Don't Let the Gains Fool You, None of This Is Priced in
Equities posted another big gain last week, at least by major market index standards. The NASDAQ rose nearly 2.4% on the week, while the S&P 500 was up better than 1.3%. However, the Dow was up by a more-muted .3% and the equal-weighted S&P index rose less than a half of 1% on the week. The small cap Russell 2000 was off just better than 1% on the week, it should be noted. In short, breadth continues to be suspect, and a rising tide is not lifting all boats.
The NASDAQ benefitted significantly from AI juggernaut NVIDIA Corporation undefined adding another 10% to its huge gains in 2024. The stock is almost at a market cap of $3 trillion. This is more than a $1 trillion over the combined market capitalization of all the energy stocks in the S&P 500. This is a factoid I have noted before because I just find it staggering. Does anyone believe NVIDIA will deliver more profits in the next five to 10 years than the likes of ExxonMobil (XOM) , Valero (VLO) , ConocoPhillips (COP) and the rest of the energy sector combined? What is going to deliver the fuel necessary for the huge electricity demand expected from the AI revolution?
Last Friday, the Bureau of Labor Statistics (BLS) jobs report came in at a much-stronger-than-expected 272,000 positions created in May. However, the report is more than suspect in my opinion. A significant 231,000 of this number came from the seasonal adjustments from the birth/death model. In addition, the unemployment rate ticked up again by .1% from the month prior to the 4% level. The unemployment rate had a similar tick up in April. The uptick in May was partly due to the labor participation rate falling from 62.7% the month prior to 62.5%.
The strong labor report flies in the face of recent jobs readings, it should be noted. April’s BLS jobs report came in significantly lower than expected and with the weakest job growth in six months. More recently, last Wednesday’s ADP report posted numbers under the consensus and the Job Openings and Labor Turnover Survey (JOLTS) report this month showed the lowest overall jobs openings since early 2021. The May BLS reading was boosted by some 286,000 part-time jobs being created in the month while growth in full-time jobs was deeply negative. This continues the trend of the past year. Over the past 12 months, approximately 1 million full-time jobs were lost while 1.5 million part-time jobs were created. Roughly half of the jobs gains of the past year were due to birth/death adjustments as well. Call me old fashioned, but a record number of Americans working two to three jobs to make ends meet doesn’t portend a strong economy in my opinion.
What the stronger-than-expected jobs number did do is push up the yield on the 10-year Treasury up by nearly 15 basis points to end the week as investors factored in a lower chance of the Federal Reserve finally cutting rates in July or September. With first quarter GDP growth coming in at a tepid 1.3% and projections for GDP growth in the second quarter getting whacked over the past month, the chances of a central bank policy error appear to be increasing as is the prospect for stagflation.
None of this is priced into a market trading near all-time highs and with the S&P 500 valued at north of 21-times forward earnings.
And those are some cautionary thoughts to begin a new trading week.
At the time of publication, Jensen was long XOM.