‘Mag-7’ Q2 earnings when GOOGL & TSLA report their earnings after market close on Tuesday. Analysts’ expectations for each companies’ earnings are quite different. Analysts are forecasting that GOOGL will post 28.5% YoY growth on their Q2 EPS while the expectation is that TSLA is going to report a 31.9% YoY decline in their Q2 EPS as the E.V. sales slump drags on.
- GOOGL earnings are expected to come in at $1.85 EPS.
- TSLA earnings are expected to come in at $0.62 EPS.

Prior to the opening bell on Thursday, two major pharmaceutical firms in AbbVie Inc. & AstraZeneca PLC will report their Q2 earnings results. The expectation is that ABBV will report a YoY decline of 12.0% in their Q2 earnings while AZN will post an 11.1% YoY increase in Q2 EPS. Both ABBV & AZN have had periods of strong performance this year. Investors will be hungry to see if either company can deliver strong results and guidance.
- ABBV earnings are expected to come in at $2.56 EPS.
- AZN earnings are expected to come in at $1.20 EPS.

On Tuesday before the market open, investors will hear from industrial giant GE Aerospace. GE shares began the year racing higher, greatly outperforming the broader market but have since cooled and have traded sideways in a consolidation pattern. The market’s expectations are that GE will report a very nice 45.6% YoY growth rate in their Q2 earnings. Should GE deliver strong results, perhaps this could be the catalyst to break the stock out of the recent consolidation.
- GE earnings are expected to come in at $0.99 EPS.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,