Here's Our Portfolio Plan as the Market Surges Higher
With rate cuts on the horizon, the market is increasingly overbought with potential impact on our portfolio.
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*Market expectations for rate cuts and TSM’s June revenue lift the market even higher
*While good for the portfolio, the S&P 500’s P/E is stretched further and the market is increasingly overbought
*Tomorrow’s June CPI report could lift the market even higher, but the start of June quarter earnings will matter
*Below is our portfolio plan for the next few days
We are seeing the market move higher yet again on Wednesday morning after the S&P 500 and Nasdaq Composite booked yet another round of new highs on Tuesday.
Wednesday's move was led by the market warming up further to Fed rate cuts following Fed Chair Powell’s first day of back-to-back testimony in Washington, D.C.
We suspected Powell would refrain from saying anything about rate cut timing and he made that point clear when he said, “Today, I’m not going to be sending any signals about future actions.”
Powell reiterated the two-sided issues that the Fed faces — inflation and the economy — but also acknowledged the cooling labor market. Our take is that Powell is incrementally closer to opting for the start of rate cuts following last week’s June ISM PMI reports and the June employment report, but much like us, he is waiting to see what Thursday’s June CPI and Friday’s June PPI reports bring.
The continued move higher we are seeing unfold in the market on Wednesday is being fueled in part by market rate cut expectations, but also from Taiwan Semi’s TSM June revenue report. Earlier on Wednesday, that TSM report led us to boost our price targets on Nvidia NVDA and Apple AAPL and we doubt our moves will be the only ones for these shares today. Those combined actions will fan the flames of enthusiasm for big tech and AI-related stocks, which explains why the S&P 500 and Nasdaq Composite are outpacing the Dow and small-cap-laden Russell 2000 once again on Wednesday.
While we digest Wednesday's Samsung Unpacked event and what it means for our shares of Universal Display OLED and Qualcomm QCOM, we are mindful that the collective moves of the last few days and this morning are stretching the market’s P/E valuation even further. The moves are also pushing both the S&P 500 and the Nasdaq Composite deeper into overbought territory with RSI readings of 78.68 and 78.41, respectively.
So, as we enjoy the push higher in the market and what it is doing for the portfolio, we will remain on the sidelines looking for signs for better-than-expected earnings in the second half of 2024. Simply put, if we want to see a higher "P" for the S&P 500 we will need to see more "E" for 2024 and greater confidence in the market’s expectation that 2025 EPS growth for the basket will accelerate to more than 14% in 2025 compared to almost 11% this year.
Why We’re Watching Earnings and June CPI Data
The next few days will bring us initial indications, but the fuller picture won’t be had until we are more than halfway through the June quarter earnings season, call it late July to early August. Should Thursday's June core CPI figure come in lower than the expected 0.2% month-over-month consensus, rate cut expectations will rise further, likely pushing the market to even higher levels.
If that scenario is the one that unfolds, we’ll have to consider some prudent management with the portfolio, examining which positions are well overbought following significant moves over the last several weeks. On the other hand, if the start of the June quarter earnings season leads to softness in the market or the start of a pullback like what we saw in April, we’ll be busy refining our shopping list.
At the time of publication, TheStreet Pro Portfolio was long NVDA, AAPL, OLED and QCOM.
