Stellar earnings support mega-cap stocks — not small-caps

Good morning! Everything finished in the green on Monday but turned mixed overnight.

Nvidia led tech stocks higher, the small-cap Russell 2000 kept chugging, and the crypto crowd got reason to celebrate with the SEC approving ether ETFs for trading.

Today, we’re covering whether this rotation into small-cap stocks can last, Tesla earnings, and Kamala’s access to Biden’s war chest.

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Momentum stalls without earnings

Market anomalies don’t tend to last. You shouldn’t expect them to.?

Over the last several weeks, the tech stocks that have won big this year began to sell off, while their small-cap counterparts staged a rare and unusual rally.

Some analysts see this performance gap as part of the Trump Trade or as a bet on falling interest rates.

Whatever vocabulary you prefer, forward earnings suggest the trend is not sticking for long.?

In the five days up to July 16, the Russell 2000 climbed 11.5%. The benchmark beat the S&P 500 by double-digits in that stretch.?

On Monday, the small-cap index added another 1.66%, moderately outpacing the S&P 500’s 1.08% gain. Yet only the former is coming off a winning week.??

As the chart shows, there has been no comparison between the two in July.

So what exactly is going on and how long will this anomaly last?

I touched on this last week, but it’s worth drilling into again: Earnings will complete this story.?

Analysts expect the Magnificent Seven — Amazon, Tesla, Apple, Microsoft, Alphabet, Meta and Nvidia — to deliver a stellar 28% jump in earnings for the latest quarter.

Four of them are forecasted to report year-over-year earnings growth of 56.4%, according to FactSet.

Big Tech names have strung together years of absurd earnings beats, and JPMorgan’s strategy team told clients they expect “another monster quarter.”?

Some estimates put the S&P 500’s earnings growth at 9.7% for the second quarter, which would mark the highest annualized figure for the index since the end of 2021.?

Russell 2000 companies, by comparison, have seen weak earnings for the last five quarters.?

Consensus estimates see the group reporting improved profits in the latest cycle, but it’s unlikely to be enough to maintain the recent stock rally, which has been fueled by:

1. Expectations for a Fed rate cut in September
2. Strong odds for a Trump 2.0 White House

Smaller companies are more sensitive to monetary policy and tax cuts, a view that investors are expressing with their portfolios.?

Torsten Slok , the chief economist at Apollo Global Management, Inc. , pointed out in a note Monday that Russell 2000 companies have 51% of their total outstanding debt as floating rate debt, compared to 25% for S&P 500 companies.

That said, the initial statement remains true: Earnings will complete this story.?

“Small-cap earnings expectations remain weak even in a strong economy with yield levels coming down,” Slok said.

So even if we take the S&P 500’s historical outperformance and recent underperformance out of the equation, forward earnings alone illustrate how far small-caps remain behind large-caps.?

“If we get a soft landing with inflation coming down and the Fed cutting rates, then earnings expectations should begin to rise for both small-cap and large-cap stocks,” Slok maintained. “But this is not what we are seeing.”

What do you expect from small-cap stocks for the rest of 2024? Leave a comment below.

Elsewhere:

???Kamala Harris now has access to Biden’s campaign war chest. Now that Biden has posted his endorsement of his VP, she can tap $96 million in funding that was dedicated to the sitting president’s reelection bid. If another candidate emerges, however, that person will likely start from zero. Separately, the Democrats’ have raised a fresh $100 million since Biden dropped out Sunday. (Bloomberg)

???Tesla, GM, and Ford report earnings this week. GM is due this morning, Tesla is after-hours today, and Ford comes Wednesday afternoon. Elon Musk, naturally, will command markets’ attention as he shares updates on cheaper car models and the company’s AI initiatives, including the RoboTaxi. (Investors.com)

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