Market Setup
The S&P 500 hit an all-time high last week on a strong earnings season. The backdrop stays mixed: no resolution with Iran, high geopolitical risk, worries about the AI trade, weaker-than-expected retail sales and jobs data, and milder inflation.
A consolidation phase started in June. Expect choppy, mixed data to continue through the midterm elections, likely for the next few weeks up to a month and a half. Q4 should close the year on a solid note.
The Fed
Recent data is enough to put the Fed on hold. The latest jobs and retail sales numbers support a hold, with the Fed staying data-dependent. Base case: a hold through year-end. There is no need to raise rates now. Some Federal Reserve board governors still want rate hikes, so a Fed surprise is possible, but the Fed can pause and keep holding through September.
Earnings and the Mag 7
Earnings season is about 90% done, with retailers reporting this week and Nvidia (NVDA) still to come. Earnings growth ran near 31% year-over-year in Q2. That is expected to ease to about 26% through year-end.
The broadening beyond the Mag 7 has been very healthy. The Mag 7 contributed about 9.3% year-to-date, against roughly 14.3% for the broader S&P as of last Friday. Leadership could swing back to the mega-cap Mag 7 names in the second half. On the day, all Mag 7 names traded lower except Nvidia (NVDA). The outlook for a robust Q4 is strong, but the midterm elections are the next hurdle.
AI CapEx
The four largest hyperscalers account for almost $2.5 trillion in spending. A key concern: much of this CapEx is financed off balance sheets, which is worth watching. Overall the spending is healthy for the economy, since CapEx makes up a large share of GDP growth. The main point is that CapEx is not shrinking - it is speeding up. That helps the economy and helps tech stocks, especially anything tied to semiconductors and hardware.
Top Picks
Question: Across the Mag 7, who is best positioned to earn a return on this spending? Look at the laggards. Tesla (TSLA) is still lagging year-to-date. Meta (META) is also still lagging. Microsoft (MSFT) has done fairly well recently. Contribution from the whole group is very likely through the end of Q4.
Question: Who is the most underappreciated in the Mag 7? Microsoft (MSFT), mainly because it got pulled down with the whole software sector. Tesla (TSLA) belongs in that group too - its runway over the coming years is enormous. Those are the two top picks.
The Consumer
Retail sales came in weaker than expected, with some one-off items that may have skewed July. Sentiment also fell unexpectedly, though a weak sentiment reading with continued spending is not new.
Question: Will weak sentiment eventually pull down spending and corporate earnings before year-end, as history suggests? More data is needed first. Digging into the retail sales number, the traditional non-store retail category like Amazon (AMZN) was down, and autos were down - broad-based enough to concern. But bars, restaurants, and clothing were positive. More data is needed for a good read on the consumer.
