Weekly Market Recap
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Robert Shiller’s Cyclically Adjusted P/E (CAPE) may be hitting its peak as stocks grow more slowly than earnings. The ratio, now near its dot-com highs, is undoubtedly elevated but may be hard pressed to continue its climb.
U.S. jobs growth is weakening again, but it will not likely materially impact the run rate of corporate profits, which are getting a boost from surging business investment on everything but employees. U.S. companies are not laying off workers, but they aren’t hiring many either.
The S&P 500’s earnings season is in full swing, and though companies are broadly and handily beating expectations, the Magnificent 7 results are stealing the show. So far, the S&P 500 is on track for a 29% earnings advance year-over-year (versus estimates for a 23.2% rise).
It’s proving to be yet another earnings season where hyperscaler spending plans are under the microscope as investor expectations are sky-high. But the difference in 2Q is that the major players that reported thus far are beginning to burn cash, inviting questions about the sustainability of future spending and exacerbating valuation concerns.
The S&P 500 has been churning in a sideways pattern for much of the summer, as a reversal of fortunes plays out beneath the headlines. The index may remain captive to dueling themes of fading enthusiasm for chip stocks and renewed tension in the Middle East in the near term.
Another earnings season will kick off in the coming week, and consensus is expecting the spectacular growth that emerged in 1Q to continue. The current expectation is for 21.8% EPS growth for the S&P 500 and if growth turns out to be as strong or stronger than expected, it will contribute to a forecast for about 25% growth in earnings in 2026, an unusually strong pace of growth for the index, particularly in the middle of an economic cycle.
Micron smashed all expectations and revised forecasts for earnings growth higher this week, but that wasn’t enough to revive large cap tech stocks from their June gloom. The sector is down 7.5% so far this month after leading the S&P 500 higher in its April-May recovery.
Kevin Warsh’s first meeting as Chair of the FOMC resulted in no change to current rate policy, but plenty for markets to chew on, nonetheless. Hawkish shifts in rate expectations, votes and language from the Fed meeting all resulted in some skittishness across markets despite the lack of direct policy change.
New Fed Chair Warsh takes the helm at the Fed at a challenging time, with consumer price inflation now running well ahead of target and employment markets in recovery mode. The consumer price index (CPI) rose 4.2% year-over-year in May, a pace that is in the 70th percentile of all observations since 1960.
The SpaceX IPO is set for launch next week, and it will likely have ripple effects within equity market benchmarks. The deal is currently expected to price on June 11 and begin trading the following day, but the impact for many investors’ portfolios will emerge when the stock joins benchmark…