CONSUMER WATCH
Tuesday, we get May’s retail sales report. During the pandemic, spending on goods outpaced labor income and total spending. Retail sales grew in line with income and total spending in 2022. Since 2023, retail sales growth has been trailing and been more volatile. During the first 4 months of this year, retail sales rose 2.3% YoY on average. considerably slower than the 5.4% growth in payrolls.
The good news is that payrolls were up 0.57% MoM in May and 5.4% YoY. Also consider that CPI-Core Goods was –1.7% YoY in May while total CPI was +3.3%.
Analyzing its internal May data, Bank of America sees that consumer spending momentum slowed from last year but remains solid. “Total card spending per household grew 0.7% year-over-year (YoY) in May, following the 1.0% YoY increase in April.”
The Market Is Blowing Off What the Fed Is Saying About Rates
The Wall Street axiom warns to “never fight the Fed.” But that’s exactly what traders are doing, and it could spark a rally in some of the forgotten corners of the stock market.
Federal Reserve forecasts and comments from central bankers couldn’t be more clear. Investors are being warned that interest rates will stay higher for longer than they’d expected, with the median projection from Fed officials calling for one interest rate cut this year.
And yet cash is pouring into stocks that benefit from lower borrowing costs. The technology sector had $2.1 billion of inflows this week, the most since March, according to data compiled by EPFR Global and Bank of America. (…)
Historically, rate cuts have marked a key inflection point that has ushered in strong equity returns — but only for cycles that aren’t triggered by a recession, like this one. That would explain why the latest flows data from Bank of America and EPFR Global show a rotation into financials, materials and utilities — three crucial groups closely tied to the economy that historically benefit from rate cuts as long as there’s robust economic growth.
The consensus expectation is that economic growth will remain sturdy, with the Atlanta Fed’s GDPNow model projecting second-quarter real GDP growth climbing to a 3.1% annual rate, from a 1.3% pace in the first quarter. (…)
Aggregate equity positioning has now climbed to its highest level since November 2021, when the Nasdaq 100 was at a peak, data through the week ended June 14 compiled by Deutsche Bank AG show. (…)
Goldman Sachs Boosts S&P 500 Target on Upbeat Profit Outlook Firm lifts index’s year-end estimate to 5,600 by 2024’s close
The bank’s equity strategists led by David Kostin now see the US stock benchmark index finishing the year at 5,600, up from a 5,200 level they predicted in February. The new target implies a roughly 3% advance in the gauge from its Friday close.
Goldman’s upgraded target ties with that from UBS Group AG’s Jonathan Golub and BMO Capital Markets’ Brian Belski for the highest on Wall Street.
The upgrade in the target is “driven by milder-than-average negative earnings revisions and a higher fair value P/E multiple,” Kostin, the firm’s chief US equity strategist, wrote in a note to clients on Friday.
The upgrade comes one month after Kostin reiterated the firm’s 5,200 target, stating there was no further room for upside in the 500-member gauge through December. (…)
While the firm’s strategists maintained their earnings-per-share forecast for 2024 and 2025, they noted that robust earnings growth by the top five megacap technology stocks have offset the “typical pattern of negative revisions to consensus EPS estimates.” Kostin also raised the S&P 500’s price-earnings multiple he deems fair to 20.4 from 19.5.
Kostin gamed out several other scenarios in which stocks can run even higher than his new baseline forecast. If gains broaden out and lift the S&P 500 Equal Weight Index, the main, cap-weighted benchmark could rise another 9% to 5,900 before 2024 closes out. In his most optimistic case, if mega-cap “exceptionalism” persists, the gauge could soar to 6,300 by the end of the year.
Conversely, if earnings estimates prove too optimistic or recession fears resurface among investors, the S&P 500 could see a correction of about 13% and fall to 4,700.
More from Kostin:
- Five stocks have accounted for 60% of the aggregate S&P 500 index’s year to date return. MSFT, NVDA, GOOGL, AMZN, and META have collectively surged by 45% and now comprise 25% of the S&P 500 equity cap. The drivers of the rally include upward revisions to consensus 2024 earnings estimates for these same tech companies, and valuation expansion stemming from increased investor enthusiasm about artificial intelligence (AI).
- The five companies listed above posted 1Q year/year EPS growth of 84% vs 5% for the typical S&P 500 stock. Strong results for the past four quarters have prompted analysts to raise their 2024 EPS forecasts by 38% for these five Tech stocks. In contrast, the profit forecast for the other 495 stocks in the index have been reduced by 5%. Consensus 2024 forecasts imply a 31 pp gap between EPS growth for these five stocks and the median S&P 500 firm (37% vs. 6%). However, the gap is expected to narrow to 8 pp in 2025 and 4 pp in 2026.
- Aggregate S&P 500 EPS estimates are unchanged YTD. Stable S&P 500 earnings estimates are unusual. Historically, starting at June of the previous year, consensus estimates have been cut by an average of 7%. We expect revisions to consensus S&P 500 EPS estimates will continue to be milder-than-average through year-end given the upward revisions to mega-cap tech earnings that have already taken place this year. However, we maintain our earnings forecasts for 2024 ($241, +8%) and 2025 ($256, +6%), as we believe consensus margin estimates for next year remain too optimistic.
- We generate our aggregate S&P 500 P/E forecast by separately modeling the P/E for the equal-weight S&P 500 index and the premium of the aggregate S&P 500. We model the equal-weight P/E as a function of real yields, the distance of forward inflation from 2%, the tightness of the labor market, demographics, and the change in earnings growth. We model the premium as a function of the difference in aggregate vs. median long-term EPS growth and return on equity, as well as CEO confidence.
- Today’s aggregate S&P 500 P/E of 21.1x reflects an equal-weight multiple of 16x and a 30% premium between the aggregate and equal-weight index. Currently, our model implies a fair-value equal-weight P/E of 15x, 9% below today’s valuation, and implies a 40% premium of the aggregate vs. the equal-weight P/E, above the actual premium of 30%. Taken together, these two components imply a fair-value aggregate S&P 500 P/E of 20.5x, suggesting the index trades close to fair value.
Trailing EPS are now $226.51. Full year 2024: $244.73e. Forward EPS: $253.42e.
The Rule of 20 Fair Value P/E is 16.6 (20.0 minus inflation of 3.4%), very close to Kostin’s “16x equal-weight multiple”. The S&P 500 Fair Value per the Rule of 20 is 3760. The current 44% “overvaluation”, which takes no account of the “magnificent stocks”, is in line with Kostin’s calculation of a 40% premium accounting for the “magnificent stocks”.
Follow the leader:
Evercore ISI Sees S&P 500 Gain Raging On, Upping Target to 6,000 Emanuel’s previous target was among the lowest on Wall Street
Julian Emanuel, the firm’s chief equity and quantitative strategist, raised his year-end forecast on the S&P 500 Index to 6,000, the highest among major equity strategists tracked by Bloomberg — and roughly 10% above the gauge’s closing level on Friday. That’s an about face from one of Wall Street’s most prominent bears who previously expected the gauge to finish the year at 4,750.
(…) Emanuel says ebbing inflation and artificial-intelligence fervor will propel stocks even higher. (…)
Emanuel also raised his estimate for the index’s per-share earnings in 2024 and 2025 to $238 and $251, respectively. The new levels imply a 8% and 5% profit growth, he said. (…)
While AI exuberance has pushed valuations “to the top decile since 1960,” the S&P 500’s price-earnings multiples may remain elevated for “extended periods,” Emanuel said. (…)
Among the big Wall Street banks, JPMorgan Chase & Co. has the lowest year-end target for the S&P 500 at 4,200, implying a drop of more than 20% from Friday’s closing level.
Momentum Meltup, Blowoff Top, Or Both? (Ed Yardeni)
(…) Is this the start of an earnings-led meltup, a P/E-led meltup, or a classic technical blowoff top? Last week, Adobe, Broadcom, and Adobe all soared. Nvidia rose to yet another record high. Industry analysts are raising their earnings expectations for the S&P 500 Tech sector, which is now trading at 30.4 times forward earnings. That’s high, but still below the blowoff multiple of 55.5 on March, 27, 2000, just before the Tech Wreck. (…)
From Callum Thomas:
The *index* is the epitome of a bull market uptrend. Yet, over half of the 500 companies that make up the index are tracking *below* their 100-day moving averages. It’s a case study in narrow leadership and bearish breadth divergence.
Source: MarketCharts extensive indicator set and charting tools
Tech stocks are likewise going from strength to strength on the surface, but meanwhile the breadth of tech sector components shows a picture of relative weakness under the surface, even in tech. Or to put it differently, this is increasingly a market driven higher only by the largest of the largest in Tech.
Source: @_rob_anderson
Another sign of narrow leadership is the extent to which individual stocks in the S&P 500 are underperforming vs the index (~2 thirds to May) — this is reaching similar levels as the later more-frenzied stages of the dot com bubble in 1998/99. It makes it harder for stock pickers to beat the index (other than just buying and market timing in the biggest stocks), but it also shows a vulnerability as any weakness in the biggest stocks could unwind all their hard work in dragging the index higher.
Source: @FrancoisTrahan
TOO MUCH POWER!
China’s dominance of world’s supply chains is being tested
(…) At home, prices have collapsed after a breakneck expansion created far too much capacity, forcing many firms to sell at a loss. Abroad, China’s dominance of the world’s supply chains is being tested by an explosion in protectionism. And the rapid uptake of solar power, the best story going in the fight against climate change, is now facing resistance as electricity grids chafe at handling a flood of energy available in the day that then disappears at night.
“We’re entering into a deep down-cycle,” Amy Song, vice president at solar material maker GCL Technology Holdings Ltd., said in an interview on Friday with Bloomberg TV. “Barely anyone is making money right now.” (…)
The world added 445 gigawatts of solar panels last year, more than all other power sources combined in any year of human history. Most of them were made in China.
That’s propelled the growth of multi-billion dollar companies, which are now comparable to the giants of oil and gas. But it’s also created the conditions that have bedeviled commodities markets through the ages. China’s solar companies have boomed, and now they’re heading for a bust that could eclipse earlier downturns in the industry’s fortunes.
A surge in demand that began three years ago boosted prices, unlocking ambitious expansion plans that have resulted in too much supply. Chinese companies ended 2023 with the ability to produce 1,154 gigawatts of solar modules — more than double the capacity at the close of 2021. Projected demand this year is just 585 gigawatts, according to BloombergNEF. (…)
Companies looked out for their own interests without considering the overall impact if all their rivals acted the same way, said Gao Jifan, chairman of Trina Solar Co, the world’s third-largest manufacturer of panels. They were helped along by local governments eager to meet their growth targets and banks hungry to make loans, he said.
Gao was one of several executives who called last week on the central government to intervene to help the industry get back on its feet. The menu of options presented included regulating which new factories can be built, cracking down on less-efficient facilities, capping price cuts, and promoting consolidation. (…)
Industry executives have warned that bankruptcies are in the offing. (…)
Chinese companies control more than 80% of capacity along every step of the supply chain. (…)
Despite the dire outlook, there are reasons for optimism in the industry. Demand will continue to grow through the next decade, doing more than any other source to help the world decarbonize. And healthy profits from 2021 to 2023 mean many firms are sitting on large cash deposits to help them through the downturn.
But the issues faced by the industry are technical as well as commercial.
China installed a record 217 gigawatts of panels last year — more than has ever been built in the US — and solar now accounts for 22% of the country’s total generating capacity. But sunlight’s intermittency is straining the electricity grid.
Hundreds of small cities have halted approvals for new rooftop solar projects, and panels across the country are seeing their hours of usage reduced as the grid rejects their electricity because there’s not enough space for it during daylight hours. (…)
The broader solution is for grids around the world to build more power lines that can transfer excess clean power to where it’s needed. More storage, mainly via batteries, is also required. But adding those costs means solar power will need to keep getting cheaper.
For now, the industry is focused on belt-tightening. Longi Green Energy Technology Co., once the world’s most valuable solar manufacturer, announced earlier this year it would lay off thousands of workers. Others have halted production. Smaller producers are being forced to delist their shares from stock exchanges.
Wuxi Suntech Power Co. Chairman Wu Fei likened China’s solar sector to the home appliance makers of 15 years ago, when 300 or so companies vied to sell washing machines, fridges and air conditioners across the country. That industry has consolidated to just a handful of players, he said, and solar will likely follow suit. (…)
Meanwhile, in the USA (Axios):
A Maryland county just north of Washington, D.C., is embarking on an ambitious effort to provide clean, sustainable public transit — even to the point of installing a microgrid for its own electricity and hydrogen fuel production.
Self-sufficient energy systems, or microgrids, are emerging as an important clean energy tool for communities, businesses and government agencies.
- Microgrids operate independently of the main grid, like a sustainable island, ensuring uninterrupted power — meaning officials don’t have to worry about increased electricity demand.
- That’s crucial if you’re trying to run a fleet of electric or hydrogen-powered buses.
The 5.5 megawatt bus depot project, designed and operated by microgrid company AlphaStruxure, includes solar panels, electric bus chargers, battery energy storage and a hydrogen electrolyzer.
- The solar panels and Schneider Electric-built battery will supply energy to the electric bus chargers and power the electrolyzer, which splits water into hydrogen and oxygen molecules through a process called electrolysis.
- That locally-produced hydrogen will be used by the new fleet of fuel-cell buses.
Solar panels will power a hydrogen electrolyzer for clean transit buses in Montgomery County, Md. Computer rendering: Courtesy of AlphaStruxure
China Property Drag Is Getting Worse, Factory Output Disappoints Retail spending picked up but remains weak by past standards
Retail sales rose 3.7% from a year earlier in May, better than a 2.3% year-over-year increase in April.
Industrial production rose 5.6% from a year earlier, the National Bureau of Statistics said, slowing from April and missing the median forecast in a Bloomberg survey. Retail sales offered some encouragement, picking up more than expected, but Chinese shoppers remain far from recovering their pre-pandemic mojo.
Source: Bloomberg Economics based on National Bureau of Statistics
Overall fixed-asset investment rose 4% in January-May, down from 4.2% in the first four months — even though there’s been a pickup in government bond issuance to fund infrastructure spending. (…)
The acceleration in retail sales was the first since November. At 3.7% the pace remains less than half of the 8% or so that was typical before the pandemic, even though social and economic life has largely returned to normal. (…)
Seeking to shore up demand at home, China rolled out a program in April that offers incentives for businesses and households to upgrade old machinery. Part of the plan involves government subsidies for buyers of new cars. Monday’s data suggests the impact has been limited. Retail sales of automobiles fell 4.4% from a year earlier in May, only a slight improvement from the previous month.
In a survey of more than 400 top executives conducted by UBS Group AG over roughly a month through mid-May, firms reported weaker prospects for orders, revenue and margins compared with the same period of 2023. There was a drop in the share of respondents who plan to increase capital expenditure in the second half of this year.
(ING)
A tip for you! “Donald Trump’s proposal to exempt tips from taxation may add up to $250 billion to the federal deficit over 10 years, a budget watchdog group forecast.”
- Corporate Tax Rate Spurs Political Fight With Over $1 Trillion at Stake The two parties are trying to turn the 21% rate in opposite directions—with each percentage point worth more than $130 billion over a decade in tax revenue.
The rate could climb as high as 28% if Democrats sweep November’s elections and move as low as 15% if Republicans gain full power.
Top CEOs Are Flocking to Trump Again in Bid to Shape Agenda Seeing the chance of a victory by the former president, business leaders want a seat at the table.
(…) Many who distanced themselves from Trump following the Jan. 6, 2021, riot at the Capitol by the former president’s supporters have softened their criticisms. (…)
Dimon, Moynihan, Citi CEO Jane Fraser and Wells Fargo’s Charlie Scharf were all in attendance at the Business Roundtable meeting Thursday where Trump addressed the group. Trump told them that as president, he would be better than Biden on taxes and the economy. He said the corporate tax rate should be at 20%, at one point positing it could go as low as 15%, his campaign’s original target, according to a person who was there. (…)
Moynihan, more understated than Dimon, has criticized Biden’s policies as bad for business, based on conversations with the bank’s clients. He has told people that bank clients, many in the middle of the country, are complaining about Biden’s policies, specifically about permitting for energy projects and dealmaking.
Trump is happy to tell business leaders mostly what they want to hear. Besides more tax cuts, he has said he would be friendly to artificial intelligence and light on regulation, in particular for dealmaking. The Federal Trade Commission during the Biden administration has been among the most aggressive in recent years trying to block mergers and rein in giant companies.
But Trump’s policies in areas such as immigration and statements he has made that question the rule of law make businesses wary. On Thursday, he floated to House Republicans the idea—lacking in details—of an all-tariff federal revenue system, large enough to replace the income tax. (…)
Despite some CEO grumbling, businesses have thrived under Biden. Stocks are near records, corporate profits are up, inflation has come down and the economy has so far managed a soft landing despite aggressive interest-rate increases from the Federal Reserve. Industries such as energy that appeared to be at risk from Biden’s policies have done well. (…)
Mark Twain, totally unrelated to any of the above:
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“Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.”