Rotation continued out of mega tech, major tech earnings and FOMC meeting next week will decide the trend

Good Morning. Mega-cap selling continued this week, with a rotation into DOW 30 value stocks and small—and mid-cap stocks. The earnings from the likes of Tesla and Google failed to impress, and concerns over whether the AI investments will lead to real return on investments.

For the week:

• Russell 2000 gained 3.59%, and DOW 30 was up a modest 0.73%. Nasdaq lost 3.38%, and S&P is down 1.55%.

• Even though the S&P was down for the week, the equal-weight S&P 500 index is actually up 0.82%, which shows that the rotation took place within the S&P 500 stocks, from mega-caps to mid-and small-cap stocks.

• The below chart shows the sector-wise performance this month:

  

  Source: Factset, Edward Jones

Next week is big, with ~40% of companies in the S&P 500 reporting 2nd quarter earnings and the FOMC meeting on Tuesday. Major tech earnings (MSFT, AAPL, AMZN) next week will be important in deciding if the current trend will continue.

CNN's Fear & Greed Index now stands at 45 (Neutral) out of 100, a drop of 4 points from last week.

The top five trending stocks on Reddit are Nvidia, SPY, AST Spacemobile, QQQ, and Microsoft.

Over the last six trading sessions, Berkshire has unloaded 52.8 million Bank of America shares worth $2.3 billion, reducing the stake to 12.5%. Berkshire still owns 980.1 million BofA shares with a market value of $41.3 billion, a distant second to its $172.5 billion holding in Apple.

On Thursday, OpenAI announced a prototype of its search engine, called SearchGPT, which aims to give users “fast and timely answers with clear and relevant sources.” The rollout could have implications for Google and its dominant search engine. If SearchGPT becomes more popular, this will have a major impact on power consumption. The below chart, which was part of the Alger report I included in last week’s newsletter -

Source - Aleger Summer 2024 report, Google and New Yorker

Cybersecurity firm Wiz rejects $23bn bid from Google parent Alphabet.

Former NY Fed president Bill Duddley said in this Bloomberg OpEd that the Fed must start cutting rates now. He cited that the unemployment rate could soon breach the Sahm Rule threshold. In summary, the Sahm rule says that when the unemployment rate’s three-month average is just half a percentage point above its 12-month low, the economy is in recession. With the indicator at 0.43% in June, we are close to this point.

The personal consumption expenditures (PCE) price index increased by 0.1% in the month and was up 2.5% from a year ago, which is in line with Dow Jones estimates.

Source: U.S. Bureau of Economic Analysis

Tesla’s second-quarter net income fell 45% compared with a year ago as the company’s global electric vehicle sales tumbled despite price cuts and low-interest financing.

Verizon Communications missed quarterly revenue estimates on Monday due to slow phone upgrades in the United States.

AT&T exceeded market expectations for wireless subscriber additions in the second quarter.

Coca-Cola raised its full-year outlook as global demand for its drinks rose in the second quarter.

American Airlines slashed its profit forecast for the year after a backfired sales strategy and an industry-wide glut of flights. The carrier’s profit fell 46% during the second quarter even though revenues rose.

Southwest profit falls 46% as the airline takes ‘urgent’ steps to increase revenue.

Alphabet Reports 29% Jump in Profit as A.I. Efforts Begin to Pay Off.

Visa's third-quarter results beat analyst expectations on earnings per share but missed revenue estimates.

AbbVie's Q2 Earnings Beat Estimates, Raises Annual Profit On Strong Sales From Newer Immunology And Cancer Drugs.

The Federal Reserve Bank of Philadelphia published the Q1 2024 insight report on July 24th. The key things to note are -

• Delinquent credit card balances are at 12 years high, evidencing that people are struggling to pay back credit card debt. This is in line with what Citibank and other banks in earning calls.

  

• Card Growth Slows as Underwriting Standards Tighten

• Large Bank Mortgage Originations Reach Lowest Point in Series History

Yahoo Finance published a chartbook for the second half of the year. Chartbook has 32 charts compiled by Wall Street economists and provides great insight into how the rest of the year may pan out. Overall, there is broad confidence that the US economy can still achieve the vaunted "soft landing" outcome following the Fed's historic rate-hiking cycle.

This post, “Mastering Fear and Greed,” from Forbes, highlights the importance of risk management for common investors. Warren Buffet 50% of his wealth 5 times in his career, but it did not bother him as he valued underlying businesses well and had a long-term vision. However, this may not be possible for common investors for various reasons, including the need for regular cash flows or emotional resilience, and hence, proper risk management is critical.

The table below shows all the S&P 500 bear markets since the index's inception. The average loss is over 33%, the average bear market duration is over a year, and the time to break even is just under 3 years! Sometimes, it is as long as 7 years.