Markets are euphoric, but what’s fueling the rally? Breaking down the earnings season, Fed outlook, and Trump momentum behind the surge
I got a feeling. I love it when stocks go up, don’t you? I mean, who doesn’t! I suppose, short-sellers and fearful cash-hoarders, but still, and very generally, rising stocks are a good thing. Indexes notched new highs yesterday -- again. It was the 56th record close for the S&P500! That’s not a small number. This morning, Bitcoin stormed the 100,000 level and took no prisoners. What in the World could be driving this seemingly unfettered optimism?
Let’s have a look-see and possibly gain some insights. Let’s start with the important stuff. Earnings season is pretty much over, but not quite, as we learned yesterday with Salesforce and Marvell’s earnings announcements which helped propel tech and the broader markets higher. Stepping back, 490 of the 500 S&P500 companies have announced earnings and, on average, they beat Sales projections by 1.31% and EPS forecasts by 6.86%. On average, those beating companies traded slightly higher in the session following the announcement. Looking at sectors, we noted that Consumer Staples, Industrials, Energy, and Consumer Discretionary stocks fell on average a day after beating EPS on average. Hmm, seems like investors were not confident about what they heard in the earnings announcements.
Meanwhile Real Estate and Materials declined after missing EPS targets on average. So, obviously, investors were not only disappointed in performance, but they were also unable or unwilling to be consoled by management commentary. Winning sectors included Communications (e.g. Netflix, Disney, AT&T), Healthcare (e.g. CVS, AbbVie, Regeneron), Technology (e.g. Palantir, Salesforce, Intel ), Financials (e.g. Travelers, Blackstone, Fifth Third Bancorp), and Utilities (e.g. American Water Works, Entergy, Duke Energy) all gained after beating EPS estimates on average (I included one loser in each of the examples). In terms of growth, all sectors grew earnings except Energy, Materials, and Industrials. Growth winners include Technology and Communications. All in all, earnings season was solid, with no real surprises within the surprises. While this is all positive for stocks, it is simply not enough to have propelled stocks to these levels on its own. There must be something else.
Fed Chair Jerome Powell said yesterday that the US economy was “in a good place.” While that is not a technical, economics term, we will just have to accept it as a positive nod. He probably meant that GDP growth, while slowing, is still growing respectfully. Additionally, unemployment, while slightly elevated, is still relatively strong with plenty of jobs available. Finally, inflation, while sticky, is still in a longer-term downward trend toward the Fed’s 2% target. If you are Federal Reserve Chairman, those are all things you would want to see, and they would likely cause you to comment on them all being “in a good place.”
Ok, so its stocks: check, and the economy: check. How about interest rates? Well, Fed Funds did not fall as low as many expected them to a few months ago. In fact, interest rates on longer maturity treasuries are higher, confounding all sorts of lending rates tied to Treasury Note yields. Fed policy hopes for next year have also been dashed as expected cuts have diminished (with just 50 basis points now expected by futures). I would, therefore say, interest rates: neutral.
That leaves the category “other.” Hmm, perhaps we can see something in the charts. Here are two of my latest additions. You will recognize one, because I highlight it constantly. Have a look then follow me to the finish.
You may recognize these charts as my “Trump Trade” charts which I now include in my Daily Chartbook every day. They track the movement of all sectors from October 8th when candidate Trump first showed signs of momentum. The top chart shows election day, so now we are observing President-elect Trump, and we can see how radically the sectors moved after Trump was elected. For the most part, the winners have stayed winners. And those winners have been, for the most part, fueled by the succession of Trump cabinet and senior leadership selections. Those pics also fueled at least one loser, healthcare.
Trump is recognized as being pro-business and anti-regulation, and his nominees and appointees are all in line with those goals. But still, there are costs associated with all of those pro-business initiatives. That’s right, higher deficits and debt. If tariffs are levied and, worse yet, a full-out trade war ensues, there may be growth inhibitors to deal with. We simply have no idea what to expect, which under normal circumstances, would flummox the markets. But no, we are at all-time high number 56 of the year.
I don’t know about you, but I have seen some stocks take on a very stonky-like complexion lately. The word “stonk,” if you don’t remember, was invented during the meme-stock era and was bestowed upon stocks like GameStop. That’s right, some formerly very regular stocks seem to be behaving like meme stocks. Is this a problem? Well, it is only a problem if those companies can’t deliver on the high and gaining expectations placed upon them by investors. Similarly, if the President-elect is unable to deliver on those campaign assurances of great growth, or his staff picks spend their days playing politics instead of effecting the great changes promised, we could find ourselves in a very unstable investment environment.
I like it when stocks go up, but I prefer it to be methodical and facts-based. Don’t get me wrong, I take gifts when they are given, but the more I receive… well, let’s just pay close attention and make sure that our investment theses are in order, because it is going to be a wild ride.
YESTERDAY’S MARKETS
Stocks rallied yesterday for a positive close after Salesforce, former CRM provider, former cloud computing champion, and now AI promoter delivered positive-ish earnings news, and yes, reminded us that AI is a good thing. Tech shares came to the rally. Powell thinks the economy is “in a good place,” which also puts stocks in a good place.
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