Dip Buyers Wade Back In to Drive Wall Street Gains: Markets Wrap

This content was published on July 22, 2024 - 23:12

9 minutes

(Bloomberg) — Stocks rebounded after their worst week since April as investors looked beyond Joe Biden ending his reelection campaign to focus on the start of the tech earnings season.

Despite the selloff that had some on Wall Street bracing for a correction, respondents to Bloomberg’s Markets Live Pulse survey expect earnings to reinvigorate the S&P 500 — which climbed 1.1% to start the week. With results from Tesla Inc. and Alphabet Inc. on deck Tuesday, nearly two-thirds of the 463 respondents expect corporate profits to boost US equities.

Read: Biden Exit Sounds Alarm on Trump Trades Riven With Contradiction

Sky-high valuations and seasonal weakness have incited some stock pullback warnings, with traders also facing political uncertainties. Yet even with the many headlines that followed Biden’s decision to quit the race and endorse Kamala Harris, a sense of calm prevailed Monday. Volatility slumped as dip buyers emerged.

“This political shake-up shouldn’t materially alter the direction of the markets,” said Tom Essaye at The Sevens Report. “The ultimate direction of the S&P 500 will still be determined by economic growth.”

The S&P 500 rose the most since early June. The Nasdaq 100 added 1.5%. A gauge of the “Magnificent Seven” climbed about 2.5%, led by gains in Tesla and Nvidia Corp. The Russell 2000 of smaller firms added 1.7%. CrowdStrike Holdings Inc. sank amid the continued fallout from a faulty software update.

Treasury yields edged higher, setting the stage for this week’s readings on the economy as well as the Federal Reserve’s preferred inflation gauge. For much of July, bets on a rate cut in September drove shorter-term bonds up — narrowing the gap with longer-dated maturities. The dollar wavered Monday.

“Don’t get us wrong, the upcoming election will certainly still be a focus for everybody — including investors — over the coming months, but there will be times when their focus will move to other issues, said Matt Maley at Miller Tabak + Co.

To Peter Boockvar at The Boock Report, debts and deficits are going to continue to skyrocket regardless of who wins the election.

“If Trump wins, we’ll get a full extension of the 2025 tax cuts but a possible slew of tariffs, more protectionism and likely a weaker dollar,” Boockvar said. “If Harris wins (assuming she’s the nominee), some of those Trump tax cuts will not be extended and we’ll get only some tariffs but still a lot of protectionism and possibly a weaker dollar.”

“I think up until the election, markets are going to trade more so on the trajectory of inflation, earnings, the economy and what the Fed does,” he concluded.

Since 1928, the S&P 500 has advanced roughly 5% on average in the third quarter of election years, logging positive returns nearly two-thirds of the time during the July through September period, according to data from Bloomberg Intelligence. Its track record has been even better in times a sitting president was up for reelection, averaging a nearly 8% rise in those months.

Strategists at BlackRock Investment Institute are reiterating their conviction in US equities after the S&P 500 logged its worst week in three months.

“We see pullbacks as an opportunity to lean into stocks,” team led by Wei Li wrote. “Looking through near-term noise” of small-cap rally, big tech is likely to keep driving returns as companies carry positive earnings results for the market, the strategists said.

After driving the rally in US stocks for most of the year, big tech slammed into a wall last week. Investors rotated from high-flying megacap shares to riskier, lagging parts of the market, spurred by bets on Fed rate cuts and the threat of more trade restrictions on chipmakers.

Hedge funds spent last week selling their winners at the fastest pace since the meme stock craze in January 2021 as the world’s largest technology companies got hammered.

The funds’ long-short net leverage, which is often viewed as a barometer of risk appetite, fell to 49.8% last week — the lowest level since March 2023, according to Goldman’s prime brokerage desk. At a single stock level, the biggest unwinds came across information technology, health care, financials and energy.

Still, the recent outperformance of US small caps is facing technical resistance and lacks fundamental drivers to carry on for a longer period of time, according to Morgan Stanley’s chief US equity strategist Mike Wilson.

“While we’re respectful of still light sentiment/positioning in small caps, we see limited fundamental and macro justification for small cap outperformance continuing in a durable manner,” Wilson and his team said in a note to clients.

Prospects of a Republican win in November’s presidential election may invoke small-cap “animal spirits,” but that is likely to be short lived, according to Morgan Stanley’s Lisa Shalett. “We prefer the resilience of large caps to small caps — bottom line,” she wrote.

John Stoltzfus at Oppenheimer Asset Management saw last week’s market action as some prudent consideration by investors in addressing a need to redistribute the weighting of opportunity and risks across more than a few sectors, styles and market capitalizations.

“That said, we remain positive on technology stocks suggesting that investors “don’t change horses in the middle of a stream” but rather that they consider distributing the load of risk and opportunity across more than a few “horses” better known in equity investing as: companies, sectors, market capitalizations and styles, he noted.

The S&P 500 just exited what’s historically been its best two-week stretch of the year in the first half of July, and is approaching its most challenging stretch in August and September.

Profit estimates for the S&P 500 in the second quarter haven’t been cut as much as they normally have, according to JPMorgan Chase & Co. strategists, a sign that there’s little room for disappointment this earnings season. A team lead by Mislav Matejka said usually projections fall by 5% in the three months before results, but this time it’s been about 1%.

The “market is trading near highs, with full positioning and extreme concentration, suggesting that there is not much scope to absorb any disappointments,” they wrote.

“The heart of earnings season begins this week and plenty of tech companies report, which should give investors an idea of how healthy the overall economy looks through corporate eyes,” said Paul Nolte at Murphy & Sylvest Wealth Management.

Corporate Highlights:

AMC Entertainment Holdings Inc. said it reached a sweeping restructuring deal with creditors that will let it delay repayment of more than $1.6 billion of debt for several years, buying it time to execute a turnaround.
Mattel Inc. is confident in its path as a standalone business after Reuters, citing people with knowledge of the matter, reported that the toymaker has been approached with a buyout offer by the private equity firm L Catterton.
Boeing Co. dominated the first day of dealmaking at the Farnborough International Airshow, sealing an estimated $12.6 billion in aircraft sales at the aviation industry’s biggest event of the year.
Delta Air Lines Inc. expects to cancel more flights this week as the carrier tries to recover from a crippling technology outage.
Ryanair Holdings Plc cut its outlook for ticket prices in the crucial summer travel period and said fares will be “materially lower” as consumers grow more cautious, adding to pessimism that the post-pandemic rebound in flying is fizzling.
Verizon Communications Inc. reported operating revenue that missed analysts’ estimates as fewer people upgraded wireless equipment.
The bulk of McDonald’s Corp. US restaurants will extend the burger chain’s $5 meal deal in a bid to attract budget-strapped diners.

Key events this week: