Weekly Market Commentary
Weekly Market Commentary
Get weekly stock market updates from top LPL Financial research strategists. Stay up-to-date on financial market trends and understand stock market predictions.
We understand that investing is both a financial and emotional effort, and it can be difficult to cut through all the clutter. LPL Research helps us keep a pulse on the global markets so that we can keep up with the rapid pace of change and make sure you feel informed and ready for what may lie ahead.
Super Six Drives Solid Earnings Season
March 4th, 2024 | LPL Research
Fourth quarter earnings season is winding down with only about a dozen companies in the S&P 500 left to report. After a slow start mired by messy bank results early on, corporate America picked up the pace and ended up delivering results well ahead of expectations. The “Super Six” was part of the story — the Magnificent Seven minus Tesla (TSLA) — but resilient profit margins are also noteworthy. Here we review fourth quarter earnings season and share some thoughts on the earnings outlook for 2024.
Buybacks Are Back
February 26th, 2024 | LPL Research
With the economy continuing to show signs of resilience and inflation moving in the right direction, albeit at a slower and bumpier trajectory than expected, buybacks are expected to rebound again in 2024. According to S&P Dow Jones Indices, S&P 500 companies are expected to repurchase $885 billion in stock this year. So far, companies are off to a solid start with $155 billion in announced repurchases year to date, including a notable $50 billion share repurchase program from Meta (META).
While there is a lot of debate over the utilization and value of share buyback programs (which we are not going to delve into here), the market has typically rewarded companies that buy back stock. This year, the S&P 500 Buyback Index is up 3.5% as of February 22 and is back in record-high territory after surpassing its 2022 highs. Both trend and momentum indicators suggest this rally has more room to run. For reference, the S&P 500 Buyback Index represents an equally weighted and quarterly rebalanced basket of the top 100 stocks with the highest buyback ratio (cash paid for common shares during the last four calendar quarters divided by the total market capitalization of common shares).
Treasuries: Who’s Buying and Why it Matters
February 20th, 2024 | LPL Research
Although the Fed was the primary central bank active in the Treasury market for many decades, global central banks began to enter the market in early 2000, as the People’s Bank of China (PBOC) launched a program of heavy buying at auctions. Treasury notes provided easy and accessible liquidity for Beijing’s export profits in U.S. dollars. The purchases were of such a scale that yields moved lower on the 10-year Treasury, leading to lower mortgage rates as a consequence. There were numerous studies attributing the housing market bubble to lower mortgage rates “provided” by China.
At the end of 2006, foreign financial enterprises held nearly one-third of outstanding Treasuries, more than twice the amount on the Fed’s balance sheet. As more foreign buyers participated in the auctions, foreign holdings climbed to 40% just as the housing market was about to crash.
Outlook for U.S. Economy Continues to Brighten
February 12th, 2024 | LPL Research
Tight labor markets and improving credit conditions create a favorable environment for both consumers and businesses. But let’s focus on the consumer here. Since the pandemic, consumer spending on durable goods, such as cars and household furnishings, plus demand for nondurable goods, have been strong and above trend. We think some of that spending was pulled forward from future demand, and we should expect a tapering of spending on goods.
Services spending experienced something drastically different. The pandemic took a toll on services demand and after several years, consumers are finally back on trend for services. We think consumer spending will revert to the mean this year, but the strong momentum we have from jobs and credit suggest the reversion to the mean will be pushed out later — just like the timing of the first Federal Reserve (Fed) rate cut, which may not come until June.
Will the January Barometer Come Through?
February 5th, 2024 | LPL Research
Market breadth has also not kept up with the pace of the rally. For example, declining shares modestly outpaced advancers last month and there were fewer S&P 500 stocks making new 52-week highs in January than in December. This negative divergence, defined by the S&P 500 moving higher as breadth metrics move lower, further raises the odds of a potential pullback or consolidation phase for stocks. This technical evidence does not suggest the bull market is over but does serve as a reminder they are not linear. Pullbacks and even corrections are completely normal within the context of a bull market. They allow for fundamentals to catch up with price action, reset often overly exuberant sentiment, prevent bubbles, and provide entry points for new capital to enter the market.
Is Too Much Optimism Priced In?
January 29th, 2024 | LPL Research
Earnings are an accounting measure that can be distorted and shifted around, even while following generally accepted accounting practices (GAAP). For that reason, we view cash flows as potentially more important than earnings and a purer measure of the profits a business generates over time.
To value securities, or an index, on cash flow, we like to use free cash flow, or cash flow left after operating expenses and capital investments relative to price. By this measure, the S&P 500 is trading at a multiple of 23, about two points above the 5-year average and six points above the 10-year average. As a result, based on cash flows, we would suggest valuations are on the high side but not extreme.
Will Shipping Disruptions Alter Fed Plans?
January 22nd, 2024 | LPL Research
During the depth of the pandemic, shipping lanes backed up due to understaffed ports and insufficient supply of intermodal containers. Additionally, activity at production plants was hampered from governmental restraints and inconsistent labor supply. Investors often overlook the length of time for the backlogs to clear — ports didn’t return to more normal levels until the middle of 2022.1 The lack of supply during the early stages of the pandemic was a significant driver for goods inflation.
Magnificent Seven and Margins Are Keys to Q4 Earnings Season
January 16th, 2024 | LPL Research
A lot has been made about this market being concentrated in the biggest growth names at the top of the S&P 500. Well, it’s true that those stocks drove a lot of the index’s 26% gain last year—more than 60% of it in fact, despite their combined weight in the index sitting at around 28%.
It’s also true that those stocks are essentially single-handedly driving earnings growth for the broad market right now. In fact, these seven stocks, including Alphabet (GOOG/L), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA), are expected to collectively grow earnings by 46% in the fourth quarter, while the S&P 493 (the S&P 500 excluding these seven stocks), is expected to experience a 7% earnings decline, according to Bloomberg data.
China 2024 Faces Demanding Economic Challenges
January 8th, 2024 | LPL Research
For investors in Chinese markets, concerns over regulatory changes and requirements are paramount. Foreign companies have been subject to unexplained audits, while local analysts have been warned not to issue negative reports on a wide range of subjects. Unemployment data is now considered embargoed.
The move towards prohibiting the use of foreign smart phones within government offices was viewed as an attempt to thwart Apple’s hold on the local market, while propping up China’s smartphone maker Huawei. A deepening paranoia over spying apparently also played a role in Beijing’s mandate.
Lessons Learned in 2023
January 2nd, 2024 | LPL Research
While ‘don’t fight the Fed’ is usually a term reserved for equity investors, it was more applicable to the fixed income market in 2023. Throughout the year, the Fed stuck to a hawkish script and reiterated there was “more work to do” on tackling inflation. The fixed income market mostly ignored the Fed’s messaging and prematurely priced in a peak terminal rate along with interest rate cuts as early as 2023.
And while we underestimated the resiliency of the U.S. economy, we did outline in our 2023 Outlook that “the path of interest rates will certainly be largely influenced by the Fed’s behavior, which will be guided by economic growth and inflation data.” So, as the economy continued to exceed expectations, interest rates went up by more than anticipated, and the chances for a recession went down, which in turn led the Fed to stick to its “higher for longer” approach—rather than lowering rates to stave off a looming recession.
Key Equity Themes for 2024
December 18th, 2023 | LPL Research
Following the Federal Reserve’s (Fed) aggressive rate-hiking campaign in 2022 and 2023, stocks are entering a phase in which the market narrative is focused on interest-rate stability — as inflation, we believe, comes down further. Low and stable interest rates should help support stock valuations, while corporate profits are moving into a sweet spot.
Discord in the OPEC+ Oil Patch
December 11th, 2023 | LPL Research
As China’s economic recovery continues to disappoint, markets hope Beijing will introduce a broad fiscally-oriented program to bolster growth. Crude oil exports to China, the world’s largest importer of oil, have declined significantly as Beijing struggles to focus on the ongoing debt problems enveloping the once prominent property market.
Thus far, monetary measures have been introduced to help maintain liquidity in the failing sector. Consumer spending in China has suffered as the economy remains sluggish, and manufacturing has slowed.
Market Opportunities Amid An Economic Rotation
December 4th, 2023 | LPL Research
After the last few weeks of softening economic data, it increasingly looks like the July rate hike will be the last one for this cycle, and that could be good news for fixed income investors. Historically, once the Fed is done raising interest rates, we tend to see lower yields on intermediate-term securities even before the Fed actually cuts rates. Of the most recent Fed rate hiking campaigns, 10-year Treasury yields were lower, on average, by 1% a year after the Fed stopped raising rates.
Anatomy of a Market Rally
November 20th, 2023 | LPL Research
As interest rates began to edge comfortably lower, and as mutual funds finished their tax-loss harvesting trades, slowly but surely markets gained momentum in November, the most hospitable month for equities.
On November 14, the softer than expected Consumer Price Index report ignited a strong bout of short covering in concert with options traders piling on, which created a squeeze and moved the S&P 500 above key levels. This “squeeze” phenomenon was a prime factor during 2021 when stock prices climbed quickly for “meme” stocks.
Volume began to gain strength as the markets moved higher and the fear of missing out, the FOMO trade, caught fire.
Is the Stock Market Correction Over?
November 13th, 2023 | LPL Research
The S&P 500 officially entered correction territory in late October after falling over 10% from its summer high. Rising interest rates and a steady drumbeat of higher-for-longer monetary policy messaging from the Federal Reserve (Fed) captured most of the blame for the selling pressure. The unexpected Israel-Hamas war, weak seasonal trends, and sputtering economic activity in China also weighed on risk appetite.
Can Muni Investors Catch a Break? We Think So.
November 6th, 2023 | LPL Research
In an effort to fight generationally high inflationary pressures, the Fed has engineered one of the most aggressive rate hiking campaigns in its history. Over the past 20 months, the Fed increased its fed funds rate by over 5%, including four 0.75% rate hikes over the course of four Fed meetings. The aggressive response was a significant headwind for fixed income markets broadly last year and has carried into this year as well.
Can Something Good Come From A Crisis?
October 23rd, 2023 | LPL Research
The recent uptick in the number of part time workers implies that businesses are starting to feel the effects of economic uncertainty, even though many of the official metrics imply robust growth. For example, growth estimates for Q3 will be released October 26 and will likely be better than expected. However, investors should be especially careful with coming to strong conclusions by lagging indicators. Now more than ever it is important to focus on leading indicators that guide investors into wise decisions.
Earnings Hope to Keep This One-Year-Old Bull Market Going
October 16th, 2023 | LPL Research
Analysts have underestimated corporate America’s ability to generate revenue and control costs throughout 2023, while economists have generally underestimated the resilience of the U.S. economy, consumers’ willingness to spend, and benefits from both prior stimulus and previously low interest rates. As a result, even under intense cost pressures, companies have exceeded expectations throughout the year and kept estimates steady.
Higher for Longer - Updating Our Treasury Forecast
October 9th, 2023 | LPL Research
The shape of the U.S. Treasury yield curve is often looked at as a barometer for U.S. economic growth. More specifically, it reflects how the Fed intends to stimulate or slow economic growth by cutting or raising its policy rate. Each tenor on the curve is roughly the expected policy rate plus or minus a term premium (the term premium represents the expected compensation for lending for longer periods of time).
Prospects For A Fourth Quarter Rally
October 2nd, 2023 | LPL Research
While falling rates are the most obvious potential catalyst for stocks to rally through year-end, third quarter earnings season starts in a couple of weeks and carries the potential to buoy investor sentiment. For one, third quarter results may bring an end to the earnings recession. Second, results excluding energy sector earnings declines have been excellent relative to expectations in the last few quarters. Third, economic growth based on third quarter data has continued to exceed expectations, pointing to potential GDP growth north of 3%. And finally, though energy sector profits will be down, recent strength may leave analysts’ estimates overly conservative.
Is India the New China?
September 25th, 2023 | LPL Research
India has emerged as a compelling economic growth story and an increasingly attractive alternative to China within the emerging markets complex. A growing population with a robust and young workforce, significant infrastructure spending, and an ongoing digital transformation have been key catalysts to India’s outperformance over China.
Buy Japan, Hold U.S., Sell Europe
September 18th, 2023 | LPL Research
Europe’s economy outpaced most expectations in late 2022 and early this year amid fears of an escalating energy crisis as the war in Ukraine continued. Rising earnings expectations coincided with that outperformance, at least until this summer. Since July, however, earnings estimates have fallen, coinciding with recent ratcheting lower of economic growth expectations in the region.
The Growing List—and Politicization—of BRICS and Friends
September 11th, 2023 | LPL Research
The BRIC acronym, without the “S,” was introduced in 2001 by the Goldman Sachs chief economist who highlighted the prodigious growth and investment prospects of Brazil, Russia, India, and China combined. In 2009, Russia advanced the BRIC platform to create an informal bloc that could challenge the dominance of Western nations, particularly the United States. In 2010, South Africa joined and became the “S” in the BRICS lexicon. The original bloc, an informal economic alliance, comprises approximately 45% of the global supply chain for commodities, including industrial, precious, and agricultural products.
Interest Rates Are Back to Normal, But What is Normal?
September 5th, 2023 | LPL Research
The Fed and other central banks ripped the proverbial Band-Aid off over the last few years, and interest rates are now back into more normal levels.
Could interest rates go higher? It’s possible. With the Treasury Department expected to issue a lot of Treasury securities to fund budget deficits and with the potential for the Bank of Japan (BOJ) to finally end its aggressively loose monetary policies, we could continue to see upward pressure on yields. However, while supply/demand dynamics can influence prices in the near term, the long-term direction of yields is based on expected Fed policy.
Lessons Learned from the grand Tetons
August 28th, 2023 | LPL Research
As investors prepare for the rest of this year and for 2024, markets need to adjust to the likelihood that central bankers will not be as coordinated in this period of transition. Europe has stickier inflation despite weakening economic growth, so we could expect a hawkish pause out of the ECB. Diverging policy has direct investment implications, especially for currency markets. If the Fed hikes and the ECB doesn’t, investors could expect the U.S. dollar to appreciate, making things difficult for U.S.-based multinational companies.
Pullback Perspective: The Reasons Why Stocks Are Pulling Back
August 21st, 2023 | LPL Research
Stocks are struggling this month as gravity appears to be setting in. While overbought conditions into August are part of the story, the recent jump in interest rates has captured most of the blame for the selling pressure. Benchmark 10-year Treasury yields have surged nearly 50 basis points (bps) over the last month, proving to be too much too fast for equity markets to absorb. This observation has been further evidenced by the correlation between 10-year yields and the S&P 500 recently turning negative for the first time since March.
How This U.S. Debt Downgrade Is Different From 2011
August 14th, 2023 | LPL Research
While Fitch’s opinion in and of itself doesn’t matter all that much in the grand scheme of things, one potential reason why it could matter to investors is likely only administrative. The U.S. is officially split-rated, so accounts that have minimum AAA-rating requirements may have to change account documentation, but it will not likely result in forced selling.
Key Earnings Season Takeaways
August 7th, 2023 | LPL Research
Earnings season is mostly behind us with about 85% of S&P 500 companies having reported second quarter results. The high level results aren’t particularly impressive, but if we peel back the onion, the numbers are encouraging. Results and guidance probably haven’t been good enough for stocks to add to recent gains, but they have been good enough, in our view, to end the earnings recession and limit the magnitude of any potential pullback.
A Cloudy Outlook Makes for Choppy Markets
July 31st, 2023 | LPL Research
Goods prices declined three of the last four months, pulling the annual rate of goods inflation down to -0.6%, the lowest since 2020. Services inflation is also cooling, but it’s still too high as consumers concentrate their spending on services. If inflation metrics continue to cool, investors should expect the Fed to pause at their next meeting in September.
Gold Shines Brighter Than Ever
March 11th, 2024 | LPL Research
Gold is widely considered as a store of value that can help hedge inflation risk and diversify a portfolio. During periods of elevated market volatility and heightened geopolitical risk, gold also serves as a safe haven asset. These characteristics helped shape the Wall Street adage of “hold gold and hope it doesn’t go up.”
Price action in gold over the last six months has been a bit paradoxical when considering the market backdrop of receding inflation and aggressive risk-on positioning. However, as investors have become more confident in the Fed’s transition from rate hikes to rate cuts, gold has done very well. Like most decisions in investing, it is all relative, so as interest rates moved lower on the back of a potential Fed policy pivot, both nominal and real yields became less attractive relative to gold, which offers no yield. Furthermore, the dollar has followed interest rates lower, providing another tailwind for the precious metal.