Tom Lee: Market Tailwinds Should Prevail Later This Month

September is proving to be challenging, but here's why we see probabilities of a better finish to the month. Plus, our top three sector picks.

Author:
Tom Lee and the FSI Team
Publish date:
Sep 8, 2023 9:33 AM EDT

Comments

In today's FSI First Word, we discuss how headwinds of VIX, yields, apprehension are growing. But tailwinds are emerging this month as well. The most notable is EPS revisions inflected positive and along with other factors this is the reason we see probabilities of a better finish to September.

Please click here to view today's Macro Minute (Duration: 5:13).

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In recent conversations with institutional investors, it is clear to us that investors are incrementally nervous. Foremost is their concern that economic momentum has been improving at a pace that might warrant the Fed to have to increase the path of hikes. This is a "good news is bad news" view and includes the rise in the ISM services, low jobless claims and even the GDP forecasts (many point to the Atlanta Fed GDPNow).

* This has pushed up the odds of a November hike to 39% (backed off from 43% earlier this week) and followed by higher 10-year interest rates and push higher in the VIX. These are all things we have been watching closely, but the VIX is probably at most risk of surging and this could put near-term pressure on stocks.

* Mark Newton, Head of Technical Strategy, notes that the VIX today posted a confirmed DeMark TD Sequential Buy Set up (daily) with a close above 13.88. If the setup is confirmed, this could lead to a VIX surge and naturally, near-term pressure on stocks.

* Many equity desks have been sending around charts showing that the VIX seasonally starts to rise in September to October, so this is essentially the base case. And Bloomberg notes that a trader bet that the VIX could surge to 180, but this was a mere $30,000 bet. This bet could have a huge payday, however, if such a surge materializes.

But there is a list of tailwinds building as well. This is what tilts us towards expecting a positive September:

-- S&P 500 profit estimates are rising in 3Q23, first time in 2 years

-- Fed officials seem to be shifting away from data dependence

-- Manheim (9/8) and CPI (9/13) should be soft

-- plus: Put-call ratio is elevated, highest since March 2023

-- Cyclicals are leading with Energy/Tech/FAANG the best sectors past 1M

* The upturn in S&P 500 profit estimates is a strong argument the US economy is slipping into an expansion. While some might argue this will lead to the Fed having to increase pace of hikes, this is not necessarily the case.

* The Chicago Fed published a study (link -> here by Stefania D'Amico and Thomas King) suggesting the current hikes in place are sufficient to bring inflation back onto target. And while this is a staff study, it should carry some weight with the FOMC, which will meet later this month. Moreover, even NY Fed Williams stated "monetary policy is in a good place."

Bottom line: September is proving to be challenging again, but the tailwinds should prevail later this month.

For much of 2023, the S&P 500 has been a game of inches. In fact, this market sounds a lot like how my anesthesiologist doctor friend describes his practice: periods of sheer boredom, followed by bursts of panic.

This describes the S&P 500 in the past few months. And it seems like incoming macro data and specific earnings reports are those triggers of sizable moves.

Friday is Manheim used vehicle index (expected weak) and 9/13 is August CPI.

We expect core CPI to come in at +0.20% MoM or so, representing 3 consecutive months of exceptionally low core CPI. Will the Fed be swayed?

The key is whether the Fed remains data dependent.

But in the meantime, our top 3 sector picks remain:

-- Technology/FAANG (QQQ) ,-0.66% (XLK) -1.45%

-- Industrials (XLI) -0.33%

-- Energy (XLE) -0.10%, (OIH) -0.51%, (XOP) -0.01%