Outlook for week of Aug 28 - Sep 1

The conclusion of the regular Q2 earnings season is nearly at hand. In the past week, 10 companies listed on the S&P 500 index disclosed their Q2 earnings, out of which 8 surpassed the consensus earnings-per-share (EPS) predictions. In totality, a substantial 97% (484 companies) of the S&P 500 contingent have submitted their Q2 performance figures up to this point. A comparative assessment of beat rates, considering results from prior quarters, is presented below.

In terms of expansion, the Q2 earnings have demonstrated a year-on-year decline of -7.2% thus far, a slight deviation from the projected -6.8% at the conclusion of Q2. Correspondingly, Q2 revenues have exhibited a positive growth of +0.8% year-on-year until now, in contrast to the estimated -0.4% at the culmination of Q2. To contextualize, these figures stand against the conclusive growth rates of -2.8% and +4.3% for earnings and revenues respectively, as seen in Q1.

This week has seen a complete resurgence of the cyclical bias observed earlier this year, reflected across various sectors. As of the market's closure on August 24, 2023, the market sector performance for the year-to-date (YTD) period in 2023, compared with the full-year figures of 2022, underscores this trend. In this context, the breakdown of sectors is as follows: Communications Services has exhibited an impressive +38.3% YTD performance in 2023, rebounding from a significant -40.4% decline in 2022; Information Technology reflects a +36.8% YTD performance in 2023, recovering from a -28.9% decrease in 2022; Consumer Discretionary displays a +27.7% YTD growth in 2023, bouncing back from the -37.6% dip in 2022; Industrials show a +7.3% YTD uptick in 2023, compared to the -7.1% drop in 2022; Materials register +3.5% YTD performance in 2023, recovering from a -14.1% slump in 2022; Financials record a slight decline of -1.5% YTD in 2023, following a -12.4% decrease in 2022; Real Estate witnesses a -1.9% YTD performance in 2023, rebounding from a -28.5% contraction in 2022; Energy, positioned within the defensive category, sees a marginal decline of -2.0% YTD in 2023, contrasting with the substantial +59.0% growth in 2022; Health Care encounters a -2.7% YTD decline in 2023, differing from the -3.6% contraction in 2022; Consumer Staples shows a -3.0% YTD performance in 2023, similar to the -3.2% decrease in 2022; and Utilities, defensively positioned, experiences a -11.0% YTD downturn in 2023, as opposed to the -1.4% dip in 2022.

In the previous update, it was noted that the existence of two bullish indicators at their extremes, persisting for a few consecutive days, heightened the likelihood of a positive rebound in the early part of the following week. The market had experienced a decline of approximately 120 points (-2.7%) over the course of the preceding four sessions in the prior week. However, during the initial three sessions of the ongoing week, there was an upward shift of roughly 66 points (+1.5%), effectively confirming the accuracy of this earlier prediction.

The technical levels outlined in the previous communication largely retain their status. These encompass an extended resistance level at 4,600, a shorter-term resistance at the 50-day Simple Moving Average (SMA) – presently positioned at 4,460, and a support level at the former threshold of the bull market, standing at 4,292. It's noteworthy that this support level aligns just below the 100-day SMA, currently situated at 4,313.

Throughout the course of the previous week, the interest rate on the 10-year U.S. Treasury ($TNX) displayed a pattern of fluctuations. It commenced the week at approximately 4.29%, reached its peak around 4.36% in the middle of the week, and then underwent a decline towards the week's conclusion. Presently, as of midday on Friday, 8/25, it stands at around 4.23%, as reported at the time of writing.

On the morning of Friday, August 25, Federal Reserve Chair Jay Powell delivered his address at the Jackson Hole symposium. In his speech, he affirmed the Fed's responsibility to curtail inflation and expressed commitment to attaining the 2 percent inflation target. Powell acknowledged that although inflation had receded from its peak, it remains elevated, hinting at the potential consideration of further rate hikes.

Over the last eight years, encompassing 25 instances of interest rate adjustments, whenever the probability surpassed 65% on the day just before a Fed meeting, it corresponded with a rate hike or cut. At present, the fed funds futures are pricing in a roughly 21% likelihood of a +0.25% rate hike at the meeting on 9/20, and approximately 42% probability of another +0.25% increase by 11/1. Consequently, the cumulative likelihood of at least one more rate hike by 11/1 is around 63%. These probabilities are subject to daily alterations but currently remain in proximity to the 65% threshold, aligning with the expectations outlined in Powell's speech.

As anticipated, there was a rebound from oversold conditions during the past week, and the indicators now suggest the potential for further upward movement in the midst of anticipated volatile and choppy market conditions ahead.

In summary, the previous week witnessed a shift in sentiment among retail traders, marked by equity volume put/call ratios that leaned towards bearishness in the short term. Drawing from historical trends that have exhibited accuracy, this positioned the equity markets for a projected short-term rebound, which materialized during the initial three sessions of the week.

Reviewing the aggregated indicator activity this week, it's noticeable that there were more upgrades than downgrades. Consequently, the overall indication leans towards a Moderately Bullish outlook for the forthcoming week. However, as one indicator remains categorized as Volatile and a significant dispersion persists across indicators, a secondary assessment of Volatile seems appropriate.

Economic reports for next week:

Monday, August 28:

No economic reports are scheduled for this day.

Tuesday, August 29:

The S&P Case-Shiller Home Price Index for June will be released, offering insight into the year-on-year change in average prices of single-family residential real estate across 20 major cities in the U.S. The Conference Board Consumer Confidence for August will also be unveiled, which provides an assessment of consumer sentiment. Among other indicators, factors like gasoline prices and stock market performance significantly impact this measure. Additionally, the Job Openings and Labor Turnover Survey (JOLTS) for July will be published, aiming to gauge the number of available job openings. This data is collected voluntarily from around 16,000 companies within various industries.

Wednesday, August 30:

The ADP Employment Change report for August will be released, drawing data from approximately 400,000 U.S. businesses and 23 million employees in the private sector. Though often seen as a precursor to the official nonfarm payrolls report by the Bureau of Labor Statistics (BLS), it doesn't account for government jobs, leading to occasional discrepancies. The second (Preliminary) estimate of Gross Domestic Product (GDP) for Q2 will also be provided, revising the data about 60 days after the end of the quarter. Additionally, the Pending Home Sales Index for July will be presented, focusing on signed contracts and offering a forward-looking perspective compared to existing home sales data.

Thursday, August 31:

Initial Jobless Claims for the week ending August 19, 2023, will be reported, reflecting changes in unemployment claims. The four-week moving average will be updated as well. The Personal Consumption Expenditures (Core PCE) for July will be released, serving as a gauge for inflation and representing the Federal Reserve's preferred metric. Personal Income and Spending reports for July, which use data from monthly employment reports, will help gauge income trends and forecast consumer spending. Additionally, the Chicago PMI for August will provide insights into business conditions within manufacturing and service firms in the Chicago area.

Friday, September 1:

The Monthly Employment Situation for August will be a comprehensive release including various labor market indicators such as Nonfarm Payrolls, the Unemployment Rate (U-3), Average Hourly Earnings, Average Workweek, Underemployment Rate (U-6), and Labor Force Participation Rate. This set of reports, often released on the first Friday of each month, offers a broad view of the labor market. Furthermore, the Construction Spending report for July will provide information about new construction activity, offering potential predictions about future housing and economic growth. Lastly, the ISM Manufacturing Index for August will be released, tracking economic data from manufacturing companies and indicating trends in the sector's profitability. An increase in this index is generally seen as favorable for equities, suggesting growth in manufacturing sector profits.

Previous update:

The regular second-quarter (Q2) earnings reporting period is almost concluded. In the past week, 15 companies listed on the S&P 500 index released their Q2 earnings, with 14 of them surpassing the anticipated consensus earnings per share (EPS) expectations.

In total, 471 firms (94%) within the S&P 500 index have disclosed their Q2 financial results to date. Here are the collective rates of exceeding expectations compared to figures from recent quarters.

In terms of growth, Q2 earnings have exhibited a year-over-year decline of -7.5% up to this point, slightly below the initial estimate of -6.8% at the close of Q2. Likewise, Q2 revenues have shown a year-over-year increase of +0.9% so far, surpassing the initial estimate of -0.4% as of the conclusion of Q2. This stands in comparison to the final growth percentages of -2.8% and +4.3% respectively observed during the first quarter (Q1).

Throughout the latter part of 2023, there has been a discernible shift away from a pronounced cyclicality trend within the market. The performance of various market sectors during the year-to-date (YTD) period in 2023, juxtaposed against their performance for the entire year of 2022, becomes evident through a breakdown of the 11 distinct market sectors, as of the closing figures on August 17, 2023. The sector landscape unfolds as follows:

In the realm of Communications Services, a remarkable upswing of +38.6% in YTD performance is observed, standing in stark contrast to the sharp -40.4% decline experienced in 2022. This sector firmly aligns with the cyclical classification. Likewise, the Information Technology sector portrays a robust +34.3% YTD performance, diverging from its -28.9% performance trajectory in 2022, showcasing its cyclical nature.

In the domain of Consumer Discretionary, a positive YTD performance of +28.1% is witnessed, in contrast to the steep -37.6% slump encountered in 2022, further reinforcing its classification as cyclical. The Industrials sector, with a YTD performance increase of +7.8%, differs from its -7.1% showing in 2022, substantiating its cyclical categorization.

Materials sector, experiencing a YTD performance uptick of +3.9%, diverges from its -14.1% performance in 2022, echoing its cyclical nature. In the Energy sector, a marginal YTD decline of -0.5% contrasts with its substantial +59.0% performance surge in 2022, placing it in the defensive category.

The Financials sector undergoes a YTD performance decrease of -1.1%, distinct from its -12.4% performance in 2022, upholding its cyclical character. Health Care, with a YTD performance dip of -2.0%, as against its -3.6% performance in 2022, exemplifies a defensive sector.

Consumer Staples, recording a YTD performance drop of -2.1%, veers away from its -3.2% performance in 2022, aligning with the defensive classification. Meanwhile, Real Estate's YTD performance registers a decrease of -2.6%, in contrast to its -28.5% performance in 2022, reinforcing its cyclical nature.

Lastly, the Utilities sector displays a significant YTD performance decline of -10.9%, differing from its -1.4% performance in 2022, further solidifying its position within the defensive category.

Given the SPX's decline of -93.69 points (-2.1%) over the course of the week, it appears evident that the prediction from the previous week regarding a "breakout," wherein the SPX would exhibit trading movement of around 1.0% in either direction by the end of the week, has proven to be quite accurate. This movement was notably driven by the shifts in bond yields. Treasury Yields, it can be asserted, have significantly contributed to the recent weakness observed in the equity market since the commencement of August.

Reflecting on observations made two weeks ago, it was noted that a resilient resistance level was found at 4,600 in the near term, and anticipation for support around 4,450 was evident. Upon examining the current situation, the resistance at 4,600 continues to exert its influence. While fleeting support was briefly witnessed at 4,450 during the past week, this support proved short-lived. It's noteworthy that the confluence of the 4,450 level and the 50-day Simple Moving Average (SMA) faltered on Tuesday (8/15), indicating a potential enduring resistance point for the SPX in future upward movements. However, an alternative point of interest emerges at the junction of the 100-day SMA and the previous bull market threshold (approximately 4,292), which might serve as a robust point of downside support should the SPX maintain its downward trajectory in the immediate future.

Starting the week around 4.18%, the interest rate on the 10-year US Treasury ($TNX) displayed a continuous climb throughout the week, reaching a significant point of technical resistance at 4.33% on late Thursday (8/17), as demonstrated in the provided data. This resistance has its roots as far back as 10/21/22, and achieving a yield beyond this mark necessitates a look back nearly 16 years to 11/7/07. Presently, the rate stands at around 4.23% as of mid-day Friday (8/18).

On Wednesday (8/16), the FOMC unveiled the minutes from their July meeting, which highlighted the continuing divergence of opinions among committee members regarding the necessity for further tightening measures. Over the past 8 years encompassing 25 interest rate adjustments, a probability exceeding 65% on the day preceding a Fed meeting has consistently led to a rate hike or cut. In the current context, the Fed Funds Futures are indicating roughly a 10% likelihood of a +0.25% hike at the 9/20 meeting and about a 26% probability of another +0.25% change on 11/1. Naturally, these probabilities are expected to undergo multiple revisions in the period leading up to the respective meetings.

In terms of outlook, the long-awaited decline has finally materialized, with the data reflecting a nearly 5% drop in the past 2? weeks. This suggests the potential for a near-term rebound before the downward trend resumes.

In summary, the message that high yields, overextended stock prices, stagnant earnings, and a sluggish China have conveyed to retail traders has been heeded. The prevailing conditions do not favor an unabated bullish sentiment, as the environment is not conducive to it.

Reviewing the indicators provided, a significant variance emerges this week. Notably, two bullish extremes have been in place for a few days, implying a reasonably favorable chance of an early-week Bullish rebound.?Yet, in the absence of these extremes, the overall forecast for the upcoming week leans Moderately Bearish. This secondary outlook appears logical, considering the broader context.

Looking ahead to next week's economic reports, Monday, August 21, has no scheduled releases.

• Moving to Tuesday, August 22, the Existing Home Sales for July will provide valuable insights into overall demand within the housing market. This metric compiles completed closings on all single-family dwellings, a significant segment of the housing market. As home buying often constitutes a substantial investment, it can be indicative of economic stability, and its trends might influence future durable goods purchases.
• Wednesday, August 23, brings the New Home Sales report for July, focusing on sales activity for newly constructed homes and other single-family dwellings. While it is a trailing report and generally considered less influential than building permits, it offers a glimpse into the sales dynamics within this sector.
• Thursday, August 24, features the Initial Jobless Claims for the week ending 8/12/23. After a 23k increase in the previous week, claims decreased by 11k. The 4-week moving average now stands at 234k, up by 2k from the prior week.
• Additionally, Durable Goods Orders for July will be released on the same day, a pivotal indicator of trends in both consumer and industrial spending. A significant deviation from estimates might trigger market fluctuations.
• Concluding the week on Friday, August 25, the University of Michigan Consumer Sentiment report for August will present its second (Final) iteration, often unveiled toward the end of the current month. This report compiles data on consumer attitudes and expectations, aiming to predict discretionary spending patterns.

Previous update:

Stocks are facing a predominantly downward trend today in response to the Producer Price Index (PPI) report's unexpectedly high inflationary data released this morning, leading to an uptick in bond yields. Both the headline and core PPI figures stood at +0.3%, surpassing the projected +0.2% for both categories. Moreover, the year-over-year statistics exceeded estimates, with the headline at +0.8% instead of +0.7%, and the core at +2.4% instead of +2.3%. As of the current writing, the SPX index has declined by approximately 0.3% for the week, settling near its lowest point in the past month. This recent downturn in the stock market over the last two weeks might be attributed to bearish seasonality, near-term bearish technical indicators, and a lack of additional bullish catalysts, given the conclusion of Q2 earnings season.

The Q2 earnings season is nearing its completion, with around 90% of S&P 500 companies having reported their results. Of these, 58% have surpassed revenue expectations, and an impressive 79% have exceeded bottom-line estimates. These figures compare to the respective percentages of 67% and 78% in the previous quarter. Notably, several notable companies are scheduled to announce their earnings next week including Home depot, Agilent Technologies, Cisco, Applied Materials, Deere & Company and others.

The Cboe Volatility Index (VIX) has seen a moderate increase, rising by 0.12 to 15.97, indicating a relatively heightened level of volatility in August as stocks have encountered selling pressure. The recent upturn in the VIX might also be attributed to the typical bearish seasonality associated with the August-September period. Essentially, the rising VIX suggests an increasing demand for protective measures, with VIX traders anticipating potentially larger movements in the SPX. For context, a VIX reading around 16 translates to approximately a 37-point daily fluctuation in the S&P 500, either upward or downward.

The S&P 500 is currently extending its recent decline and seems to be in the process of testing the support level represented by its 50-day Simple Moving Average (SMA) today. Indications of a potential shift in trend started emerging on the Relative Strength Index (RSI) in late July. This was manifested as negative divergence, implying that the RSI was establishing lower highs while the SPX was achieving higher closing highs. A clearer understanding of whether the 50-day SMA will successfully act as support is likely to emerge by the upcoming week. Until then, it might be advisable to adopt a relatively cautious approach, especially considering the presence of bearish seasonality in the near future.

The technical indicators for the Nasdaq 100 appear somewhat more concerning in comparison to the S&P 500, given that the NDX is currently descending to its lowest points since late June and is positioned below the 50-day Simple Moving Average (SMA). The recent decline in the Nasdaq 100, which is largely composed of technology stocks, can likely be attributed to the recent uptick in bond yields. This rise in bond yields tends to have a negative impact on assets with longer durations, thus affecting the relative weakness in the tech-heavy NDX.

The upward movement of 10-year yields is persisting today, potentially influenced by the hotter-than-expected Producer Price Index (PPI) report released this morning. If the current trajectory continues, there's a possibility of testing the previous cycle peak of 4.33% seen in October last year, which could result in further decline for stock prices. Elevated yields generally reduce the appeal of equities in terms of valuation, particularly for assets with longer durations, and they also elevate the cost of capital for smaller businesses, which could negatively impact future profits. Therefore, this situation warrants close observation. Although inflation has been on a downward trend, the increase in yields might be partially attributed to heightened treasury issuance for fiscal stimulus and the potential unwinding of the yen carry trade.

As today's trading session enters its final hour and a half, stock performance remains varied, with the Dow Jones Industrial Average (DJI) up by 70 points, the S&P 500 (SPX) down by 7 points, and the Nasdaq 100 (NDX) down by 91 points. As earnings season reaches the 90% mark, it is anticipated that the upcoming week's price movements will be primarily influenced by technical factors and changes in bond yields. The Nasdaq 100 seems to be heading towards a close below its 50-day Simple Moving Average (SMA), while the S&P 500 is displaying some signs of support as it approached its own 50-day SMA earlier in today's session. A potential scenario involves a relief rally if 10-year yields retreat slightly and the S&P 500 maintains its support at the 50-day SMA. However, the situation could take a downturn if yields continue to climb.?A potential "breakout" could take place next week, indicating that the S&P 500 might experience a movement of approximately 1.0% either higher or lower by the end of next Friday, primarily influenced by the direction of bond yields.

Here's a preview of the economic releases scheduled for next week:

• Moving on to Tuesday (15th), the schedule includes various indicators such as Business Inventories, Empire State Manufacturing data, Export Prices, Import Prices, the NAHB Housing Market Index, Net Long-Term TIC Flows, and Retail Sales figures.
• Wednesday (16th) brings a set of economic data, including Building Permits, Capacity Utilization numbers, EIA Crude Oil Inventories, Housing Starts statistics, Industrial Production figures, and the MBA Mortgage Applications Index.
• Thursday (17th) features a lineup consisting of Continuing Claims information, EIA Natural Gas Inventories, Initial Jobless Claims data, the Leading Indicators Index, and the Philadelphia Fed Index.

Previous update:

As we approach the end of the regular Q2 earnings season, 165 companies in the S&P 500 have recently reported their Q2 earnings this week, with an impressive 129 of them surpassing the consensus earnings-per-share (EPS) expectations. So far, a total of 420 companies in the S&P 500 have disclosed their Q2 results, accounting for 84% of the index's constituents. Comparing the current Q2 results with previous quarters, the growth outlook indicates a year-over-year decline of -8.1% for earnings, slightly worse than the estimated -6.8% at the end of Q2. On the other hand, Q2 revenues have performed slightly better, showing a year-over-year increase of +0.1%, compared to the projected decline of -0.4% when Q2 concluded. In comparison, the final growth rates for earnings and revenues in Q1 were -2.8% and +4.3%, respectively.

As of August 3, 2023, the market in 2023 continues to show a cyclical bias, with most sectors experiencing significant year-to-date (YTD) gains compared to the full-year performance of 2022. The Information Technology sector has been particularly robust, showing an impressive YTD growth of +41.7%, significantly rebounding from its -28.9% performance in 2022. Similarly, the Communications Services and Consumer Discretionary sectors have also seen remarkable YTD growth at +41.1% and +31.9% respectively, compared to their negative performances in 2022. Industrials and Materials sectors have also made substantial recoveries, recording YTD gains of +10.8% and +7.7% respectively. However, not all sectors have followed the cyclical trend, with some showing defensive characteristics. The Energy sector, while performing exceptionally well in 2022 with a growth rate of +59.0%, has experienced a slight decline in 2023 with a YTD performance of -1.4%. Similarly, the Health Care and Utilities sectors have also registered negative YTD growth rates of -2.4% and -8.3% respectively, although their 2022 performances were relatively stable. Overall, the market's performance in 2023 indicates a clear focus on cyclical sectors, with some defensive sectors facing challenges.

At the close of Thursday, the SPX experienced a significant decline of -80.34 points (-1.8%) for the week, indicating that last week's "neutral" outlook missed its mark. Over the past two weeks, there had been a prediction of a possible 5% or less pullback at any moment, and from Monday's (July 31) high to Thursday (August 3), the aggregate decline amounted to -1.9%, aligning with that expectation.

As of Thursday's close, the SPX remained at a level 25.8% higher than its low point of 3,577 on October 12, 2022, but it was still 6.6% below its all-time high of 4,796 achieved on January 3, 2022. While there is a belief that the SPX will eventually reach new highs in 2023, the near-term resistance at 4,600 seems formidable. If the index were to drop further, there might be some support around 4,450, assuming it reaches such a level. As of midday Friday, August 4, the SPX has seen a slight uptick of +37 points (+0.8%).

Throughout the week, the 10-year U.S. treasury interest rate ($TNX) started at approximately 3.98% and steadily increased until Friday, when it experienced a slight pullback. Currently, at midday on Friday, August 4, it stands at around 4.07%, marking a new nine-month high.

Over the past eight years, with 25 interest rate changes, whenever the probability exceeded 65% on the day preceding a Federal Reserve meeting, a rate hike or cut has been implemented. Presently, the fed funds futures indicate a roughly 12% chance of a +0.25% rate hike at the September 20 meeting, and approximately a 20% chance of another +0.25% increase on November 1. These probabilities are subject to daily fluctuations until the official announcement.

Midweek volatility spurred by multiple catalysts settled down towards the end of the week, resulting in calmer markets.?Indicators suggest that next week may see more consolidation and sideways movements as the most probable scenario.

Following the U.S. Treasury downgrade by Fitch on August 1, interest rates surged, leading to a 1.38% decline in the SPX, the largest daily drop since late-April. Simultaneously, the VIX (volatility index) soared to a three-week high. However, as July's employment data was released with moderate figures, the markets settled down by week's end.?This week saw a relatively balanced number of upgrades and downgrades, but overall, the indicators are largely neutral across various aspects.

Next week's economic data releases are as follows:

• On Monday, August 7, the Consumer Credit report for June will be released, providing insights into consumer debt, including auto loans, credit card debt, and other personal debt. Although it is a lagging indicator with minimal impact on the markets, it sheds light on consumer borrowing patterns.
• Tuesday, August 8, will see the release of the International Trade (Trade Balance) report for June, which tracks trends in exports and imports of goods and services. Export data can indicate economic expansion both in the U.S. and abroad, while imports may reflect growing domestic demand. However, as a lagging report, it usually has little influence on the market. Additionally, the Wholesale Inventories report for June, covering manufacturing inventory data, might not be a good indicator of consumer activity but could have implications for future GDP levels.
• Wednesday, August 9, has no economic data releases scheduled.
• Thursday, August 10, will bring the Consumer Price Index (CPI) report for July, which measures changes in the average price level (inflation or deflation) of a fixed basket of goods and services relative to the base year of 1984. Additionally, Initial Jobless Claims data for the week ending July 29 will be available, indicating changes in unemployment claims. Furthermore, the Treasury Budget report for July will measure year-to-year changes in tax receipts and outlays, but since most taxes are collected in April, its market impact during other months is typically limited.
• Finally, on Friday, August 11, the Producer Price Index (PPI) for July will be released, gauging inflation at the wholesale or manufacturing level. Additionally, the first (Preliminary) report of the University of Michigan Consumer Sentiment for August will be available, providing data on consumer attitudes and expectations, intended to predict discretionary spending.

Previous update:

As we are now in the peak of the regular Q2 earnings season, a significant number of S&P 500 companies have already reported their Q2 results. This week alone, 159 companies from the index released their earnings, with an impressive 136 of them surpassing the consensus earnings-per-share (EPS) expectations. So far, a total of 262 companies (52%) have reported their Q2 results, and the aggregate beat rates are compared to the final results from recent quarters.

From a growth perspective, Q2 earnings are currently showing a decline of -1.8% year-over-year (y/o/y), which is better than the estimated decline of -6.8% projected when Q2 ended. Similarly, Q2 revenues have seen a positive growth of +2.0% y/o/y, outperforming the estimated decline of -0.4% projected at the end of Q2. These figures indicate a more favorable earnings and revenue trend compared to the final growth rates of -2.8% and +4.3%, respectively, observed in the previous quarter (Q1).

As of July 27, 2023, the market continues to show a clear cyclical bias with almost one-third of Q3 completed. The year-to-date (YTD) performance of the 11 market sectors compared to their full-year performances in 2022 highlights significant trends. Among the cyclical sectors, Information Technology has made an impressive comeback, registering a remarkable YTD gain of +43.5% after facing a substantial decline of -28.9% in 2022. The Communications Services sector also demonstrated strong growth, recording a YTD increase of +41.5% following a significant downturn of -40.4% in 2022. Similarly, the Consumer Discretionary sector displayed resilience, bouncing back with a YTD rise of +32.3% after experiencing a sharp loss of -37.6% in 2022. Industrials have shown steady progress, achieving a YTD growth of +11.4% after encountering a decline of -7.1% in 2022. Materials recovered from the previous year's decline, posting a YTD gain of +8.9%, compared to a decrease of -14.1% in 2022. Despite challenges, the Real Estate sector managed a modest YTD increase of +2.6%, showing improvement from the significant loss of -28.5% in 2022. Financials have also made steady strides, recording a YTD growth of +2.4% after facing a decline of -12.4% in 2022. On the other hand, the defensive sectors displayed varied performance. Consumer Staples maintained relative stability, achieving a YTD gain of +1.4% compared to a slight decline of -3.2% in 2022. Health Care faced some headwinds, experiencing a marginal decline of -1.0% YTD, showing a modest improvement from the -3.6% loss in 2022. The Energy sector showed a mixed trend, facing a YTD decrease of -2.5% following a substantial gain of +59.0% in 2022. The Utilities sector encountered challenges in 2023, resulting in a YTD decline of -4.8%, although this is not as significant as the -1.4% dip in 2022. The data underscores the prevailing cyclical trend in the market, with sectors like Technology, Communications, and Consumer Discretionary leading in robust performances, while defensive sectors such as Utilities and Energy have exhibited mixed performance when compared to their strong showings in 2022.

The SPX ended Thursday's trading session with a minimal increase of +1.07 points (+0.02%), aligning closely with the "neutral" outlook mentioned in the previous week's analysis. The prediction of a potential 5% or less pullback was seemingly confirmed as there was a significant selloff of around 70 points in the final two hours of trading on Thursday (7/27). However, Friday's market open with a gap up suggested that the pullback might not have fully materialized.

The sharp plunge on Thursday was triggered by two key events. Firstly, technical resistance was encountered at the 4,600 level. Secondly, a notable spike in US Treasury yields was observed when the Bank of Japan (BoJ) announced plans to modify its yield curve control policy, allowing the -0.5% to 0.5% range to function as reference points instead of strict limits. At the close of Thursday's trading session, the SPX remained 26.8% above its low on 10/12/22, which stood at 3,577. However, it was only 5.7% below its all-time high of 4,796 reached on 1/3/22. On Friday we saw a sharp rebound.

Throughout the week, the interest rate on the 10-year U.S. treasury experienced fluctuations, starting at approximately 3.81% and reaching around 3.98% at mid-day on Friday, July 28th.

Historical patterns have shown that whenever the probability of a rate hike or cut exceeds 65% just before a Fed meeting, such a change has typically occurred. On July 25th, the probability of a rate hike on July 26th was 97%, and the Fed proceeded with a +0.25% increase, marking the 11th increase in this cycle. Currently, the Fed Funds Futures indicate approximately a 22% chance of another +0.25% hike at the September 20th meeting and about a 17% chance of another +0.25% increase on November 1st. These probabilities are subject to change up until the announcement.

While economic data during the week showed a mix of results, the overall economy appears to be growing at a steady pace, the labor market remains robust, and consumer spending continues. Despite some positive economic indicators, technical resistance may hinder significant upside advances.?As a result, the outlook for the upcoming week remains mostly neutral, with the potential for a largely sideways market.

Upcoming Economic Reports for Next Week:

Monday, July 31:

• Chicago PMI for July: This report provides insight into business conditions in the Chicago area, with a reading above 50 indicating expansion and below 50 indicating contraction.

Tuesday, August 1:

• ISM Manufacturing Index for July: Tracks economic data from the manufacturing sector, with an increasing value suggesting rising profits in this sector.
• Construction Spending for June: Measures overall construction activity, which can be indicative of future economic growth and housing activity.
• JOLTS for June: The Job Openings and Labor Turnover Survey measures job openings, employment, hires, quits, layoffs, and discharges, providing insights into the labor market.

Wednesday, August 2:

• ADP Employment Change for July: Based on data from private-sector businesses, this report can offer a preview of the Bureau of Labor Statistics (BLS) nonfarm payrolls report, but may differ due to its exclusion of government jobs.

Thursday, August 3:

• Nonfarm Productivity for Q2: Measures work efficiency in producing goods or services, impacting overall employment trends and corporate profits.
• Unit Labor Costs for Q2: This report tallies total wages, benefits, and payroll taxes paid by employers, but has limited market impact.
• Initial Jobless Claims for the week ending 7/22/23: A report indicating a 7k decrease from the previous week, with a 4-week moving average of 234k.
• Factory Orders for June: Includes durable and non-durable goods orders, wholesale, and retail inventories, with minimal market impact.
• ISM Services Index for July: Tracks economic data from the services sector, with increasing values signaling rising profits in this sector.

Friday, August 4:

• Monthly Employment Situation for July: A comprehensive report on the labor market, including Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings, Average Workweek, Underemployment Rate, and Labor Force Participation Rate. This report is released on the first Friday of each month and provides a broad view of the labor market.

Previous update:

The ongoing Q2 earnings season is currently in full swing, with a total of 59 S&P 500 companies having reported their Q2 earnings this week. Out of these, an impressive 48 companies managed to exceed the consensus expectations for their earnings per share (EPS).

So far, approximately 17% of the companies in the S&P 500 have disclosed their Q2 results. When compared to the final results from recent quarters, the aggregate beat rates have been quite notable.

In terms of growth, the Q2 earnings have shown a positive trend, currently standing at +5.1% year-over-year, which is a significant improvement from the initial estimate of -6.8% made at the beginning of the quarter. Similarly, Q2 revenues have seen positive year-over-year growth of +9.4%, a marked improvement from the estimated -0.4% when the quarter started. These figures are particularly noteworthy when compared to the final growth rates of -3.4% for earnings and +4.3% for revenues in Q1.

As we move further into the third quarter of 2023, the market maintains its strong cyclical bias, with certain sectors displaying impressive year-to-date (YTD) performances compared to their results in 2022. As of July 20, 2023, the Information Technology sector has surged with a remarkable YTD gain of +44.2%, a significant rebound from its -28.9% performance in 2022. Similarly, the Communications Services and Consumer Discretionary sectors have also shown considerable growth, rising +36.2% and +33.1% YTD, respectively, after facing declines of -40.4% and -37.6% in the previous year. The Industrials and Materials sectors have displayed a positive trend as well, recording YTD gains of +12.0% and +7.7%, compared to their -7.1% and -14.1% performances in 2022. On the other hand, some sectors, like Real Estate and Financials, have exhibited more modest YTD growth, but still represent an improvement from their negative performances in 2022. The Consumer Staples and Health Care sectors have demonstrated relatively stable results, with slight YTD declines of -0.9% and -3.6% respectively, following relatively mild negative movements in 2022. In contrast, the Utilities and Energy sectors have faced challenges, with YTD declines of -4.4% and -4.8%, respectively, while the Energy sector continues to be behind compared to its extraordinary +59.0% performance in 2022.

The SPX showed a positive performance this week, gaining +29.49 points (+0.7%), validating the previous week's outlook of "moderately bullish." While a slight 5% pullback is not out of the question, some analysts still anticipate the SPX to fall significantly to the October 12, 2022 low of 3,577, representing a 21.6% drop from the current level, before surpassing the January 3, 2022 high of 4,796, which is 5.1% above the current level.

The market concerns during April and May centered around two key issues: the regional banking crisis and the debt ceiling standoff, as indicated by the white box. As these worries gradually eased, and a debt ceiling deal was reached on June 1, the equity markets began to strengthen, leading to an expansion of market breadth. On June 8, the market surpassed the +20% threshold, signaling the start of a new bull market, backdated to October 22, 2022, as represented by the green box. This noticeable shift towards a more bullish trend coincided with the announcement of the debt ceiling deal.

Additionally, the lower chart shows that June 1 marked the second day in 2023 when the VIX closed below 16, indicating reduced volatility and market stabilization. Remarkably, the VIX has remained below 16 consistently since that date, reinforcing the notion of a more stable and positive market environment.

The interest rate on the 10-year U.S. treasury started the week at approximately 3.85%, experienced a decline mid-week, and later rose again towards the end of the week. As of midday on Friday, July 21, it stands at around 3.83%. Historically, whenever the probability exceeded 65% just before a Fed meeting in the past eight years (which involved 24 interest-rate changes), a rate hike or cut has occurred. Currently, the fed funds futures indicate a nearly 96% chance of a 0.25% hike at the upcoming July 26 meeting, but only a 17% chance of another 0.25% hike on September 20. These probabilities are subject to daily changes until the official announcement.

The economic data and earnings results for this week have been mostly negative, leading to a possible modest pause in the market rally for the next week, although it may only be temporary. While bullish momentum has moderated, it hasn't completely disappeared.?The indicators show more downgrades than upgrades this week, resulting in an overall outlook for next week that is solidly in the Neutral territory.

Next week's economic reports are as follows:

On Tuesday, July 25, we have the S&P Case-Shiller Home Price Index for May, which provides insights into the year-over-year changes in average prices of residential real estate in 20 major U.S. cities. Also on Tuesday, we'll see the Conference Board Consumer Confidence for July, an important measure of consumer sentiment, influenced by factors such as gasoline prices and stock market performance.

Moving to Wednesday, July 26, we'll get the New Home Sales report for June, offering data on sales activity of newly constructed homes. This is followed by the FOMC Rate Decision for July, where changes in interest rates may be announced, and a press conference with the Federal Reserve chairman typically follows the meeting.

On Thursday, July 27, we have the Initial Jobless Claims for the week ending July 15, providing information on unemployment trends. Additionally, the first (Advance) estimate of Gross Domestic Product (GDP) for Q2 will be released, offering a crucial measure of economic growth. Also on Thursday, we'll get the Durable Goods Orders for June, indicating consumer and industrial spending trends, and the Pending Home Sales Index for June, showing actual contracts signed for home sales.

Finally, on Friday, July 28, we'll see the reports on Personal Income & Spending for June, which assess income from wages and salaries and indicate consumer spending trends. Additionally, the Personal Consumption Expenditures (Core PCE) for June will be released, which is the Federal Reserve's preferred inflation gauge. Lastly, we'll receive the Employment Cost Index for Q2, a measure of payroll compensation costs, and the second (Final) report of the University of Michigan Consumer Sentiment for July, which provides insights into consumer attitudes and expectations regarding discretionary spending.

Previous update:

The second quarter earnings season is underway, with 12 S&P 500 companies reporting their Q2 results this week. Of these, 10 companies surpassed the consensus earnings per share (EPS) expectations. So far, 28 companies, accounting for 6% of the S&P 500, have reported their Q2 results. It's important to note that these numbers should not be extrapolated as it is still early in the reporting season.

From a growth perspective, Q2 earnings have shown a positive year-over-year (y/o/y) growth rate of 12.7%, surpassing the estimated decline of 6.8% at the end of the quarter. Q2 revenues have also shown a positive y/o/y growth rate of 10.1%, exceeding the estimated decline of 0.4% at the end of the quarter. Comparatively, the final growth rates for Q1 were -3.4% for earnings and +4.3% for revenues.

As we reach the halfway point of 2023, it is evident that the market sentiment continues shifted towards a predominantly cyclical bias. The year-to-date (YTD) performance of the market across the 11 market sectors reflects this shift. In the technology sector, the YTD performance has been particularly strong, with a significant increase of 44.1%, in contrast to the negative performance of -28.9% in 2022. Similarly, the communications services and consumer discretionary sectors have shown substantial YTD gains of 40.6% and 35.9% respectively, compared to the negative performance in 2022. Other cyclical sectors, such as industrials, materials, and real estate, have also demonstrated positive growth in 2023. However, defensive sectors like consumer staples, health care, energy, and utilities have experienced negative YTD performances, indicating a preference for cyclical sectors in the current market environment.

The Information Technology sector experienced a decline of -28.9% in 2022. However, it has shown significant improvement in 2023 YTD, with a gain of +44.1%. Similarly, the Communications Services sector had a challenging year in 2022, with a decline of -40.4%. However, it has rebounded strongly in 2023 YTD, with a gain of +40.6%. The Consumer Discretionary sector also struggled in 2022, experiencing a decline of -37.6%. However, it has made a strong comeback in 2023 YTD, recording a gain of +35.9%. Industrials had a more modest decline of -7.1% in 2022. In 2023 YTD, the sector has shown steady growth with a gain of +10.9%. Materials experienced a decline of -14.1% in 2022. However, it has shown signs of recovery in 2023 YTD, with a gain of +7.7%. Real Estate faced challenges in 2022, with a decline of -28.5%. In 2023 YTD, the sector has shown modest growth with a gain of +4.8%. Financials had a decline of -12.4% in 2022. In 2023 YTD, the sector has experienced a marginal gain of +0.6%. Consumer Staples, which are typically considered defensive stocks, had a relatively stable performance with a decline of -3.2% in 2022. However, in 2023 YTD, the sector has seen a slight decline of -0.3%. Health Care, another defensive sector, had a decline of -3.6% in 2022. It has faced some challenges in 2023 YTD as well, with a decline of -4.6%. Energy, on the other hand, had a remarkable performance in 2022, with a significant gain of +59.0%. However, it has experienced a decline of -4.7% in 2023 YTD. Finally, Utilities had a relatively stable performance in 2022, with a decline of -1.4%. In 2023 YTD, the sector has seen a slight decline of -4.9%.

The equities market surprised analysts with an unexpected rally this week, fueled by lower inflation numbers. As a result, the S&P 500 (SPX) reached new highs, closing at record levels multiple times. Based on Thursday's close, the correction line for a potential 10% decline moves up to 4,059, while the bear market line for a 20% decline moves up to 3,608. Despite technically overbought conditions, the lack of a significant catalyst for a pullback of less than 5% makes it difficult to foresee a near-term market correction. The bulls remain firmly in control.

The interest rate on the 10-year U.S. treasury (TNX) started the week at approximately 4.09% but steadily declined throughout the week. As of mid-day Friday, it stands at around 3.80%.

Historically, when the probability of a rate hike or cut exceeded 65% on the day before a Fed meeting, a rate adjustment has occurred. Currently, the Fed Funds Futures market indicates a 92% chance of a 0.25% hike at the upcoming July 26 meeting, but only a 13% chance of another 0.25% hike on September 20. These probabilities are subject to change as economic reports are released in the coming weeks.

With inflation concerns taking a backseat and a positive start to the earnings season, indicators suggest a moderately bullish outlook for the next week. The faster-than-expected decline in inflation and better-than-anticipated early earnings reports have elevated trader optimism, solidifying the dominance of the bulls in the market. The number of upgrades outweighed downgrades this week, reinforcing the positive sentiment.?Overall, the outlook for the next week leans towards moderately bullish territory.

Upcoming economic reports for the following week are as follows:

Monday, July 17:

• No economic reports are scheduled for release.

Tuesday, July 18:

• Retail Sales for June - This widely monitored report provides insight into consumer sentiment and spending habits, serving as an important gauge of economic activity.
• Industrial Production & Capacity Utilization for June - Industrial production measures the output of various industries as a percentage relative to the output from 2007. Capacity utilization measures the percentage of actual output relative to the maximum potential output from 2007, reflecting the strength of the manufacturing sector.
• Business Inventories for May - This report measures the inventory of goods held by producers or acquired for resale, providing a lagging indicator of economic activity as all the components have previously been released.
• NAHB Housing Market Index for July - This composite index, ranging from 0 to 100, includes components such as single-family home sales, future sales expectations, and buyer traffic. It serves as an indicator of trends in new home sales, providing insight into the overall conditions of the housing market.

Wednesday, July 19:

• Housing Starts and Building Permits for June - Housing starts represent the commencement of construction on new residential properties and indicate housing demand and the strength of the construction industry. Building permits, which are required before construction can begin, often impact housing starts in subsequent months.

Thursday, July 20:

• Initial Jobless Claims - This report reveals the number of individuals filing for unemployment benefits for the week ending July 8. It provides insights into the labor market's strength and helps gauge economic stability.
• Existing Home Sales for June - This report measures the total number of completed closings on single-family dwellings, offering a comprehensive view of demand in the housing market. It serves as an indicator of economic stability and can influence future durable goods purchases.
• Leading Economic Indicators for June - This index, composed of 10 components that tend to move before changes in the overall economy, is considered a trailing report as its components have already been released. Therefore, market reaction to this report is usually muted.