Face-Ripping Rotation, Trading Tesla, Earnings Liftoff, An Ignored CPI Number
As exposed as I am to some of this year's high-flyers, I closed the day just slightly in the green. How did I do that? A little luck, crossed with some strategy.
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3,2,1.... We have liftoff!
The Less-Than-Magnificent 493? Small-caps? Sure. Maybe.
Friends, Romans, and citizens... I'm talking about earnings season. Today is Friday, July 12 and sure, a couple of well-known firms may have already reported, but the unofficial kickoff of second-quarter earnings season comes this morning ahead of the opening bell. Quite a few banks and financials will post their numbers over the coming days, but a few of the larger banks... will do so this morning.
We'll hear from Citigroup C, JPMorgan Chase JPM and long-time Sarge name Wells Fargo WFC, so let the games begin. Those three names are up 27.7%, 21.9% and 21.3%, respectively, year to date, versus an S&P 500 that stands 17.08% higher than it did at the close of business on December 31, 2023. So much for the bank stocks being dead money.
Expectations are high for the second quarter, though I find it far more likely that what firms project for the current (3rd) quarter and for the full year will matter far more than what they have already done. Not simply because it almost always does, but also because of what happened on Thursday.
According to FactSet, consensus view for the S&P 500 for Q2 is for earnings growth of 8.8% on revenue growth of 4.6%, after a first quarter that saw aggregate S&P 500 performance land at earnings growth of 5.9% on revenue growth of 4.3%. For the full calendar year, FactSet is looking for earnings growth of 11.2% on revenue growth of 5%. This implies that corporate performance really heats up over the final six months of 2024.
As it is, FactSet is projecting third-quarter performance more or less in line with Q2 (8.1% earnings growth on 5% revenue growth) and a fourth quarter that just awes us all with a quarter sent from Heaven. At the moment, FactSet shows Q4 expectations at a stunning growth rate of 17.3% for earnings on revenue growth of 5.6%. Really, Sarge? Really, gang.
The fun does not even stop there. For all of calendar 2025, on top of what I see as fairly tough comps, FactSet shows a consensus for earnings growth of 15.6% on 6% revenue growth.
Crikey, mates... good times for corporate America are dead ahead. Rock & Roll!! At least that's what sell-side analysts, many of whom work for firms that offer investment banking services generally see as a group. For one, I have some doubts, but happy Friday.
About That Earnings Pre-Season
Readers likely noticed that Delta Air Lines DAL warned of less fare discounting moving forward, while PepsiCo PEP cut its outlook for organic revenue growth and Conagra CAG issued full-year guidance short of projections. Yikes.
While PEP posted a small gain for the Thursday session, CAG gave up 1.49% and DAL was simply smoked for a daily loss of 3.99%. On to the banks.
CPI: Good, Yet Still Not So Good
I don't think many of you reading this need to be told that the BLS posted cooler-than-expected consumer-level inflation for June. For those that do, on a month-over-month basis, headline CPI printed at -0.1% beating expectations for a print of positive 0.1%. Headline CPI landed at growth of 3% year over year, down from 3.3% growth for May, and below what was the consensus view for 3.1%. Core CPI crossed the tape at monthly growth of 0.1% for June, below expectations for a 0.2% print. The annual print for Core CPI showed growth of 3.3%, which was below expectations for a 3.4% print.
What the financial media did not spend so much time explaining was that despite proclamations from certain economists and armchair analysts that consumer inflation was dead (a full percentage point above the Fed's target), June super-core services CPI is still up 4.6% and the Atlanta Fed's Sticky-Price CPI is still up 4.2% y/y. On that, we heard crickets.
Marketplace
Rotation!! Sell the Mag 7 and a few of their friends, buy everything and I mean everything else. Holy moly. The major equity indexes had their faces ripped off on Thursday, while breadth was exceedingly strong and many of the mid-major equity indexes ran around the bases, Bugs Bunny style.
The U.S. Dollar Index was roasted versus its reserve currency peers, while investors poured into Treasuries. The yield for the U.S. 10-Year Note dropped to 4.21% as the 2-Year Note's yield dropped to 4.52% as the entirety of the curve from three-month paper out to the long bond moved towards multi-month lows.
The Nasdaq Composite gave up 1.95% for the day, as its sibling the Nasdaq 100 took a beating of 2.24%, led by the Philadelphia Semiconductor Index, which was simply pasted for a loss of 3.47%. Among semiconductor and semi-related large caps, Lam Research LRCX and Nvidia NVDA both lost more than 5.5%. Conversely, the Russell 2000, S&P SmallCap 600, S&P MidCap 400 and Dow Transports posted daily gains of 3.57%, 3.31%, 2.45% and 2.19%, respectively.
Perhaps most telling was this: The S&P 500, cap-weighted as it is, surrendered 0.88% for the day, while the equal-weighted version of the S&P 500 gained 1.17% for the session. The day that "Fink beat the Stomach?" No, the day that more than a thousand hobbits and elves beat the snot of a handful of giants. Kind of reminds me of that day that Andre the Giant took on about a dozen midgets in the ring. Don't remember who won that match.
Notes for Next Time
By day's end, as exposed as I am to some of this year's high-flyers, my P/L had held its own. Actually, I closed the day just slightly in the green. How did I do that? A little luck, crossed with some strategy.
Just ahead of the close on Wednesday, I started to get cold feet. It had become apparent, I thought that a cooler-than-expected CPI had possibly been leaked and the market was acting like it. I started to expect either a "sell the news" event or a rotational event. We got the latter as traders took profits where they were largest.
As a hedge against such an event, just a day after my Tesla TSLA short had failed me, I went long deeply out of the money long-dated puts in Tesla. Figured they protect against a large downside move across mega-tech without suffering that much loss of time premium if nothing happened.
Fortunately (for me), Bloomberg News ran a story on Thursday reporting that Tesla may be delaying its robo-taxi event that had been scheduled for August 8, out into October as the firm was not quite ready. Shares of Tesla gave up 8.44% for the day as the value of those puts went up 46.2%. Crisis averted, at least across one portfolio.
Minty Fresh
Though I am sure the many took a beating on Thursday, while the few celebrated with joy, the broader equity marketplace was strong. Seven of the 11 S&P sector SPDR ETFs shaded into the green on Thursday led by the REITs XLRE, the Utilities XLU and the Materials XLB as bond proxies found help in lower yields and commodities-focused stocks found help in the cheaper dollar.
Five of those seven winning sector ETFs sported gains of 1% or more for the session, while Technology XLK was roasted for a loss of 2.5%. I already told you that the semis were tagged. Additionally, the Dow Jones U.S. Software Index gave up 1.63% as my beloved Palantir PLTR and Microsoft MSFT were slapped around for daily losses of 2.74% and 2.48% in that order.
Winners beat losers by an incredible 6 to 1 margin at the NYSE and by a more believable 3 to 1 at the Nasdaq. Advancing volume took a commanding 80% share of composite NYSE-listed trade and a surprisingly solid 66.9% share of composite Nasdaq-listed volume.
Now, here's my question, and I really do not know the answer. Aggregate trade increased by a significant margin across NYSE listings, Nasdaq listings as well across the memberships of the S&P 500 and the Nasdaq Composite. That's usually a confirmation of something. Does that confirm a downward shift for markets as the headline indexes all closed in the hole? Does that confirm an upward shift for markets as the breadth was so strong and the majority of equity indices closed in the green?
Food for thought. Guess, we'll have to be as agile as possible as we wait to find out just how sticky this rotation actually is. In the past, attempts to rotate have largely failed. Mega-cap tech can succeed in any rate environment. The rest of the marketplace would do better when existing in a reduced interest rate ecosystem.
Not the end of the road for large-cap tech? I don't think so. Will the wealth be shared more equitably across the equity marketplace? Quite possibly, even likely. If the economy cracks? Well, my friends... that's a horse of a completely different color.
Talking Tesla
No doubt it was time for a pullback in Tesla TSLA. Relative Strength had reached absurd levels. The daily Moving Average Convergence Divergence (MACD) remains incredibly extended, even after Thursday's pummeling. There remains an unfilled gap from early July that would need the stock to trade at $213 or lower to fill.
The cup pattern that I had previously shown you has now started to develop a handle. That's actually a potential positive for the shares. Not that this handle still won't develop further. It could, but the pivot moves from the left side of the cup to the right side. That leaves the stock with a $271 pivot and a possible target price of $325.
I may be on the other side of the Tesla trade at the moment, but I know enough not to add to that position or become married to the idea. Longer-term, the bulls may very well still have the upper hand.
Economics (All Times Eastern)
08:30 - PPI (Jun): Expecting 0.1% m/m, Last -0.2% m/m.
08:30 - Core PPI (Jun): Expecting 0.2% m/m, Last 0.0% m/m.
08:30 - PPI (Jun): Expecting 2.2% y/y, Last 2.2% y/y.
08:30 - Core PPI (Jun): Expecting 2.5% y/y, Last 2.3% y/y.
10:00 - U of M Consumer Sentiment (March-F): Expecting 68.0, Last 68.2.
10:00 - U of M Consumer One Year Inflation Expectations (March-F): Last 3.0%.
10:00 - U of M Consumer Five Year Inflation Expectations (March-F): Last 3.0%.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 585
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 479.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: BK (1.42), C (1.40), ERIC (0.59), FAST (0.51), JPM (4.45), WFC (1.28)
At the time of publication, Guilfoyle was long WFC, NVDA, PLTR and MSFT equity; long Tesla puts.
