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.

Earnings Are Doing Their Part

May 28th 2024 | LPL Research

If companies can continue to control costs, then improving margins for the rest of the year seems doable. Economic growth is supportive. Wage pressures seem to be stabilizing as the job market loosens up a bit. Consumer prices are increasing at a faster pace than wholesale prices, using the latest readings for the Consumer Price Index (CPI) and Producer Price Index (PPI), which supports margins. And margins in healthcare and energy are depressed and poised to reverse. One risk is further consumer pushback on high prices as savings dwindle. Higher commodity and borrowing costs present other potential headwinds.

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How's It Going? Depends on Who You Ask

May 20th 2024 | LPL Research

The national median asking rent was just shy of $2,000 at the end of Q1, putting immense pressure on renters as rents have increased by over 20% since the onset of the pandemic. Renters are paying roughly $370 on average more each month, a stark contrast to the savings found by homeowners who refinanced before the Fed started increasing rates. Of course, the spike in rents is more prominent in big cities such as New York City and Chicago. Conversely, those with mortgages saved approximately $220 per month on average from refinancing, and recent refinancing activity reached record levels, surpassing even those seen just before the Great Financial Crisis.

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Preferred Securities: Still Our Preferred Non-Core Bond Sector

May 13th 2024 | LPL Research

Preferred securities (preferreds) are often referred to as “hybrid” securities as they have both bond and equity characteristics. This hybrid nature results in preferred securities being senior to common stock but subordinated, or junior to bonds within a company’s capital stack. Similar to bonds, preferred securities offer a stated yield and a par value, which limits potential losses while not participating in potential price appreciation of a company’s common stock. While there are many types of preferred securities, dividends are generally guaranteed, but may be deferred based on company management’s discretion. Preferred securities, then, tend to offer a higher yield compared to other bonds issued by a company to attract investors.

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Sell in May? Maybe Not.

May 6th 2024 | LPL Research

While the U.S. might not have the St. Leger race, we did celebrate the Kentucky Derby over the weekend, and the thought of “enjoying” some golf and beach time this summer sounds appealing, but we don’t wholly subscribe to going away from the market over the next six months.

The table below highlights rolling six-month price returns for the S&P 500 across all 12-month periods since 1950. And while the May through October time frame has historically underwhelmed with an average gain of only 1.7%, returns importantly have been positive 65% of the time. Of course, that doesn’t stack up very well compared to the 7.2% average gain between November and April, but other technical and fundamental factors point to upside potential beyond the average 1.7% gain during this year’s “Sell in May” period. Longer-term momentum indicators point to more potential upside for stocks before year-end, earnings continue to surprise to the upside with estimates holding steady (estimates typically fall 2–3%), while economic activity is humming along at a solid pace. Furthermore, Friday’s goldilocks jobs report showed labor demand slowing but still growing and cooling wage growth, helping raise the probabilities for two rate cuts by year-end. 

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This Was Quite A Week

April 29th 2024 | LPL Research

According to the American Association of Individual Investors (AAII) sentiment survey, bearish sentiment among its members recently rose to 34%, snapping 23 weeks of below-average bearish sentiment. At the same time, bullish sentiment fell 6% to only 32% last week, down from over 50% in April. Combining bullish and bearish sentiment provides a more comprehensive view of risk appetite.

As highlighted in the accompanying chart, the bull-bear spread dipped into negative territory for the first time since early November, which means some of the frothy optimism has been wrung out of this market — a good thing for the near-term outlook — but our assessment of these and other sentiment measures do not yet point to a contrarian buy opportunity. 

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The Ever-Changing Market Narrative

April 22nd, 2024 | LPL Research

Treasury yields are inversely related to rate cut expectations. As the market repriced the probability of the Fed keeping things on hold for longer than originally anticipated, yields jumped higher across the curve. The closely watched 10-year Treasury yield surged over 40 basis points this month to around 4.60%, a far cry from the 3.88% starting point of the year. Technically, yields have also broken out above key resistance near 4.35%, a level tracing back to the October 2022 highs and a tipping point for risk appetite last summer. And while today’s price action shares some parallels to then — surging Treasury yields contributed to selling pressure in an overbought equity market — stocks have thus far absorbed the recent jump in rates much better. This is demonstrated by a less negative correlation between the S&P 500 and 10-year Treasury yields between now and then, suggesting markets may be a little more comfortable in the economy handling higher rates this time around.

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Revisiting Energy

April 15th, 2024 | LPL Research

Economic growth forecasts issued by OPEC+ continue to estimate stronger global growth for 2024 and 2025, which would provide an important tailwind for oil demand. The cartel views the economies of China, the U.S., and India reinforcing its forecast. Although the goal of OPEC+ is to keep prices elevated, the consortium is also careful not to cut production dramatically, which could ignite a serious economic downturn denting oil prices.


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What to Watch This Earnings Season

April 8th, 2024 | LPL Research

Big tech will certainly play a key role if corporate America is going to deliver upside to the consensus S&P 500 EPS estimate. But margin improvement may also help. Net margins for the S&P 500 are sitting at around 12.2% currently, but consensus is calling for 13.3% in Q3 2024 — just two quarters away. If companies can effectively control costs while revenue continues to rise, consistent with the growing U.S. economy, margins should rise this year. A healthy two-point difference between the consumer price index and the producer price index is indicative of a favorable margin environment, while elevated borrowing costs, rising commodity prices, and wage pressures from a tight labor market are among key risks to margins.

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IPOs as a Market Tell

April 1st, 2024 | LPL Research

During the period of extraordinarily low interest rates, private equity/venture capital firms across the globe supported smaller privately-held businesses, especially start-up “unicorns” valued at $1 billion or more. At the end of 2023, there were approximately 554 unicorns globally. This is in addition to broad support for a wide range of companies within many sectors. The goal for financial backers is to unwind the enterprise and apply for the IPO process in order to return a profit for shareholders.

Although the 2024 IPO pipeline is well-stocked amid an underpinning of constructive optimism, there are many factors that could hinder companies from taking the final step towards the public market, particularly as private equity sponsors are reluctant to take a discount, or “haircut.”

Fed policy will play an essential role in final decisions, as a move to an interest rate cutting cycle is seen as necessary to maintain a risk-on posture for markets and support successful IPOs. If rates remain “higher for longer,” providing a positive rationale for investing in a newly public company could be more difficult. A broader market in terms of sector performance so that one sector such as technology does not dominate could also help strengthen the IPO pipeline.

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IPOs as a Market Tell

April 1st, 2024 | LPL Research

During the period of extraordinarily low interest rates, private equity/venture capital firms across the globe supported smaller privately-held businesses, especially start-up “unicorns” valued at $1 billion or more. At the end of 2023, there were approximately 554 unicorns globally. This is in addition to broad support for a wide range of companies within many sectors. The goal for financial backers is to unwind the enterprise and apply for the IPO process in order to return a profit for shareholders.

Although the 2024 IPO pipeline is well-stocked amid an underpinning of constructive optimism, there are many factors that could hinder companies from taking the final step towards the public market, particularly as private equity sponsors are reluctant to take a discount, or “haircut.”

Fed policy will play an essential role in final decisions, as a move to an interest rate cutting cycle is seen as necessary to maintain a risk-on posture for markets and support successful IPOs. If rates remain “higher for longer,” providing a positive rationale for investing in a newly public company could be more difficult. A broader market in terms of sector performance so that one sector such as technology does not dominate could also help strengthen the IPO pipeline.

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Navigating the Strategic Investing Landscape

March 25th, 2024 | LPL Research

With the Federal Reserve’s (Fed) aggressive rate-hiking campaign of 2022-2023 behind us, we have entered 2024 with an equity risk premium (ERP) slightly below zero. The ERP compares the earnings derived from equities to the income (or yield) offered by high-quality fixed income. A near-zero ERP is a far cry from the 5% level back in March of 2020 at the depths of the pandemic lockdown when the Fed took its target rate to zero and the 10-year yield plummeted to the lowest levels ever recorded near 0.5%. Equities offered tremendous strategic value back then, but less so now.

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A Busy (and Perhaps Historic) Week for Central Banks

March 18th, 2024 | LPL Research

Along with the SEP, the Fed releases its “dot plot”, which represents the expected path of short-term interest rates by Fed members. Each dot represents a member’s opinion on where the Fed funds policy rate should be over the next few years. While not official policy, it does provide additional transparency into Fed member thinking — albeit anonymously.

In December, which was the last time the dot plot was released, the Fed, in aggregate, expected three rate cuts in 2024; however, the opinions of individual members ranged from no cuts to six cuts. So, while the “median” member expected three cuts, it would only take two members (out of 17) to change their view to reflect only two expected cuts in 2024.

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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.

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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.

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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