S&P Futures Little Changed:
S&P futures are flat in Tuesday morning trading, pulling back from earlier highs. This follows a mostly positive Monday session where the S&P 500 reached its 40th all-time high for the year. Energy was the top-performing sector, with Tesla (TSLA-US) providing a significant boost to the consumer discretionary sector. Treasuries weakened with further curve steepening, while the Dollar Index remained little changed, and the yen weakened on dovish comments from BoJ Governor Ueda. Gold rose 0.2%, Bitcoin futures increased by 0.5%, and WTI crude jumped 2.3%.
The focus is on China’s policy support measures, which, although more aggressive than expected, have raised concerns that more robust fiscal stimulus is necessary to boost domestic demand. Structural issues in China’s property sector, such as destocking and debt restructuring, remain unaddressed. Otherwise, the session is relatively quiet. The market continues to weigh the Fed’s easing cycle and expectations of a soft landing, although near-term worries persist about negative seasonality and a fading buyback bid heading into earnings season.
US Economic Calendar
Today’s economic reports include the FHFA house price index, S&P Case-Shiller 20-city home price index for July, Conference Board consumer confidence, and the Richmond Fed manufacturing index for September. Fed Governor Bowman will also speak today after dissenting in favor of a 25 bp rate cut last week. She expressed concerns that a 50 bp cut could signal a “premature victory” over inflation and warned that a larger cut might stoke demand. The Treasury is set to auction $69B of 2-year notes today, followed by 5- and 7-year auctions later this week.
Fed Commentary/Positioning/Q3 Earnings Preview/Sentiment
Minneapolis Fed’s Kashkari (non-voter) supported last week’s 50 bp cut but expects smaller 25 bp cuts in November and December unless data changes significantly. He warned that the temporarily elevated neutral rate could become more structural. Atlanta Fed’s Bostic (voter) leaned toward a 25 bp cut, concerned about inflation, but agreed the larger cut showed commitment to addressing the cooling labor market. Chicago Fed’s Goolsbee (non-voter) took a dovish stance, expecting more rate cuts over the next year to avoid falling behind the curve. With 16 Fed member speeches expected this week, market pricing for a 25 vs 50 bp cut in November remains balanced at ~50%, with 57 bp of total cuts expected by year-end, per CME’s FedWatch
Positioning Not a Headwind for Further Upside; Inflows Have Room to Run: Despite a recent rally in equities, positioning isn’t seen as a barrier to further upside. JPMorgan noted hedge funds added more shorts than longs in the past four weeks, particularly in tech. Goldman Sachs reported a significant reduction in US tech positions, with long/short ratios hitting the 1st percentile on a 5-year lookback. BofA highlighted that CTA positioning in US equities remains unstretched, with only modest moves following recent all-time highs. Deutsche Bank noted systematic strategies are only slightly above neutral, and while $300B+ has flowed into equities since April, this is typical for upcycles, suggesting inflows can continue.
Q3 Earnings Growth Expected at +4.6%: With one week remaining in Q3, FactSet reports that S&P 500 earnings growth is expected at +4.6%, down from +7.8% at the start of the quarter. Tech, Healthcare, and Communications Services are expected to lead growth, while Energy is projected to see a double-digit earnings decline. Key themes for Q3 earnings include AI, Fed easing, a soft but healthy labor market, disinflation, consumer sentiment, operational efficiency, geopolitical tensions, and weak China data.
Labor Cost Moderation Positive for Margins, Limited EPS Impact: Slowing labor costs, with Goldman Sachs’ Wage Tracker at 3.9%, down from a 6% peak in August 2022, is a positive for profit margins. However, the impact on S&P 500 earnings is expected to be modest, with a 100 bp change in labor costs affecting EPS by just 0.7%. Goldman forecasts modest margin expansion of 24 bp to 11.7% for 2025, below the consensus expectation of 12.8%.
Big Jump in Sentiment, Large Equity Inflows: Recent sentiment and flow data indicate a surge in risk appetite. The AAII bull-bear spread increased 15.6 points to 24.4%, the largest weekly jump since last November. BofA reported US equities saw a $34B inflow for the week ending 18-Sep, the largest in nine weeks and the third largest this year. Utilities, which had been strong performers, saw the biggest outflow since May, while consumer funds saw the largest inflow in eight months.
Fed Rate Cuts Historically Positive for Stocks: The start of Fed rate cut cycles has historically been positive for equities. JPMorgan noted that in the last five easing cycles, the S&P 500 has gained 2.5% in the first month, 6.1% over six months, and 4.5% over a year. Goldman Sachs added that in non-recession scenarios, the S&P typically returned +6% over three months, +9% over six months, and +17% over 12 months after the first cut, with earnings driving the bulk of the gains. Defensives, particularly Utilities, have typically outperformed, with a median outperformance of 5 percentage points in the six months following a rate cut.
GICS Sector Breakdown | Stock Level
Information Technology
- Snowflake (SNOW-US) announced a $2B convertible note offering, leading to a drop in its stock price.
Financials
- Visa (V-US) is reportedly facing a potential lawsuit from the Department of Justice over monopolization of the debit card business.
Industrials
- Boeing (BA-US) is dealing with continued labor issues as striking machinists rejected the company’s final offer, calling it insufficient.
- Former President Trump has threatened Deere (DE-US) with 200% tariffs if the company moves production to Mexico.
Consumer Discretionary
- Tesla (TSLA-US) led the consumer discretionary sector on Monday, providing a significant boost.
- Starbucks (SBUX-US) was downgraded, along with Costco (COST-US), due to concerns about growth prospects and valuation.
- AutoZone (AZO-US) missed earnings estimates, citing deferrals in its discretionary merchandise categories.
- Thor Industries (THO-US) reported better-than-expected earnings but gave weak FY25 guidance, pointing to challenging industry conditions.
- Levi’s (LEVI-US) issued another warning of delays in reaching its $10B sales target.
Communication Services
- Liberty Broadband (LBRDK-US) surged on news of a merger proposal with Charter Communications (CHTR-US).
Consumer Staples
- Walmart (WMT-US) received an upgrade due to improving business fundamentals.
Overall, the session remains relatively calm, with key attention on economic data and corporate developments across several sectors.
Eco Data Releases | Tuesday September 24th, 2024
S&P 500 Constituent Earnings Announcements | Tuesday September 24th, 2024
Data sourced from FactSet Data Systems
