13th May 2024

Weekly Index Movement

S&P500+1.9%
Nasdaq+1.5%
Aussie All Ords+1.6%

How bearish can you be when the S&P is within 1% of an all-time high?

Why don’t we ask the Bears?

So, Mr Bear, what is your argument for stocks to fall?

Um…..well….they’re just too high….and…..um…government debt is too big……and…um….we are going to have a recession. So….yeah.

I will fill in for the Bulls.

  • The S&P is just 1% from making a new all-time high
  • The Nasdaq is 0.6% from a new all-time high
  • The Russell2000 is 3.0% from a 1-year high
  • MSCI Europe is 0.3% from a 1-year high
  • Small-cap European stocks are at a 1-year high
  • European Financials, a long-time underperforming group made a new 5+ year high
  • MSCI Emerging markets made a new 1-year high
  • MSCI China, whilst still 11% from a 1-year high has been on a tear recently.

Then the macro picture

  • Earnings are forecast to rise for the rest of 2024
  • Interest rates are forecast to fall by the end of 2024

The story is all very positive for US/Global stocks. Price action we have seen is all very typical of mid-cycle behaviour where markets twitch when monetary policy questions arise but otherwise find reasons to keep moving higher.

The only thing that can derail the Bulls is some kind of exogenous shock.

New York Fed on Homeowners

The New York Fed posted a very interesting blog post last week. I will try and summarise here

  • Homeowners are staying put far longer than in the past. Households changing addresses has gone from 20% in the mid-1980s to 5-10% since 2006.
  • When asked if mortgage rates are the reason for not selling house. Most said now. The NY Fed determined that high mortgage rates are not a primary factor in relocation plans.
  • Nearly all (91%) of US homeowners think they would have to take out a higher mortgage than they have now

Takeaway – there isn’t a lot of supply of existing houses for sale in the US.

Then consider that according to Gallop, immigration is the Top of the most important problem list facing the US.

and according to this article, immigration is higher now than at any point in the last 25 years.

So what we have is increasing demand with slow supply…..and we know what that leads to.

This probably explains why the homebuilders have been so strong. This is the Homebuilders ETF. XHB.

Even with the strong run for US homebuilding stocks over the last few years, the fundamentals outlined by the Fed’s research says demand for new housing will remain elevated for many years to come. The idea there is a structural shortage of US housing presents a new angle on these stocks and they could well be worth a allocation of capital.

US Big Tech Earnings

Now that every US Big Tech company except NVidia has reported earnings I thought I would take a look and see how it has affected analyst earnings estimates for the coming quarters

Three points here:

  • These 6 Big Tech companies make up a quarter of the S&P, and most (4-5 out of 6) have seen upward earnings estimate revisions for the current quarter and year over the past month. Big Tech’s stronger earnings estimate momentum versus the S&P as a whole shows why these stocks continue to mostly outperform the broader US equity market.
  • Just TSLA and META has worse earnings momentum than the index, whereas Google and Amazon are by far the largest outliers to the upside.
  • Wall Street analysts think just 2 Big Tech stocks have greater upside potential than the S&P 500 from here. These are MSFT and AMZN (+14 to +20 pct versus +11 pct for the S&P), and they are therefore the most attractive names versus the S&P if we use analysts’ price targets as a proxy for fair value.

I say it every week, but I am going to say it again. Make sure you own Google, Microsoft and Amazon at a minimum.

Bottom line: US Big Tech is outperforming the broader US equity market because most of these names have better earnings estimate momentum. These companies just proved they are able to keep delivering on earnings by beating expectations for the most recent quarter, save TSLA and NVDA (reports on May 22nd). As long as they keep doing that, they should be able to keep driving the S&P higher through year end given their outsized weightings in the index

Buffet agrees with me on Apple

The “Oracle of Omaha” spoke for hours at Berkshire Hathaway’s annual meeting this weekend, where he reflected on his mortality and paid tribute to his longtime partner and right-hand man, Charlie Munger, who died late last year. Chairman and CEO Warren Buffett discussed why Berkshire sold off its Apple investment by about 13% and he revealed that the conglomerate dumped its entire Paramount stake at a loss. Buffett also said his planned successor Greg Abel should be the one making investing decisions once he is no longer in the top role, including those involving the stock portfolio. During the meeting, Buffett also fielded questions from shareholders, opined on the future of artificial intelligence and praised Fed Chair Jerome Powell for his work steering the economy. “I not only hope you come next year. I hope I come next year,” Buffett said at the end of the meeting.

Remember that Buffet is a value investor so he buys low and sells high. He has sold a fair chunk of his Apple investment and is raising cash. I doubt he will deploy it any time soon, but when you have positions as big as his, it takes a long time to change your weightings.

Everyone agrees he is the best, so if he is trimming his Apple position, going to cash and waiting for the right time to snap up a bargain elsewhere, should you consider doing the same?

Next Week

Earnings season is almost over and overall the results were good. Next week, the crucial event will be Wednesday’s CPI. Markets think it will come in on expectations which is why the US dollar is weakening and equities are strong. The risk event to watch out for next week will be a high CPI reading which stocks would react negatively too. Based on recent trends, markets think this is only a very small probability.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.