The Weekend Edition # 131 - Will the Mag 7 be the White Knights that Save the Market?

Welcome to another issue of the Weekend Edition!

Thank you for reading and subscribing to our newsletter.

Here's what we cover

• Market Recap - Stocks under Pressure

• Markets - Will the Mag 7 be the White Knights that …

  • Articles This Week - In case you missed it

• Earnings Season - Consumer Trends, China, GLP-1 an …

• Closing Thoughts - It’s Time to be Careful

• Calendars

Market Recap - Stocks under Pressure

April 15 - April 19, 2024

US Equity Markets continued to roll over this week as they priced in a “higher for longer” scenario from the Fed. There was no shortage of Fed speakers talking about postponing rate cuts in the face of higher inflation. Fed Chair Powell, himself, spoke on Tuesday acknowledging that inflation could be a concern again and that they are in no rush to cut rates. However, he did say that if the jobs market weakened that could compel them to change their stance.

Given how inflation has been trending for the last three months and the recent strong Retail Sales data, the last thing we’d want is for the Fed to make a policy mistake here and cut rates too soon.

Commodities

The geopolitical tensions in the Middle East have also caused pressure in global stocks as people rotate into safe havens.

Add to that the US Government is now imposing further sanctions on Russian aluminum and steel, which is good for Alcoa (see under earnings) but, definitely not good for global prices.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Markets - Will the Mag 7 be the White Knights that save the market?

With the way markets have declined over the last few days, everyone’s focus will now be on earnings in the US next week. 42% of the S&P 500 report and as usual, traders will be hoping that earnings beats will turn this price action around.

For several quarters now, we’ve been seeing the outperformance of the Mag 7, or at least most of them, drive the turnaround in earnings season. The companies have been delivering and living up to the task of being the White Knights of saving the market when we see price declines.

In fact, without the Mag 7, the S&P 500 still remains in an earnings recession. According to estimates, without these companies, earnings growth is expected to be -2.6% for the quarter.

On a sector level, the major contributions are set to come from tech, IT, and discretionary.

But, it’s prudent to be cautious. As we’ve been saying, these companies are priced to perfection and a miss could mean further pressure given the current sentiment. In fact, we don’t even need a miss in EPS or Revenues. Any hint of bad news could send these stocks lower. We saw that when Google reported lower YouTube ad revenue last quarter and we saw that this week when Netflix issued softer guidance and announced that they wouldn’t be reporting subscriber numbers anymore starting next year.

We’re coming to a stage where the effect of cost reductions is probably ending and the luster of AI is fading. So growth should start to normalize in tech as other sectors start to see higher EPS revisions.

Articles This Week - In case you missed it

Earnings Season - Consumer Trends, China, GLP-1 and Housing

Procter & Gamble (PG) experienced flat volume growth for the third quarter (MarQ), marking the second consecutive quarter without an increase, despite strong earnings that exceeded estimates. The company's revenue growth of 0.6% to $20.2 billion was primarily driven by price increases. Organic sales growth improved in Latin America but fell by 10% in China due to weak market conditions, and remained soft in the Middle East amid ongoing regional tensions.

Intuitive Surgical (ISRG), the medical devices company, reported strong Q1 earnings with a significant 16% year-over-year increase in worldwide da Vinci procedures, but concerns about the slow rollout of the da Vinci 5 system due to supply constraints overshadowed these results. Additionally, the rising popularity of obesity drugs like Eli Lilly’s Zepbound and Novo Nordisk’s Wegovy has impacted ISRG negatively, as bariatric procedures remained flat, reflecting a broader slowdown from the second half of 2023 levels..

D.R. Horton (DHI), the largest homebuilder in the US, provided a positive outlook in its Q2 earnings report, easing concerns around housing market momentum which had been dampened by a recent uptick in CPI and a significant drop in March housing starts. Despite a previous dip in gross profit margins due to increased incentives for home affordability amid rising mortgage rates, DHI reported an improvement in margins thanks to declining construction costs, notably in lumber. DHI's home closings increased significantly, suggesting that the sector might withstand the current economic headwinds better than anticipated.

Alcoa (AA), the aluminum giant, experienced a mixed Q1 earnings report, showing a larger-than-expected loss but surpassing revenue expectations, leading to a relatively stable stock performance. This was their seventh consecutive quarterly loss. They discussed Alumina prices have reached a two-year high, though supply concerns persist due to factors such as capacity curtailments in Chinese refineries and uncertainties in Australian supply. On the aluminum front, demand continues to be robust in the automotive and electrical sectors, with signs of recovery in packaging, although construction remains weak but is showing signs of stabilization in North America. Furthermore, recent sanctions on Russian aluminum by the US and UK are expected to impact the market positively.

Discover Financial Services (DFS) and American Express (AXP) both reported their Q1 earnings with contrasting outcomes and implications. Discover experienced a challenging quarter marked by a significant rise in delinquency rates and credit losses, alongside a sharp drop in net income due to a rise in card misclassification remediation reserves. In contrast, American Express showcased a robust performance, capitalizing on its affluent, younger customer base, which remains less sensitive to rising interest rates.

Closing Thoughts - It’s Time to be Careful

We’re now halfway down to the levels we marked off two weeks ago, with the S&P 500 closing below the 5000 mark. The Russell 2000 small cap index is now down on the year, while the Dow Jones Industrial Average is barely positive for the year.

What we’re likely seeing is profit-taking ahead of the biggest week of the quarter. Most of the Big Tech companies report next week and Friday brings us the PCE inflation numbers, which may come out hotter than expected.

If nothing else, we will definitely see plenty of volatility, and price action is bound to be choppy. I usually advise against trading earnings because often it’s simply a gamble and no one can say with any certainty how a stock’s price will react.

It makes sense to be careful next week, as the market still remains underhedged, and we’re in negative gamma territory which means any moves (up or down) will be magnified.

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

Calendars

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.