The bull market for the S&P 500 Index and Growth factor leadership are obvious, and we are aligned with those trends for July. Inflation prints have remained stable since a low of 3% yoy in June of 2023. Investors are starting to price in a more dovish Fed. over the next 6 months, which has been a boon to the Consumer Discretionary Sector.
Price Action & Performance
The S&P 500 is now >14% above its January 2022 high after breaking out above that level on January 19, 2024. Daily momentum gauges are overbought in the near-term, but they are not showing any negative divergence on the new highs. What is notable is the continued and building spread in performance between XLC and XLK on the positive side and the other 9 GICS Sector SPDR’s on the negative side. Stable inflation and deteriorating economic data have kept cyclical earnings surprises subdued while keeping macro tailwinds behind Growth stocks as interest rates have corrected lower over the intermediate term. However, the bull trend has now advanced far enough that rates are again rising in the near term. Our models suggest that investors will continue to favor Growth Sectors given a growing consensus that the Fed. will begin to lower rates in the second half of the year with commodities prices acting tepid and inflation data basically flat over the past 12 months.
Economic and Policy Drivers
The S&P 500 has been led throughout 2024 by XLC and XLK. Both sectors are powered by multiple Mag7 constituents and have benefited from technological adoption among consumers and businesses. Increased demand for cloud computing and storage, mobile computing, AI, data centers and cyber security have benefited from these trends while operating co.’s in other sectors are forced to invest in R&D to leverage these new technologies effectively in the future. As this played out in June, the Mega-Cap. Growth outperformance trend won big with the CPI print coming in basically unchanged from last month while NVDA managed to blow by their expected earnings target and print yet another huge quarter. This has upheld the bifurcated status quo of the US equity market.
Interest rate policy projections will continue to be critical to positioning. Rising rates would likely derail XLK and XLC leadership as benign scenarios appear to be priced into the leading stocks in those sectors. Typically, equity markets will also begin to react to the presidential election odds around this time of the year. In the recent past equities typically have responded favorably to the Republican Party’s nominee improving in the polls, typically with the assumption that taxes will be cut. That scenario is again on the table.
High level concerns for the equity market include a flagging consumer. Rates have been arrested to the upside, but they are still far higher than pre-covid levels. A particular pain point is the housing market where structural shortage has bumped into a high-cost environment with manufacturing wages moving steadily higher, fuel costs elevated above 10yr averages and some disaggregation of the global supply chain contributing.
Immigration policy will be an important driver of marginal gains or losses as the election comes into sharper focus as a principal difference between the candidates. Foreign policy is hard to predict, but as we watched the two very old men spar about inflation during the 1st presidential debate, we were struck by how far off the market they both were when discussing inflation. The view here is that the two main drivers of inflation going forward will be economic policy towards China (Donald Trump’s sanctions on China pre-covid and the subsequent dis-integration of the previous global supply chain were a driver of the current inflation we feel) and the abandonment of any sane immigration policy is the other big driver of inflation. Absent the salacious fear mongering on immigration, we should keep in mind that immigrants have long come to this country to work hard and do jobs that are typically very hard to fill because most Americans do not want or are unable to do them…migrant farm labor being one prime example, but many other services are now rising rapidly in cost because people who used to do the work for less money are no longer here.
How Can Sector Investing Help?
Sector investing is particularly useful in a period when the spread in performance between best and worst is as wide as it has been in 2024. XLC and XLK have been clear winners in a year when the average stock has underwhelmed. The Sector vehicles offer more targeted exposure on one hand while still giving far more diversification benefit than single stock positions. This our biggest trade recommendation is for investors to sell XLV and buy XLY. We also see XLE showing signs of improvement at the expense of XLB as firming petroleum prices have been a bit of a headwind to the Chemicals’ co.’s. Our 3rd big pos ition trade this month is to trade in XLP for XLRE
In Conclusion
Last month the bull continued to gain steam as investors gained more confidence that bearish inflation scenarios are increasingly unlikely. It is perceived that the Fed. will be compelled to respond to a deteriorating consumer and sky-high cost of housing by lowering the target interest rate in the 2nd half of the year. This has spurred a strengthening of the YTD bullish trend to new all-time highs. Our macro and technical inputs continue to favor Mega-Cap. Growth as the leading alpha generating theme in the US equity market and we continue to bet on sectors with high exposure to that theme.
ETFsector has created the Elev8 Sector Rotation Model Portfolio as a framework for establishing a differentiated monthly view vs. our S&P 500 benchmark. Our starting weights for July are as follows:
| Sector SPDR | +/- |
| XLK | 5.05% |
| XLC | 4.66% |
| XLY | 2.55% |
| XLF | 2.08% |
| XLI | 1.87% |
| XLE | 1.35% |
| XLRE | 1.10% |
| XLU | 0.98% |
| XLB | -2.15% |
| XLP | -5.77% |
| XLV | -11.72% |
Chart | S&P 500 Technicals
S&P 500 12-month, daily price (200-day m.a.|14-day RSI|12, 26, 9 MACD)
- S&P 500 re-established its uptrend in May
- MACD and RSI momentum gauges are showing persistent strength consistent with a strong bull trend
- Consumer Discretionary (XLY), Real Estate (XLRE) and Energy (XLE) have shown some signs of improvement and have been upgraded to OW positions in the Elev8 Sector Rotation Model. They have been replaced on the short side by XLB, XLP and XLV
