The Charts Say Don’t Chase Stock Market Rally

AJeff Buchbinder:

Hello everyone, and welcome to the latest LPL Market Signals podcast. Jeff Bookbinder here, your host for this week, with my friend and colleague, Adam Turnquist. It is July 1, 2024 as we are recording this. So happy July. Happy July Fourth week. Happy early birthday America. Adam, how are you today?

Adam Turnquist:

I am good. Getting excited for the Fourth of July. Still have some fireworks shopping to do, hopefully today. But getting pumped up for it. We got good weather here in the Midwest.

Jeff Buchbinder:

Yeah, Wisconsin's certainly a place where I'm sure you can get them. Oh, yeah. Probably a little harder where I'm at. Well, we just go up to New Hampshire, folks in Massachusetts. So not too far. So everybody be safe this holiday, first of all. So here's our agenda for this week. We're going to have, you know, a quick recap of last week's market action as we always do. Then we'll get into the charts, which of course, is Adam's specialty. So you picked three charts in particular to go over this week. Next, I think it's three charts. Next, we'll talk about seasonality. July is a good seasonal month, spoiler alert, and the first half is particularly strong. Next, the Weekly Market Commentary this week is on earnings season. An earnings preview.

Jeff Buchbinder:

We're a little early because next week we're going to publish our Midyear Outlook, and we really don't want to distract from that with too many other things going on. So look for our Midyear Outlook to be released on the ninth. And certainly, that'll be available on LPL.com, just like the weekly commentaries are. So looking forward to that. So we're a little early on earning season, but the twelfth is when the big banks report so not too early. Then we'll close with the preview of the week ahead, even though it's a holiday week, we've got very important economic data certainly coming this week. So we'll get into that too. So we'll start with last week's market recap. We closed out, you know, not only a week, but closed out a month, closed out a quarter, and closed out the half. All positive except for the week, but we'll call it flat on the S&P. I guess the Russell 2000 was the standout. I mean, we haven't really seen Adam enough to get excited about small caps. We still have a neutral view. Have you seen anything out of the Russell 2000 lately that gets you more interested or no?

Adam Turnquist:

No. Other than fits and starts of some outperformance, but when you look at the chart of the Russell right now, it's just range bound. So neutral makes sense technically. Still needs to get through those December highs to really participate in this bull market, and I think that would be a good sign for that rotation we're looking for. Just not seeing it in small caps right now.

Jeff Buchbinder:

Yeah, I think when we do get the rotation, you're going to probably see better performance out of small. And then on the sector side, probably cyclical value. So that's where we're kind of barbelling things, right? We don't want to be underweight tech. We don't want to be underweight mega cap tech. So we're still generally speaking neutral those areas. But also positive on industrials, which is cyclical value and positive on energy. Also, cyclical value. Great week for energy last week. Looks like, I mean, it's not a good reason, right? Geopolitical conflict, but it looks like that is finally starting to, you know, boost the energy sector. So it's still, we think a pretty decent hedge against, you know, potentially widening conflict in the Middle East. You didn't see it held in natural gas but we did get a little bit of a bounce in crude. You'll see that on the next page. So energy, a big winner last week. Communication services, which of course, has a lot of digital media. Mega cap tech with Alphabet and Meta so strong week for that sector as well. And of course that meant you had a great week for growth. You know, the comm services is a very growthy sector and consumer discretionary also outperformed, also a growthy sector. Anything catch your eye Adam, in terms of sector performance last week,

Adam Turnquist:

Just going back to comm services, an area that we like, obviously from our Strategic and Tactical Asset Allocation Committee. You can see year to date up 27%. Sounds like a big number, maybe due for a bit of a breather, but it's not even breaking out to record highs yet. It's just getting close to that breakout point. So typically when you hit new highs, momentum continues. So that rally, I think, could have some legs if we get that breakout point in comm services. So that's a sector to watch over the coming weeks.

Jeff Buchbinder:

Yeah. Absolutely been a big winner this year for sure, but is getting a little less attention than just basic tech. Also a little bit more diversified than tech. More on that a little bit later. Turning to international markets. Of course, all eyes are on the French elections. The market has liked the prospects for the far-right National Rally party to not get an overwhelming majority. The, you know, the phrase gridlock, you know, stocks like gridlock comes to mind. So you'll see you're seeing a balance in Europe today, which is helping the Euro. But certainly last week, political uncertainty ahead of the first round of the elections. There was an issue. So you saw the French market underperform still was a decent week for international with, you know, IEFA, little changed. Well up a little bit 0.4% in emerging markets. Little change. Anything internationally that you think is interesting here, Adam?

Adam Turnquist:

Definitely the CAC 40. We had the election uncertainty, we'll call it, when Macron called the snap election. CAC 40 dropped right to its 200-day moving average, interestingly enough, and that's where buyers came in, started to bid that up. And I don't know if it's a playbook to potential U.S. election drama, but you look at what happened in India. We had a big drop in India markets with Modi losing some of his majority there, and a big bounce back to record highs in some of the major Indian indices. Same thing in the CAC 40. At least for now, we're seeing a bounce back, a pretty sizable one, as well. So something to keep in mind from some of this near term noise, the longer term picture and the longer term trend seems to outweigh and have a little bit more impact.

Jeff Buchbinder:

Yeah, the French CAC 40 has gotten back about half of its losses from last week today, even though the tape isn't particularly strong. We're recording this early afternoon on Monday. So I guess last thing, you know, nice bounce back in Japan. We still have a currency volatility problem there, but if you can look beyond maybe this challenging period for the yen we still think the Japan equity market is an attractive opportunity within the developed international universe. So turning to bonds, commodities and currencies. Speaking of the yen so Treasuries were down last week and it's, you know... The economic data didn't really give Treasuries an excuse to sell off. So, you know, I think, the political environment is really the bigger story there. You know, we know that Biden and Trump, regardless of who wins are going to be bad for the the deficit. That's no surprise to anybody listening, I'm sure. But now that the market is starting to price in a higher probability of Trump winning after Biden's poor debate showing, I think you're seeing a realization that this, you know, the tariffs and the extra spending potentially under Trump from tax cuts being extended, you know, could weigh on the bond market Treasury supply and all of that. So, you know, unless you have a better idea, Adam, I'm going to attribute the recent bond market weakness to to the politics.

Adam Turnquist:

I think you got it spot on. I was looking for answers last week when we had a big jump in yields on Friday, even after that PCE report. Some follow through today and I think you nailed it in terms of the rationale. It shed some light on the deficit and the problem the U.S. government has, I think, that that debate reopened that, call it a can of worms, I guess, that continues to get kicked down the road.

Jeff Buchbinder:

Yeah, absolutely. So, you know, four or five is an important area psychologically on the 10-year yield. We're pretty close to that right now. So, you know, at some point, higher yields will start to weigh on the stock market. You know, maybe that's starting today. We'll see. That is certainly something to watch this week, even though, you know, a lot of folks are going to be checking out early for vacations. The, I guess, you know, the yen, I, you know, I'll say it again. This is just a period of extreme volatility. The market may like stable or gradual declines in the yen, but not sharp declines, right? And so really what we've been getting is sharp declines. I mean, it's, you know, down 12% year to date, down almost 6%, three months. That's a pretty big move considering they already spent, what, 60 something billion U.S. dollars intervening in the currency markets, you know, buying yen.

Jeff Buchbinder:

It hasn't really helped. We're back to the levels on the yen at 161, where they intervened before. So that one, talk about that more in a bit when we show you the chart. But the yen has been a real trouble spot. So the, you know, the big economic data point last week was the core PCE. So I put Jeff Roach's inflation heat map in here just to show you this, you know, pretty positive trend. Of course in March, you know, or really the first quarter, we had a little bit of a re-acceleration in inflation. And now if you look at the last three months, that trend has improved clearly. We got, you know, 2.6, which is what the market was looking for on the core PCE Deflator. It was actually the same number as the headline, which was also right around 2.6. So, you know, we're getting pretty close to the point where you would have to think that the Fed would be comfortable being neutral or very close to neutral, and that means we're probably going to get a a cut in September. But if we don't, then it could come right after the election. Anything to add there, Adam?

Adam Turnquist:

No. I think, you know, when we look at the trends here, you can see clearly moving in the right direction, just a little bit slower than I think most expected. And I think it's interesting too, when you factor out the shelter component, which is a big one in CPI. You can see that core CPI ex-housing now below 2%. So the Fed obviously welcoming that. We'll get some more labor market data this week, and I know we'll talk about that shortly. That's going to be another big factor I think in how the Fed's thinking about interest rate cuts as well.

Jeff Buchbinder:

Yeah. The Fed cares about the recent trend, not so much the cumulative impact of inflation since the pandemic began. So, you know, inflation is still, of course, hurting lower income folks and it's creeping up into the middle income. But the, you know, if the Fed looks at the recent trend and makes the assumption like we do that home prices are going to come or home price inflation is going to come down. Rent inflation is going to come down. We've already seen plenty of evidence of that. Then they're going to be essentially backed into a cut, right? It's going to be really hard to defend such a restrictive stance. We can debate how restrictive it is, but it is restrictive, for sure. So let's get into your charts, Adam. This is the fun part where you tell us where the market's going. I mean, we have S&P 500 and we have yields in here. Those might be the most important charts right now at least in the near term, other than maybe another chart I know you have in here, which is semis.

Adam Turnquist:

Yeah, I think those are going to be the charts to watch here. And you can see up and to the right has been the path continuing to climb higher in record high territory for the S&P 500. We've had 31 record highs this year. I think, seven alone in June. So even though we've talked about narrow leadership, the markets continue to climb higher. In terms of the big question, okay, how high can this rally go? You can use technical analysis to at least get an idea of where this market could go. And when you take the March highs to the April lows and you measure that move and apply it to the breakout to record highs back in May, that gets you to a minimum upside price objective around 5,570. Now, this is not science, but it gives you at least an estimate of where this rally could go.

Adam Turnquist:

The problem though that we see technically for the market is just the narrow breadth. And it's hard to ignore because when you look at, for example, last month, you had 18 days with more four-week lows than four-week highs. Even on the record, high days of those seven, four days actually had more lows than highs. So it just continues to raise the question of sustainability for this rally. It's, we haven't had on a longer term breadth metrics expand at all in this rally. So I think when you take how overbought the market is and just the low volume that we've seen on some of these rallies, and also just the diverging breadth, that does raise the odds for a potential pullback here this summer. Terms of downside, I think you could use as a worst case scenario, potentially the April lows, right around, call it 4,950. That would be, call it a correction, 10% around off the high. So nothing out of the ordinary, especially for a bull market. We haven't had much volatility. And we'll talk about seasonality for volatility and why we could see that expand. But I think instead of chasing this rally, the tactical call here is to wait for a dip back to support.

Jeff Buchbinder:

Yeah. That's the LPL Research call here. It's wait for a dip. Don't chase. Certainly consistent with that technical outlook that you just shared, Adam. You know, I just sort of talked up yields as important. So what are we seeing here? This looks a little bit ominous to me, to my amateur chart reading skills.

Adam Turnquist:

That's the correct call here. Not a technical term, I guess. But you can see, just when we thought we were safe with lower yields, we broke below the 200-day moving average. Had a big bounce back last week. I think 10-year yields are up 14 basis points on the week. Most of that was on Friday. And you can see we're right at this inflection point, right at the upper end of this declining price channel. We start getting through that channel and through the 50-day moving average. That does shift the risk profile to upside risk for yields. And in terms of upside, where could we go? You'd use the late May highs, around 4.64 as the next major resistance. Momentum indicators in the bottom panel that the relative strength index suggests some of the downside momentum in yields is waning. Getting close to n,ow we're actually in bull market territory, or bull territory, for the RSI indicator, suggesting this latest move higher could have some room to go. So definitely a chart to watch this week, really to see if we can break through this rising price channel. Can see it was rejected the last time we were near these levels, but lots of price action left until we get through, really through the week here.

Jeff Buchbinder:

Yeah. It feels like a yield curve steepener trade too, right? You know, if you assume, obviously it's far from over, but if you assume like the odds, the betting odds are saying that Trump wins, then you've got potential for, you know, Fed cuts. At the same time, you have additional deficit spending, right? With the tax cuts being extended. And that's bearish for the long bond, right? There's your potential yield curve steepener. So I think that's the market direction now, but probably more important to that is stocks have not behaved well when yields have made runs at 5%, right? You know, that's what set the lows last year. And, you know, if we make another run at five, I think you're going to see the same thing. I think that the stock market might not be able to withstand that.

Jeff Buchbinder:

So yield's very important to watch here. You know, it's behavior of the market, but it's also just valuations, right? Higher yields fundamentally make stocks worth less because their future cash flows are worth less. And it's a, you know, hindrance on the economy because you're raising borrowing costs. So cannot overstate yields. And I'm an equity guy and I'm saying you cannot overstate the importance of yields here. But we'll watch that closely, of course. All right. Well, next is semis. And I know, I mean this is clearly getting as much attention as just about any segment of the market and probably rightfully so. Not just because it's done so well, but it's also a huge weight in the in the S&P 500. It's a huge weight in tech and therefore I think it's the biggest weight of any industry group in the entire market.

Adam Turnquist:

Yeah, I think you're correct. And going back to the valuation argument, I'll let you chime in on semiconductor valuation, given this huge rally we've seen. But when you break it down, at least on a shorter term basis, you're starting to see the SOX semiconductor index slip. And you can see it breaking. There's this steeper up trend right around the 20-day moving average, just starting to break that. You have some additional support at the 50-day, right around 5087. But if you start breaking through that 50-day moving average, that overlaps with the March highs as well. You could be talking about the SOX index, going back to the 200-day moving average around and here 4342. So a pretty big pullback in the semiconductor space. And if you think about market leadership off the bear market lows, even going to October, 2022, semiconductors have been very consistent in terms of that leadership.

Adam Turnquist:

It looks a little bit stretched even on a relative basis for the S&P 500, so could be due for a little bit of a breather as well. We ran some technical indicators on this chart showing the PPO indicator. So the percent price oscillator, think of that as Mac D, but in percentage terms, and I'll spare you all the technical details, but you can use it for buy and sell signals. And the important message here is we just gotta sell signal in that indicator. And when you're this overbought, I pay more attention to sell signals and uptrends and to quantify how overbought or extended the SOX index, we included the price premium to the 200-day moving average in the bottom panel. That's that blue line that gyrates around. And when you get to a two standard deviation move, so as we recently did, we were at a 35% premium to the 200-day moving average. That marked an over two standard deviation move. You can see those red bars. When you combine that with a momentum sell signal, you often get a pretty sizable pullback. So at least precedence here says we could be due for a decent pullback here in the semiconductor space. And I think if you extrapolate that out to the S&P 500, that lines up with our call more or less for at minimum a pause in the rally here that we're seeing in the S&P.

Jeff Buchbinder:

Yeah. I think on the valuation side, it's probably not going to be any surprise to folks, that the valuations are elevated. Of course, Nvidia is a big piece of this. But the growth has been so strong, I mean, Nvidia by itself has been moving S&P 500 earnings by two plus points in recent quarters, right? I mean, it's just, it's a massive weight. So I would argue that the valuations are probably mostly justified. I would argue that the tech sector as a whole probably deserves to trade at a 40% plus premium to the S&P 500, given the near term growth outlook or even intermediate term growth outlook. I would say that probably say the same for for chips. Although I think their valuations maybe are even a little bit hotter, we'll say, than the broad tech sector.

Jeff Buchbinder:

Because, of course, within tech you've got some cheaper legacy tech segments that bring the overall sector valuations down. So we're still neutral on tech despite elevated valuations. And, you know, primary reason we're not underweight is, well, there's two reasons really. The fundamentals are just very strong. And then you have pretty good technical momentum at the sector level. Not talking about just industries, but sector as a whole. So I guess we'll write it until the technicals tell us to sell it. I think that that's the story. So thanks for that, Adam. Let's keep moving. We've got some seasonal charts here. I guess we stretched the definition of seasonality, maybe a little bit with the correlation chart, but it's still basically telling us about a historical pattern that we want to pay attention to. So what do we have here?

Adam Turnquist:

So now that we're in July, we looked at first half versus second half returns, and we broke it down a few different ways for the S&P 500 here. This is all going back to 1950. So if you just look at the average second half for the S&P 500, you're higher 4.8 or by an average of 4.8%, and you're also higher 72% of the time. So pretty good stats going into the second half over that six month stretch. However, when you have good momentum, as we did in the first half, in gains of at least 10%, you can see on the bar chart average returns for the second half, you're up 7.7% higher 83% of the time. And even when you look at the other side of the equation, the drawdowns drawdowns tend to be a little bit more limited. When you have that first half momentum, you can see second half the average max drawdown about 9% versus 10% for all second halfs. And even during election years drawdowns are about 10%. Those tend to happen more toward the election, and that's where volatility really picks up. But overall, I think seasonality suggests to our our call is really to buy the dip because you tend to get momentum to continue longer term.

Jeff Buchbinder:

Yeah, very. You, you, you can look at this data and obviously decide that you're probably going to get a correction, but most years, whether it's, you know, a good first half, a bad first half election year or no election year, you almost always get 10% corrections at some point. We've only had five and a half so far, that's our max draw down year to date. So it's really not a bold call at all to say we're going to get a correction at some point to buy. I guess the hard part is to know when it's going to start. Seasonality tells you maybe it's couple months off, but you never know what kind of catalyst you're going to get. The bottom line though, again, is we would be looking to buy the dip, not chase this rally. I guess the other thing I'll add, I mean, the best two week period of the year is the first half of July going back. I think that might even go back to 1928. You can correct me if I'm wrong, Adam. But so this first half of July has a very positive seasonal factor. I mean, part of it I think has to do with rebalancing, right? But I think it's more than that. Well, part of it has to do with earning season, right? Which starts in mid-July, and then maybe there's some sort of vacation lift in there, maybe a patriotic lift. How about that?

Adam Turnquist:

There you go.

Jeff Buchbinder:

Because of the July Fourth holiday. I like that one. All of those things probably weighing in and, you know, lead to a really strong first half.

Adam Turnquist:

And it's a great level for tech too as well to highlight, which is obviously a heavier weight within the S&P or the heaviest weight tech, second best sector in July next to real estate discount real estate a little bit. 'cause The comparisons are tough. It, the data only goes back to early two thousands versus tech 1990 at least by Bloomberg data standards.

Jeff Buchbinder:

Yeah. And that's, sectors undergone probably more change than any, you know, with some of these tech companies being classified as REITs now and they weren't before. So yeah, real estate is it's tough to draw historical comparisons there, but, but certainly the good seasonals for tech, another reason to stick with tech even though it's, it's expensive. So I guess you know, this is seasonal in a sense that it's telling us that, you know, this low volatility might, might be due to reverse. Is that the right way to read this VIX chart?

Adam Turnquist:

Yeah, in terms of your, question on timing when a pullback or some volatility could come into the market at, we're getting close to that period, at least when we look at the vix, which is the 30-day implied volatility for the s and p 500. The bright blue is the current VIX progression throughout the year. You compare that to the dark blue, that's the average progression for the VIX going back to its inception in the early nineties. And you can see the low for the VIX is often found in the beginning or mid part of July. Volatility tends to creep up and then peak around the late September, early October timeframe. We also included election years for the VIX and how it progresses. And it's pretty interesting, especially when you compare it to this year, you have a pronounced spike in the first quarter for volatility and then you fade down into, call it the August timeframe is when you trough and then you have another more pronounced peak in the right around election day actually is the peak for the VIX index during election years, probably no surprise given, given some of the, the unknown and uncertainty going into election night.

Adam Turnquist:

And also I think the first peak, that first spike is really due maybe the Super Tuesday and some of the uncertainty over the candidates as they figure out who's going to be on the ticket for the fall.

Jeff Buchbinder:

Well, it seems like we have a little uncertainty about the candidates this time too, but maybe not the kind that we've gotten historically. Anyhow, that's that's really interesting. Well, first thing that jumps out at you is, wow. The VIX is so low now. Yeah, right? And it just can't stay low forever. So at some point this thing's going to move higher. You have some structural things, maybe depressing it for those who don't know, the VIX is just using the options market to figure out implied volatility, right? How much volatility are markets pricing in in the forward-looking options market. So that's first, right? Volatility is very, very low, but then you're right. I mean right before the election, that's, you know, potentially a time to peak. So we'll see. But you know, certainly the seasonals turn negative in August, so call it August through October. That's kind of the, you know, the period to look at where you might get a good opportunity to buy buy low. So here's where we stretch the definition of seasonality. 'cause This really isn't seasonal, but it is a historical pattern, I guess, that you've identified, which is both good news and bad news, right? Depending on which which year you think this looks like you could be running away screaming or you could be pretty excited about second half.

Adam Turnquist:

Yeah. You can pick your own path here for the S&P 500. We ran, we'll call it quantified seasonality I guess if you will, bit of a stretch. But how we ran this data, we looked at the progression of the first half for 2024, we compared all of those trading days to every single year to 1950 to come up with what years closest resemble this year, at least on the first half. And interestingly enough, 1995 is there, that was a year that included several record highs, extremely low volatility. The dawn of the internet, we'll call it on the dawn, is the start of the internet, or at least when it was becoming more and more popular. I was only 11 at the time, so I don't quite remember having the internet. But and then of course the Fed soft landing, I think that's the closest analog or most used analog going back to that year.

Adam Turnquist:

But it also rhymes with this year. And you can see average, the first half return for 1995, you're up 18.6%. Very strong, second half as well with very low volatility. You can see the drawdown in the second half was only two and a half percent, and that year had the lowest drawdown on record for the S&P 500. Then you compare it to, let's just go to 1987 because I'm sure that's sticking out in a lot of people's minds. And Black Monday in October, you can see a very strong first half the market was overbought. There was at that time stagflation fears in the market that triggered a massive sell off into the second half, really more pronounced in a few trading days. And you can see little different path for the S&P 500 down 33 and 5% during the second half there. So I think when you look at analog's economy, I think I'll lean a little bit more toward 1995, but you can certainly make the case of 1987 and stagflation a little bit with some of the slowing economic growth. I don't know if I go that far at this point, but we'll leave that to the economist, I guess.

Jeff Buchbinder:

Yeah, I haven't seen anybody make a compelling case that we have some of the same risks as we did in 87, so we'l just leave that out maybe, and, you know, use the parallel between soft landing, easy Fed or Fed pause and you know, generally tech innovation working for you. I think that leads you to these other, these other periods as as better comps. So let's hope so because nobody wants another 87. I actually, I have very well, they're not that faint. I have memories of 87. You know, my dad's in the business and so I remember being really pleasantly surprised at how quickly the market came back from that, right? I mean, I think we basically dug ourselves completely out of that hole in a little over six months, if I'm not mistaken.

Jeff Buchbinder:

So that was, that was a good lesson to learn that, you know, it's really about the fundamental value of companies. It's not, you know, the sort of gimmicks going on in the options market, right? That's going to dictate your sustained value, right? These are just valuations of future cash flows for companies aggregated up. So that was real good to see. I also, unfortunately am old enough to remember having internet in 1995, but we won't go more into that because it'll just make me feel old. Let's talk earnings a much more pleasant discussion than how old I am. I am double digits in age, and I also think we are going to get double digit earnings throughout this quarter because the consensus is right around nine. Actually we priced this, I guess Thursday, and I think this has come down just a smidge since then, but Q2 consensus plus, we'll call it plus nine.

Jeff Buchbinder:

Remember the average upside in any quarter is right around 3%, three to 4%, but over the last few years we've been running higher than that. So there's a number of reasons for that. People have underestimated the resilience of the economy, of course, that that's been a big one. And I think the AI, the power of the AI profitability, the amount of capital expenditures that we've gotten from these big tech companies doing AI build outs, I think it's just cut a lot of people off guard. We're onto it now, right? But certainly, you know, you didn't see analysts anywhere near predicting the earnings growth we would get from that dynamic if you go back a year or two. So it's just been a consistent environment of beating expectations. This will be no different. If you wanted to make a bear case for earnings, I think, you know, currency you could argue is going to clip a point.

Jeff Buchbinder:

So that's, you know, maybe could constrain upside. Manufacturing data like the ISM, which we'll get this week that is not particularly strong. Historically, that correlates to earnings. So maybe that suggests that the earnings growth won't be, you know, much more than 9%. I get it. That kind of it. I mean the Atlanta Fed GDP Now trackers point to 2% growth in Q2. We've had disinflation, not a ton of disinflation, but we've had disinflation and that should be supportive of earnings. And then, you know, the tech boom continues. So, you know, it's hard to make a bear case. We'll probably end up with about half of the earnings growth coming from big tech. And if the recent quarters or any indication, big tech's going to beat expectations soundly, and that alone will get us over 10. So the, the logical question to ask is, is this going to help stocks?

Jeff Buchbinder:

And if we went back and looked at how the S&P 500 has done during the first half of quarters versus the second half of quarters, so now we're in the first half of a quarter, and that's where the earnings come primarily. So it'll be July one to August 15th just to keep the analysis simple, I just use that, you know, guess it's basically 45 days, that 45 days versus the subsequent 45 days. And stocks tend to do better in the first half of the quarter where the earnings are. Those are the blue bars, average gain 4%, and then on the other half, the orange bars average flat. So, you know, obviously there's some outliers here, 4% versus zero, not super dramatic, but I think this shows you, and you can look at batting averages. The batting average for gains first half of quarters has been very good, right?

Jeff Buchbinder:

There's only two down periods here. I think you can sa odds are stocks go up during this earning season. Now that doesn't change the fact that we're waiting for a dip and we think this rally has to maybe pause, consolidate, whatever you want to call it. But the earnings piece of this, we think will be supportive again, just based on this this data alone. And then last thing, and I'll send it back to you, Adam, for any comments you have on earnings. Estimates have been incredibly resilient. You know, I said this last quarter and estimates for 2025 have actually gone up since then, which is really almost hard to believe. This is, I call this a 10-to-one event in the Weekly Market Commentary. You know, in other words, something that happens less than 10% of the time. I think that that might even be sort of understating, you know, how unusual this is for earnings estimates, this far out to be rising, like they have. The 25 estimate is an orange and then on the bottom here is the 2024 estimate S&P 500 earnings. It's at 243. It's been at 243 all year basically. Remember these estimates normally fall, and they normally fall a lot. So much better outcome. It's just estimates. It's not reality yet. But this is really impressive and I think AI is a big reason. What do you think, Adam?

Adam Turnquist:

I think that's a big factor in all of this and go back to valuations and where the market is trading or tech sector, that AI theme seems to make investors overlook some of the valuations. And maybe it's, this time is different type of analog, but I think that's supporting it. Also, just the momentum behind earnings. Keep in mind, we were in a earnings recession not too long ago, so we're still coming out of that. And you've made the point for a while now, how earnings are going to broaden out beyond just the mega caps. We're going to see additional contributions at the sector level. I think that's an important factor as well as we look at the second half. And really the strength of the overall earnings picture for the S&P 500. So should be a interesting earning season, I think, to see if we can at least hit the bar. If not beat the bar for the S&P here.

Jeff Buchbinder:

Yeah. That's right. Good point about the earnings broadening out. We're not there yet. You're still looking at half the market earnings being driven by mega cap tech. But as you get into 2025, you may actually see some of these other areas of the market, like whether you measure equal weight S&P or you just measure earnings growth for cyclical value, however you want to do it. I think we're going to see these other areas keep up starting early next year. We'll see how it goes, but still a ways off. So let's turn to the week ahead here before we wrap. We're not going to get earnings yet, although we got some some May quarter end company results already and they've been a little bit disappointing, I guess. Well, FedEx wasn't, but Nike sure was. So I think the highlight of the year of the week is going to be the payroll number, but I'm a huge ISM guy, so I actually think the ISM matters just as much because you get the prices paid piece, which is inflation, and you get services, right, which is the majority of the economy.

Jeff Buchbinder:

So I think that index is going to be really important too. I think payrolls, well, at least based on talking to our economists, Jeff Roach, payrolls are a little bit at risk of upside. You know, you can argue whether that's good or bad in this environment where everybody's watching the Fed. I'm going to say it's good. So maybe a little bit better than 188, which is the Bloomberg consensus. Thoughts, Adam, on the jobs or anything else this week?

Adam Turnquist:

I agree on the payrolls really being the marquee events and also look good. Payrolls is, I think, obviously good for a good sign for the economy. It may, on a short-term basis, if payrolls come in hot May, the market might not like that because it prolongs the rate cut expectation. But on a long-term basis, if the labor market's holding up, it's generally a good sign for the economy holding up as well.

Jeff Buchbinder:

Right. Yeah, I mean, I guess too hot would be bad when earnings or when interest rates are rising, right? We're already getting concerned about an uptick in deficit spending and higher rates. So if you get a blowout number, I think the market would be a little skittish on that, but as long as it's in the range, you know, I don't know, one 50 to two 50 I don't think you're going to get a dramatic move higher in yields. Of course, we also have to watch the, the wage number, right? The average hourly earnings. We want to see that tick down. You know, 3.9% is consensus. That's actually fine. That kind of wage number is not inconsistent with overall inflation in the two, you know, two even kind of range. So don't get too caught up in that, but we just want the trajectory to continue down a little bit before that number plateau. So we'll be watching that closely in addition to all this ISM data this week. So they're going to cram a lot of big data points into a short week because we only have of course four days, but really it's going to be three days, I think, where investors are paying attention. And that might even be stretching it. Maybe two days. How many days are you going to be paying attention to markets this week, Adam?

Adam Turnquist:

All week long. So we'll be looking at how all this data, of course. Friday morning's going to be a big one, so we'll be up and ready to go.

Jeff Buchbinder:

I'm not going anywhere either, so I'll be paying close attention throughout the week even more. My red, white and blue shirt here today. You might not be able to see it on the Zoom very well, but certainly Happy Birthday America, and again, everybody have a wonderful holiday safe holiday for those of you who are shooting off fireworks, and stay cool if you're in one of these hot zones. I got the the backyard pool set up. We got an above ground pool ready to go. I'm probably two weeks later than I should have been, but that mid-June heat wave, I just didn't see that coming. And it does, the backyard pool we have is pretty big, so it takes a while to set up. So anyway any final words Adam before we wrap?

Adam Turnquist:

No, just happy fourth of July. Have a safe and a great fourth. Thanks for having me on.

Jeff Buchbinder:

Happy birthday America. We'll see you all next week where we will walk through our Midyear Outlook 2024. Looking forward to bringing that to all of you here in only about a week. So looking forward to that. Take care everybody. Thanks for joining and we'll see you next week for another edition of LPL Market Signals.