Large-Cap Indices Weighed Down by the Mega-Caps After Earnings

The S&P 500 (-0.4%), Dow Jones Industrial Average (-0.4%), And Nasdaq Composite (-1.1%) Ended The Week In Negative Territory, More So The Nasdaq, After Setting Intraday And Record Highs To Start The Week. The Russell 2000 Outperformed And Gained 0.8%.

It was a busy week to say the least, from reviewing a ton of earning news, to scrutinizing the Fed's latest policy decision, and sifting through the latest economic data and coronavirus headlines.

Starting with earnings, Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Alphabet (GOOG), and Facebook (FB), which comprise about 22% of the S&P 500's market capitalization, struggled this week after soberly reminding investors that their incredible growth over the past year is apt to moderate. 

Apple and Facebook issued cautious outlooks due to tough yr/yr comparisons while Amazon went as far as providing below-consensus revenue guidance for the third quarter. This fit nicely with the peak growth narrative, which was reinforced by mixed economic data and the continued spread of the Delta variant.

New home sales for June, durable goods orders for June, and the advance estimate for Q2 GDP each missed expectations. On the plus side, Q2 GDP still increased at a robust annual rate of 6.5% (Briefing.com consensus 8.5%), the consumer confidence report for July was better than expected, and the Personal Income and Spending report for June featured better-than-expected spending data and better-than-feared PCE price inflation data.

Despite the mega-cap losses, the market hung in there, as the Fed made no changes to its extraordinarily accommodative policy stance. Fed Chair Powell took it one step further and said there's still some time until substantial further progress has been made towards reaching the Fed's employment goal.

Fed Chair Powell's observation was conducive for risk sentiment, and while it may not have looked like it from an index perspective, seven of the 11 S&P 500 sectors did close in positive territory. The mega-caps pressured three of those sectors -- consumer discretionary (-2.6%), communication services (-1.0%), and information technology (-0.7%).

The materials (+2.8%) and energy (+1.6%) sectors posted decent gains while the financials (+0.7%), health care (+0.5%), real estate (+0.3%), utilities (+0.3%), and consumer staples (+0.2%) sectors rose modestly.  

The 10-yr yield decreased five basis points to 1.24%, underscoring peak growth/inflation expectations. 

Market Rebounds and Ends Week at Record Highs

The S&P 500 (+2.0%), Dow Jones Industrial Average (+1.1%), and Nasdaq Composite (+2.8%) ended the week at record highs, as investors embraced a buy-the-dip mindset and piled into the largest stocks in the market after a rough start to the week. Each of the major indices, including the Russell 2000 (+2.2%), rose between 1-3%.

On Monday, the S&P 500 dipped below its 50-day moving average (4257) and the Russell 2000 entered correction territory, which is often defined as a 10% decline from a recent high, reportedly because the market was concerned about the Delta variant slowing down economic growth.

Each of the major indices fell between 1-2% that day, but the silver lining was that the S&P 500 successfully retested its 50-day moving average. The benchmark index subsequently closed higher every day after Monday, largely due to the following factors:

• A belief that successfully retesting the 50-day moving average was bullish, as it has been since April 2020.

• Easing Delta variant concerns after the CEOs of Coca-Cola (KO), Chipotle Mexican Grill (CMG), and United Airlines (UAL) said their businesses haven't been impacted by the dominant variant.

• Expectations that the mega-caps will provide strong earnings reports next week after a heavy slate of good earnings news this week. The Vanguard Mega Cap ETF (MGK) rose 3.1% this week.

• Price momentum and a fear of missing out on further gains.

Nine of the 11 S&P 500 sectors closed higher, led by the communication services (+3.2%), consumer discretionary (+2.9%), information technology (+2.2%), and health care (+2.2%) sectors with gains over 2.0%. The energy (-0.4%) and utilities (-0.9%) sectors closed lower. 

Signs of peak growth still lingered, though, which likely restrained the rebound gains in many of the value/cyclical stocks. These signs were manifested in the latest economic data:

• Building permits, which are a leading indicator, declined 5.1% m/m to a seasonally adjusted annual rate of 1.598 million (Briefing.com consensus 1.700 million).

• Weekly initial claims reached their highest level since mid-May at 419,000 (Briefing.com consensus 360,000).

• The Conference Board's Leading Economic Index increased at its slowest pace since February at 0.7% (Briefing.com consensus 0.9%).

• The preliminary IHS Markit Services PMI decreased to 59.8 in July from 64.6 in June.

The 10-yr yield decreased one basis point to 1.29%, although it dipped below 1.14% early in the week.

Tough Week for Stocks as Treasury Market Throws Off Investors

The Week Started With The S&P 500 (‐1.0%), Nasdaq Composite (‐1.9%), And Dow Jones Industrial Average (‐0.5%) Closing At Record Highs, But That's About As Good As It Got. They Each Finished Lower As The Market Turned Defensive While The Real Loser Was The Russell 2000 (‐5.1%) With A 5% Decline.

There wasn't one specific event to blame for the losses, but the Treasury market continued to behave as if inflation rates and growth rates could be peaking. That's because the 10‐yr yield decreased six basis points to 1.30%, even as consumer and producer prices ran hotter than expected in June and retail sales data for June beat expectations.

On a year‐over‐year basis, total CPI was up 5.4% and producer prices for final demand were up 7.3%. Total retail sales increased 0.6% m/m in June (Briefing.com consensus: ‐0.6%).

The defensive bias was further underscored by the solid gains from the S&P 500 utilities (+2.6%), consumer staples (+1.3%), and real estate (+0.7%) sectors. Apple (AAPL) did well, too, rising 0.9% for the week after Bloomberg reported the company plans to increase production for its next‐gen iPhone by 20% this year.

Conversely, energy sector was beat up with a 7.7% decline, outpacing the decline in oil prices ($71.76/bbl, ‐2.80, ‐3.8%). The consumer discretionary (‐2.6%), materials (‐2.4%), and financials (‐1.6%) sectors also underperformed with losses over 1.5%.

There were a lot of EPS beats this week, most predominately out of the financials sector, but that didn't matter so much for the broader market, let alone the banks given the lower Treasury yields. Taiwan Semi (TSM), however, missed EPS estimates, which really weighed on the Philadelphia Semiconductor Index (-4.1%)

Separately, Fed Chair Powell testified before Congress for his semiannual report on monetary policy. The key takeaway from that hearing was that the Fed isn't ready to dial back its accommodative policy since Mr. Powell said, "reaching the standard of 'substantial further progress' is still a ways off."

All in all, it seemed like the stock market cooled off in part because of the confounding price action in the Treasury market. We'll see what happens next week when a host of non‐financial companies report earnings.

SLOPPY WEEK ENDS IN RECORD HIGHS

The S&P 500 (+0.4%), Dow Jones Industrial Average (+0.2%), And Nasdaq Composite (+0.4%) Eked Out Small Gains And Ended The Week In Record Territory. The Small‐Cap Russell 2000 Struggled This Week And Declined 1.1%.

The trading week was shortened to four days in observance for July 4th on Monday, so the week's action started on Tuesday when the S&P 500 snapped a streak of seven straight record closes. Reportedly, investors were worried about peak growth concerns due to a deceleration in the June ISM Non‐Manufacturing Index and the spread of the Delta Covid variant.

The next day featured a mega‐cap driven advance before the peak growth narrative again resurfaced as an excuse to do some selling on Thursday. The biggest source of angst was out of the Treasury market after the 10‐yr yield traded as low as 1.25% in part due to short‐covering activity since many people had been calling for yields to go up and not down.

To be fair, growth concerns seemed legitimate on Thursday after Japan extended its coronavirus state of emergency through Aug. 22 (barring spectators from the Olympics), and reports indicated the People's Bank of China (PBOC) could soon cut the required reserve ratio for banks due to slower growth expectations. The PBOC did just that by 50 bps on Friday.

Stocks and Treasury yields recovered a bit on Thursday and continued their rebound bids on Friday, with some attributing technical factors and a buy‐the‐dip mindset for the resilient price action. At the end of the sloppy week, the growth stocks stood atop the leaderboard while the cyclical stocks generally lagged.

The S&P 500 consumer discretionary (+1.5%) and real estate (+2.6%) sectors finished with strong gains and were the only sectors that rose more than 1.0%. Conversely, the energy (‐3.4%), communication services (‐0.4%), and financials (‐0.6%) sectors were the only sectors that closed lower.

Interestingly, WTI futures briefly hit a six‐year high above $76 per barrel after OPEC+ was unable to agree to further production increases. On a related note, the EIA reported its seventh‐straight weekly inventory draw.

The 10‐yr yield ended the week at 1.36%, or seven basis points below last Friday's settlement.

THIRD QUARTER BEGINS WITH NEW RECORD HIGHS

This Was An Impressive Week For The S&P 500, Which Gained 1.7%, Extended Its Streak To Seven Straight Record Closes, And Topped The 4300 Level With Ease.

The Nasdaq Composite outdid the benchmark index with a 1.9% gain and its own set of record‐setting performances.

The Dow Jones Industrial Average advanced 1.0% and closed at its first record high since May, while the Russell 2000 fell 1.2% amid rebalancing factors.

Interestingly, the Russell 1000 Growth Index rose 2.4% while the Russell 1000 Value Index (comprised of many cyclical stocks) increased just 0.4% despite a host of positive developments:

• June nonfarm payrolls increased by 850,000 (Briefing.com consensus of 680,000).

• The June ISM Manufacturing Index checked in at 60.6% (Briefing.com consensus 61.0%) for its 13th straight month above 50.0% (expansionary activity).

• The Conference Board's Consumer Confidence Index for June was better‐than‐expected at 127.3 (Briefing.com consensus 120.0).

• Weekly initial claims declined to a post‐pandemic low of 364,000 (Briefing.com consensus 400,000).

• Many banks increased their dividend payments after easily passing the Fed's stress test in the prior week.

The employment report, however, wasn't as strong as the headline jobs figure initially suggested. The unemployment rate (5.9%), average hourly earnings (+0.3%), and the average workweek (34.7) missed expectations. In addition, the labor force participation rate (61.6%) was unchanged, and there were higher rates of unemployment for minority groups.

What's more, there were reported growth concerns linked to the spread of the Delta coronavirus variant and the restrictions several countries imposed to curb infections. On a related note, Johnson & Johnson (JNJ) said its COVID‐19 vaccine showed persistent activity against the Delta variant with long‐lasting durability of response.

These growth concerns were manifested in the 11‐basis‐point decline in the 10‐yr yield (1.43%), which acted as a tailwind for the growth stocks ‐‐ especially the mega‐caps. The Vanguard Mega Cap Growth ETF (MGK) rose 2.6% this week. Facebook (FB) reached a $1 trillion market capitalization, and NVIDIA (NVDA) reached a $500 billion market capitalization.

Separately, WTI crude futures topped $75 per barrel amid speculation that OPEC+ will agree to a smaller‐than‐expected increase in supply, starting in August. An agreement was supposed to be reached on Thursday, but the week ended without an agreement.

S&P 500 and Nasdaq Kick Off the Summer with New Record Highs

Each of the major indices bounced back from last week's losses and rose more than 2.0% this week, showcasing that the buy-the-dip strategy was still alive and well. The S&P 500 (+2.7%) and Nasdaq Composite (+2.4%) set all-time intraday and closing record highs while the Dow Jones Industrial Average (+3.4%) and Russell 2000 (+4.3%) outperformed with strong gains.

All 11 S&P 500 sectors contributed to the record-setting advance, including the energy (+6.7%), financials (+5.3%), and industrials (+3.0%) sectors atop the sector standings after a trio of pitiful performances last week. The utilities sector (+0.7%) underperformed on a relative basis.

There were many developments this week that supported the bullish action:

• The S&P 500 reclaimed its 50-day moving average (4193) on Monday, which really set the tone for the rest of the week given that this key technical level has rewarded buyers over the past 14 months.

• Fed Chair Powell said on Tuesday the central bank isn't going to raise rates preemptively because there are fears of inflation and said he expects strong jobs growth in the fall.

• The White House unveiled a $1.2 trillion "Bipartisan Infrastructure Framework" on Thursday that included $579 billion in new spending.

• 23 large banks easily passed the Fed's latest stress test on Thursday, raising expectations for increased share buybacks and dividends.

• The FDA granted Breakthrough Therapy designation for Eli Lilly's (LLY) investigational antibody therapy for Alzheimer's disease. Nike (NKE) jumped 15% on Friday following its earnings report.

The stock market overlooked a weaker-than-expected new home sales report for May and grew patience for the labor market to improve and inflation rates to peak. The core-PCE Price Index for May rose 0.5% m/m (Briefing.com consensus 0.6%), leaving it up 3.4% yr/yr. Weekly initial jobless claims (411,000) stayed above 400,000 for the second straight week.

Elsewhere, the 10-yr yield rose nine basis points to 1.54% while the 2-yr yield increased one basis point to 0.27%. This curve-steepening activity provided additional fuel for the bank stocks.

REFLATION NARRATIVE REPRICED AS FED STRIKES LESS DOVISH TONE

The S&P 500 (-1.9%) And Nasdaq Composite (-0.3%) Started The Week At Record Highs, But The Benchmark Index Ended The Week Down 2% As Value/Cyclical Stocks Sold Off After The Fed's Policy Meeting.

The Dow Jones Industrial Average (-3.5%) and Russell 2000 (-4.2%) succumbed to heavy losses of 3.5% and 4%, respectively.

From a sector perspective, the financials (-6.2%), materials (-6.3%), energy (-5.2%), and industrials (-3.8%) sectors dropped between 3-6%, while the information technology sector (+0.1%) managed to eke out a positive finish.

The FOMC made no changes to the fed funds rate or the pace of asset purchases, as expected, but the median forecast for the path of interest rates signaled two rate hikes by the end of 2023 -- the prior indication was leaving rates unchanged through 2023. Seven members expected a rate hike in 2022.

What's more, the Fed increased the interest on excess reserves to 0.15% from 0.10%, and the reverse repurchase rate was increased by five basis points to 0.05%.

Fed Chair Powell struck an accommodative tone following the FOMC policy statement, but St. Louis Fed President Bullard (FOMC voter in 2022), who was often seen as one of the more dovish Fed members, sounded more hawkish in a CNBC interview. Mr. Bullard said he was one of those seven officials who forecast a rate hike next year and said the Fed shouldn't be involved in mortgage-backed securities.

To be clear, the central bank acknowledged the rising inflation pressures in the economy, most evident this week in the hotter-than-expected Producer Price Index for May, but it remained assured that inflation will moderate and reach the Fed's longer-term goals.

In theory, raising rates modestly would help dampen inflation pressures without being overly restrictive for economic growth. The Fed also said it will provide advanced notice before announcing any decision to make changes to asset purchases.

The downside, though, was that the messaging from the Fed supported the burgeoning view that inflation rates, and growth rates, are peaking as the immediate effects from reopening the economy wear off.

The 10-yr yield decreased one basis point to 1.45%, respecting the Fed's view on transitory inflation factors, while the fed-funds-sensitive 2-yr yield jumped 11 basis points to 1.27%. The U.S. Dollar Index rose 2.0% to 92.32.

The unwind of the reflation narrative was further pressured by a series of other developments: commodities, ex oil, continued to pull back (copper futures dropped 9%); retail sales for May were weaker than expected; weekly initial claims unexpectedly increased; and JPMorgan Chase (JPM) and Citigroup (C) warned of lower trading revenue for the second quarter.

June Begins on Strong Note

The Stock Market Ended The First Week Of June On A Higher Note With The Dow, S&P 500, And Nasdaq Advancing A Respective 0.7%, 0.6%, And 0.5%.

The first half of the abbreviated week was very quiet, as the S&P 500 shed two points on Tuesday and gained six on Wednesday. That masked a strong start from the energy sector, which gained 6.7% during the week, extending its year-to-date advance to 45.3%. The sector benefited from a 5.0% rally in the price of oil, which climbed to $69.61/bbl, its highest level since mid‐October 2018.

Growth stocks showed some weakness on Thursday, pressuring sectors like technology, communication services, and consumer discretionary. However, they bounced on Friday as Treasury yields fell in response to a weaker than expected Employment Situation report for May. Technology and communication services gained a respective 1.2% and 0.6% for the week while the consumer discretionary sector lost 1.0%.

The past week saw renewed volatility in stocks that made headlines earlier this year. AMC (AMC) surged 95.2% on Wednesday and gained 83.4% for the week while GameStop (GME) and Bed Bath & Beyond (BBBY) gained a respective 11.9% and 13.3% for the week.

On the news front, the G-7 neared an agreement on a 15% global minimum corporate tax while the Biden administration negotiated the terms of an infrastructure spending package with Republicans. The administration also signaled openness to implementing a minimum corporate tax rate of 15% instead of raising the top rate to 28% from 21%.

GOOD PERFORMANCE FROM NOT ONLY STOCKS BUT ALSO BONDS

The Stock Market Had All‐Around Good Performance From The Large‐Caps, Mid‐Caps, Small‐Caps, And Even The Micro‐Caps. Risk Assets Appeared To Draw Support From The Calmness Of The Treasury Market, Which Staved Off Pestering Inflation Concerns And Accompanying Valuation Concerns.

The Nasdaq Composite (+2.1%), Russell 2000 (+2.4%), and iShares Micro‐Cap ETF (IWC, +3.3%) rose more than 2.0%. The S&P 500 (+1.2%), Dow Jones Industrial Average (+0.9%), and S&P Mid Cap 400 (+1.4%) each advanced closer to 1.0%.

From a sector perspective, the consumer discretionary (+2.2%), communication services (+2.5%), information technology (+1.6%), and real estate (+2.1%) sectors finished atop the leaderboard. Conversely, the utilities (‐1.6%), health care (‐0.7%), consumer staples (‐0.4%), and energy (‐0.02%) sectors closed lower.

Highlighting some of the economic data, which should help explain the relative strength in the Treasury market (the 10‐yr yield declined five basis points to 1.58%):

• New home sales declined 5.9% m/m in April to a seasonally adjusted annual rate of 863,000 (Briefing.com consensus 980,000)

• The Conference Board's Consumer Confidence Index dip 0.3 points to 117.2 in May (Briefing.com consensus 118.0)

• Durable Goods Orders unexpectedly decreased 1.3% m/m in April (Briefing.com consensus +0.8%)

• Personal income declined 13.1% m/m in April (Briefing.com consensus ‐15.0%), as the total of stimulus payments made was greatly reduced from March.

The data supported the thesis that economic growth rates are peaking, which in turn would suggest inflation rates are also peaking. The latter was corroborated by longer‐dated Treasury yields moving lower (not higher) to the following inflation news:

• The PCE Price Index ‐‐ the Fed's preferred inflation gauge ‐‐ was up 3.6% yr/yr in April

• The expected year‐ahead inflation rate was a record 4.6% in the final May reading for the University of Michigan Index of Consumer Sentiment

• Costco's (COST) CFO said, "inflationary factors abound" and estimated that overall price inflation at the selling level is in the 2.5‐3.5% range, or above prior expectations.

The question that remains is will inflation really be as transient as the Fed expects, especially when additional fiscal stimulus appears to be on the horizon? Senate Republicans confirmed a $928 billion infrastructure counteroffer to the Biden administration's $1.7 trillion American Jobs Plan while the White House confirmed a $6 trillion budget for FY22, which would include both the American Jobs Plan and American Families Plan.

The Treasury market thinks so.

NASDAQ ESCAPES WITH A WEEKLY GAIN, ITS FIRST IN FIVE WEEKS

This Week Featured A Lot Of Churn And Rotation Between Growth And Value Stocks, Which Made For A Lackluster Performance At The Index Level. The Nasdaq Composite (+0.3%) Rose Modestly, While The S&P 500 (-0.4%), Dow Jones Industrial Average (-0.5%), And Russell 2000 (-0.4%) Ended With Modest Losses.

The market appeared to adhere to the "peak growth" narrative this week after April housing starts, April existing home sales, and the Philadelphia Fed Index for May all decelerated on a month-over-basis basis. To be fair, preliminary data out of the IHS did show manufacturing and service-sector activity accelerate in May.

Accordingly, the cyclical S&P 500 energy (-2.8%), industrials (-1.7%), financials (-0.9%), materials (-1.4%), and consumer discretionary (-1.2%) sectors declined the most this week. Aside from the consumer discretionary sector, each of these sectors are up double-digit percentages this year.

Conversely, investors leaned defensively on the health care (+0.7%), real estate (+0.9%), utilities (+0.3%), consumer staples (+0.1%), and information technology (+0.1%) sectors. Granted, the outperformance of the tech sector was more likely a function of investors nibbling into beaten-down growth stocks.

The growth stocks helped the S&P 500 climb back above its 50-day moving average (4091) after it briefly dipped below the key technical level for the first time since March on Wednesday. 

Separately, the FOMC Minutes from the April meeting revealed that some participants thought it might be appropriate to start talking about tapering asset purchases in future meetings if the economy continues to make rapid progress towards the Fed's goals on employment and inflation.

The market didn't react too noticeably to this passage, arguably due to a view that it might have been more surprising to see no mention of the need to start talking about tapering asset purchases.

The 10-yr yield decreased one basis point to 1.63%, representing a view that the Treasury market isn't that concerned about inflation and is siding with the Fed's view that inflation will be transitory.