S&P futures are up 0.3% in early trading on Tuesday, following a positive start to the week despite a pullback in the Mag 7 tech names and semiconductors. Financials, Energy, and Materials were among the standouts on Monday. Asian markets were mixed overnight, with Hong Kong leading gains due to strength in property stocks, while Japan’s Nikkei lagged with a 1% drop. European markets are trading higher as well. In other markets, Treasuries are unchanged to slightly weaker at the short end of the curve, the Dollar Index is down 0.1%, Gold is off by 0.3%, Bitcoin futures are up 2.4%, and WTI crude is up 0.2%.
Monday saw major US indices mixed with the S&P 500 adding 0.13% while the Dow was up 0.55% and the Nasdaq lagged, giving back 0.52% on the day. Tech and Staples sectors were laggards as Value and Cyclicality were leading factors on the day.
Markets remain relatively quiet ahead of the FOMC meeting on Wednesday, where the main debate continues over whether the Fed will implement a 25 or 50 basis point rate cut to kick off the new easing cycle. This potential pivot by the Fed, combined with hopes of an economic soft landing, is driving the bullish market sentiment. Other positive drivers include the ongoing AI secular growth theme, a broadening in earnings growth, over $900 billion in year-to-date corporate buyback authorizations, and favorable Q4 seasonality. However, near-term risks persist, including negative September seasonality, corporate buyback blackout periods, and election-related uncertainty.
Information Technology
- Microsoft (MSFT-US) made headlines with the announcement of a new $60B share repurchase program and a quarterly dividend increase of nearly 11%. This signals confidence in its cash flow and long-term growth, adding to the broader narrative of tech sector strength.
- Intel (INTC-US) extended Monday’s rally, boosted by news of its production of an AI fabric chip for AWS on Intel’s advanced 18A process. This is part of a series of recent AI-related developments, contributing to the broader optimism around Intel’s comeback in the AI chip space.
Consumer Discretionary
- Starbucks (SBUX-US) announced that Michael Conway, the CEO of Starbucks North America, will retire in November. The company has not yet named a successor. This comes as Starbucks navigates a challenging post-pandemic environment with shifts in consumer behavior and ongoing labor relations issues.
Materials
- Steel Dynamics (STLD-US) issued disappointing guidance for Q3, projecting earnings nearly 6% below consensus at the midpoint, primarily due to lower average selling prices within its flat-rolled steel operations. This highlights ongoing price volatility in the steel market as demand fluctuates.
Financials
Financials were a top-performing sector on Monday, with expectations that the Fed’s potential rate cuts could benefit banks and other financial institutions. The sector continues to draw attention as discussions around economic resilience and credit conditions evolve. The potential softening of rates is viewed as a tailwind for bank margins and lending activities, despite recent concerns about growth risks.
Retail Sales & FOMC
Today’s highlight on the economic calendar is August retail sales data. The market is anticipating a decline of 0.2% month-over-month, following a 1.0% increase in July. The key control group is expected to rise by 0.3%, following a 0.4% increase in July. Weakness in autos and softer gas prices are likely contributors to the expected decline, along with possible payback from stronger sales in June and July. However, the control group’s resilience is a positive sign for consumer spending heading into Q4. Retailers have conveyed a cautiously optimistic tone on consumer trends into the second half of the year, with strong performances from back-to-school (BTS) and Halloween shopping, according to comments from Goldman Sachs’ Global Retailing Conference.
The FOMC decision on Wednesday remains the major macro event of the week, with the market fully pricing in a rate cut, though it remains divided on whether it will be 25 or 50 basis points. Recent reports have suggested that a more aggressive move has not been ruled out, especially given that the core CPI on a three-month annualized basis aligns with the Fed’s 2% target. Powell’s press conference is expected to emphasize a dovish stance, consistent with his Jackson Hole remarks, focusing more on growth risks rather than inflation concerns. Most economists expect the new dot plot to show 75 basis points of cuts in 2024, though markets are pricing in closer to 110 basis points in cuts by year-end.
Macroeconomic Data and Earnings Reports
Other key data releases today include industrial production, the NAHB housing market index, and business inventories. Additionally, the Treasury will sell $13B of 20-year notes this afternoon. Later this week, reports on housing starts, building permits, initial claims, the Philly Fed manufacturing survey, and existing home sales will provide further insights into economic conditions.
On the earnings front, General Mills is set to report its fiscal Q1 results on Wednesday morning. The company recently reaffirmed its FY25 financial targets, though the market will be watching for updates on sluggish organic sales and how investments are ramping up to drive volume growth. Darden Restaurants will report on Thursday, with expectations of continued softness at Olive Garden, though analysts are optimistic about cost controls. FedEx will release its fiscal Q1 results after Thursday’s close, with the market focused on the company’s cost-cutting efforts and potential spin-off of its Freight business. Lennar is also set to report Q3 earnings on Thursday, with the stock previously lagging due to concerns about a Q4 margin ramp, despite strong performance in the homebuilder space overall.
Sector Positioning & Outlook
Positioning continues to lean defensive despite last week’s equity market rally, leaving the S&P 500 just 1% below its mid-July all-time high. Deutsche Bank noted that overall equity positioning has fallen to just above neutral, with a shift away from tech and into defensive sectors like Utilities, which have benefited from lower interest rates and exposure to AI-related infrastructure growth. Goldman Sachs’ sentiment indicator is at its lowest level since October 2023, suggesting that while a continued rally is possible, fading buyback activity and increased supply could pose challenges.
Gasoline prices are trending lower, offering a disinflationary tailwind for consumer spending. A Jefferies report noted that a 16% year-over-year drop in gasoline prices is a rare event, historically associated with an average 18% gain in the S&P 500 over the next year. This aligns with expectations for stronger discretionary spending as consumers benefit from cheaper fuel.
Big Tech Earnings Outlook
As the market looks ahead to Q3 earnings season, Big Tech is expected to be a key driver, although outperformance may narrow. FactSet estimates S&P 500 earnings will grow 4.9% year-over-year in Q3, down from the initial estimate of 7.8%. Tech, Healthcare, and Communication Services are forecasted to deliver double-digit earnings growth, while Energy is expected to contract. UBS expects the six largest tech names to grow earnings by 16.3% in Q3, compared to a 1.5% rise for the broader S&P 500, though this gap is expected to shrink slightly in Q4.
In summary, markets remain focused on the Fed’s next move, with retail sales and earnings reports providing key insights into economic resilience. Defensive positioning continues to gain traction, while cheaper gas and big tech earnings could offer support in the months ahead
Eco Data Releases | Tuesday September 17th, 2024
S&P 500 Constituent Earnings Announcements | Tuesday September 17th, 2024
No S&P 500 Constituents report today
Data sourced from FactSet Data Systems
