More Sectors Lead the Rally: Market Shifts. NIO Results Preview
While the beginning of August brought with it significant fears, with the return of volatility to the markets (VIX at 65 points) and a “Black Monday” on August 5, during which the S&P 500 lost 3% in a single session, the month closed in green. This marks four consecutive months of growth for the S&P 500, with April being the only exception in 2024 to show a correction. Over the past 10 months, starting in November of last year, the index has gained nearly 35%, with 9 months of gains. The summer numbers are no exception: between June and August 2024, the S&P 500 has increased by 8.9%. This is the third-best summer result since 1998, surpassed only by the peaks of 2020 (15%) and 2009 (11%).
Changes Beneath the Surface of the Rally
But beneath the surface of the rise and continuity of American shareholder base, some signs of change are presenting themselves forcefully. Unlike the first half of the year, a broader range of sectors and stocks are now leading the rally, indicating a gradual shift in market leadership. While the S&P 500 has yet to reach a new high since its early August pullback, the equal-weight index has hit new highs, suggesting that market volatility has worked to the average stock’s advantage. Supporting the broadening theme, S&P 500 earnings growth excluding the Magnificent Seven was positive for the first time in five quartersi. Nine of the 11 sectors posted positive growth, with the biggest upside surprises coming from financials, healthcare, utilities, and technology. Consumer Staples, Real Estate, Healthcare, Utilities, and Financials led the gains in August, while technology ended a meager +0.7%.
Second Quarter Earnings Season: Solid Results, Tepid Reactions
With 99% of S&P 500 companies having already reported results, the second-quarter earnings season is now complete. The result was better than expected, with 80% of companies beating analysts’ estimates, and earnings grew 11.4%, an acceleration from the first quarter. Full-year forecasts for 2024 and 2025 remain optimistic, with earnings growth expected to be above 10% for each year. Despite the good earnings season, the market response has not been so positive, especially for big tech. The results highlighted a headwind facing mega-cap tech winners: elevated expectations.
A Shift in Perspective in Economic Data
There has been a major shift in the way economic data is interpreted recently. Until recently, good news for the economy could be seen as bad news for markets, as it could imply a tightening of monetary policy by the Fed. Now, with inflation nearing 2% and a more transparent Fed in its intentions, we’re back to the situation where bad news for the economy is actually bad news. for markets too. A case in point was July’s weak jobs report, which stoked recession fears and triggered the biggest stock market decline of the year.
Volatility Lurks: The Importance of a Diversified Strategy
While the market ended the summer on a solid footing, near record highs, supported by rising corporate earnings, lower bond yields and expectations of a more dovish Fed policy, we cannot yet consider volatility over. The next two months, leading up to the November elections, are historically challenging for equity markets, with greater daily fluctuations and lower yields. The possibility of a return of volatility underscores the importance of investment discipline and diversification across asset classes, styles and sectors, especially after an August that revealed subtle shifts in market leadership.
September: The Weakest Month But Not Without Opportunities
September is typically the weakest month for markets. The drivers of the perceived “September effect” are varied, with a late summer “return to reality” with over 85% of global assets under management in the Northern Hemisphere. However, behind every darkness lies a light. September’s weakness could also be an opportunity to position for the fourth quarter’s strongest seasonality of the year.
Key Events on the Calendar: What to Expect in September
The September calendar is full of crucial events. Among these, the following stand out the Fed’s expected first rate cut on September 18, the ECB’s second, the Apple event on September 9, and the upcoming US elections in November. As for this week, which opens with US markets closed for Labor Day, investors will focus on US labor market data, due on Friday. Estimates call for 163,000 new jobs to be created in August, up from 114,000 in July, with the unemployment rate expected to return to 4.2%. Before that, the August ISM indices for manufacturing and services will also be released, along with July’s JOLT data. In the euro area, compensation per employee, a key measure of wage growth tracked by the ECB, is due on Friday.
On the quarterly front, The spotlight will be on companies such as HPE, Dollar Tree, Broadcom, Zscaler and Nio. For Broadcomthe consensus estimate is for earnings of $1.20 per share on revenue of $12.90 billion, representing 45.3% year-over-year revenue growth. Options traders are looking for an 8.7% move in earnings, with the stock averaging 5.9% in recent quarters. For Zscaler, the consensus estimate is for $0.69 per share on revenue of $567.62 million, representing 24.8% year-over-year growth. The company’s guidance is for earnings of between $0.69 and $0.70 per share on revenue of $565.00 million and $567.00 million. Options traders are pricing in a 9.9% move in earnings. NIO is forecast to report a loss of $0.46 per share on revenue of $2.35 billion, representing revenue growth of 94.3% year over year. The company’s guidance was for revenue of $2.30 billion to $2.37 billion, and options traders are pricing in a 14.0% move. Monthly deliveries are due Tuesday. by Chinese car manufacturers (Nio, Xpeng, Li Auto)while Intel will present the next generation of Intel Core Ultra processors in Berlin.
* Italian Market Analyst at eToro
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