VIDEO: Our Roadmap for This Inflation Data Week

In today’s Daily Rundown video, Chris Versace explains why the market’s move last week has the portfolio once again walking a cautious path ahead of this week’s October inflation data. As he explains, the data could influence the pace of Fed rate cuts and that means comments from Fed Chair Powell on Thursday will be a market focus, especially if the S&P 500 and Nasdaq Composite move into overbought territory. 

Chris also discusses what the portfolio will be listening for when Skyworks Solutions SWKS, CyberArk Software CYBR, Cisco Systems CSCO, and Applied Materials AMAT report earnings this week.

Transcript

CHRIS VERSACE: Hey, folks, Chris Versace here. Monday, November 11. Veterans Day has the bond market closed today. But for those of us in the equity markets, it is full steam ahead. We have a full day of trading. And it's going to be a somewhat busy one, though not as busy as last week.

If you remember last week, we saw a pronounced move in the stock market, which we, of course, enjoyed with the portfolio. What were the catalysts for that? Well, the outcome of the 2024 election. The Fed also delivered another 25 basis point rate cut, widely as expected. We also had another wave of corporate earnings.

So all good things, but the stock market and for the portfolio, on the other hand, all of that strength in the market pushed both the S&P 500 and the NASDAQ composite almost to the point of being overbought. Not quite when we look at where their relative strength index, or RSI, levels closed last week, but pretty close.

And based on what looks like spillover as we enter the seasonally strongest time of the year or the market, it is possible that we see both of those indicators get overbought later this week. I would encourage you to take a look at some of the writings of Helene Meisler over the weekend. She is in that camp as well.

But let's talk about a potentially overbought status and what's coming this week because we have some very important inflation data coming. Yes, I'm talking about the October CPI and PPI reports. Stepping back a second, the market, as we know, especially after last week, is trying to figure out, what is the real cadence for which the Fed is going to cut interest rates in the coming months?

You've heard me talk about this, how at one point, four, five, maybe even six rate cuts were expected before June. We have seen that start to come back. The economy, the data has been good. Inflation has been sticky. So we're going to take a look at this next round of data and really try to understand, how does all this fit into what the Fed is likely to do over the coming months?

Setting the backdrop for that, the year-over-year core CPI ticked higher in September to 3.3%. Prior to that, July, August, it was at 3.2%. So here, the inflation data, not only is it well above the Fed's 2% target, signaling it's sticky, but it moved in the wrong direction. At the same time, recent core PPI data has been inching higher on a year-over-year basis as well.

Over the last three months, it hit 2.8% in September. Again, both metrics moving the wrong way, higher, and well above the Fed's 2.8% target. Now when we get these reports, you know that we're going to look at the data on a sequential basis. We're going to look at it on a year-over-year basis. But we're also going to want to take a look at it on a trailing three month basis.

And the reason for that is during last week's press conference, Fed Chair Powell said that that's one of the ways the Fed is starting to really look at the inflation data. How has it performed over the trailing three month period? Does that take some of the noise out of the data? What's the clearer signal that it is sending? So we'll be taking a look at that data as well.

What makes it very interesting is that Powell speaks on Thursday afternoon. That's after the CPI and PPI reports. And we'll also get a number of other Fed heads as well. But you know that when Powell speaks after this data, the market is going to be really leaning into what he says and how he says it. We'll be doing that as well, looking to see if there's any softening of his comments coming out of last week.

Generally speaking, that doesn't happen unless there's something really pronounced or something that really stands out in the data. So we'll be breaking our comments down about the CPI for October, the PPI for October, and then, of course, rationalizing, and dissecting, and digesting all of that once we get Powell's comments.

But also, we have other Fed speakers this week. All in all, there's about a dozen appearances. To us, the appearances after the data will be far more insightful than the comments that they make ahead of the different data streams. So we have those two pieces of data coming this week. We also have the October Retail Sales Report, and this is going to be a little bit messy.

When we heard from Costco last week and it shared its October revenue report, it kind of indicated that, yes, there was some issues with it given the hurricanes of Helene and Milton. Odds are that's more than widespread just from just impacting Costco. But on the positive side of the ledger, we did have Amazon's Prime Big Deal Days and competing offers by others.

So all in all, I wouldn't be surprised if the headline data is a little wacky and we're going to have to dig in to really understand the puts and takes of what's happening. I also think that as we move deeper into the September quarter earnings season, we're going to start to hear from more retailers. We'll get a little bit of that this week, and I'll talk about that in a moment.

But as we get more of them, we'll start to get a clearer picture as to how the retail sector was impacted by the hurricanes during late September, early October. But as it relates to the October retail sales report, obviously, it's going to be another yardstick by which we can measure Costco's results, which were very nice. But also, too, we should expect to see a pop in the non-store category for retail sales. That's the, wink wink, nudge nudge, digital shopping category.

And again, the Amazon's Prime Big Deal Days and the competing efforts-- Target, Best Buy, you name it-- that really should give a pop to that line item. And remember, we're going to continue to watch this because this has the potential to pull forward some of the holiday shopping season. We saw this last year. Given everything that we've read about consumers who are still struggling with the impact of higher prices, I wouldn't be surprised if we see that repeat this year.

We also have the October Industrial Production Report, and that will give us another look at manufacturing. But at the end of the week, once we have this inflation data, retail sales data, the industrial production data, we're going to want to take another look at the rolling GDP forecast that is published by the Atlanta Fed in its GDP Now model.

The last update that we got last week was around 2.5%, a little slower compared to the prints we've seen initially for the third quarter, but it is early and we only have a handful of data points. And we'll get more this week, and we'll get more in the coming weeks, so we'll have to continue to monitor that. But we will want to see how this latest data impacts that GDP Now model because remember, we only have a handful of weeks until the Fed's December policy decision.

So we're going to continue to follow all the data and what it means, and we're going to revisit and rethink the potential cadence of rate cuts and what that could mean for the market, the economy, and the portfolio as we get that data. So, of course, we want you to continue to check your alerts and your emails, but we also have another wave of earnings this week.

And so far, about 91% of the S&P 500 is reported. By and large, the majority have put up better EPS numbers and better revenue numbers than the market consensus forecast. So that's good news. The not so good news, however, is when we tabulate the earnings expectations for the S&P 500, and you know we like to compare the second half of the year versus the first half, we continue to see second half earnings expectations compared to the first half trickle lower.

Coming out of last week, again, 91% of the basket having reported. The second half is now only expected to grow about 5.6% compared to the first half of the year. That's down considerably compared to July, down compared to the 8% figure that we saw at the end of August. So slower growth on the earnings front. We've even seen expectations for 2025 trickle a little bit lower. They're still a little lofty, in my opinion, around 14%, but we'll have to see what the next couple of months in the data brings.

I will say this. Earlier, I mentioned that the S&P 500, NASDAQ composite was bumping up against being overbought. And when we look at the S&P 500's PE valuation, remember, those numbers have come down a little bit on the EPS side. With the pronounced move we saw in the market last week, it tells us that the valuation is once again stretched.

And when I say this, typically, when we look back over the last 20 years or so, maybe a little bit more, the only times that we have seen the S&P 500's PE valuation at higher levels is when the EPS has been plummeting. So think about 2008, 2009. Think about the pandemic. That's when we really saw the PE valuation move significantly higher.

Why? Well, those earnings were kind of falling off a cliff. But that's not the expectation for 2025. So a little concerned here about that. And I think when we put it together, it tells us that we've got to be a little cautious here, especially if the market continues to trend a little higher, it gets frothy, gets overbought. So we'll be walking the cautious, the prudent path over the next couple of days, especially as we get this data and understand a little bit better about what it could mean for the Fed and potential rate cut timing.

One last thing I just want to talk about. Lay out what we've got in the next couple of days, because, as I said, the earnings wave still continues. Tuesday, we've got Home Depot, EVgo, and Skyworks. Those are the ones that we'll be paying close attention to. Skyworks because we want to get another read on the smartphone market.

Wednesday, CyberArk, Shopify, and Cisco. Of the three, yes, CyberArk will give us some good insight for our First Trust NASDAQ cybersecurity ETF shares. Remember, in that, we continue to see a lot of pain points for cybersecurity. We should expect to see cybersecurity spending continue to ramp, especially as bad actors embrace AI. That keeps us bullish on the CIBR shares in the portfolio.

With Cisco, we're going to be-- we're going to want to listen for what it has to say about enterprise network spending, carrier infrastructure spending. This is going to tie back to our position in Marvell. If you remember, about two, maybe three weeks ago, Eriksson reaffirmed our thought process about ramping AI adoption and the pressure it's going to put on networks, whether it's enterprise networking or carrier infrastructure.

We're going to want to see if Cisco says the same thing. My suspicion is that it will. And if it does, that will give a lot more support to our views on Marvell's non-data center, non-AI business. Remember, we've been expecting that business to rebound in the back half of this year, and then grow as AI adoption grows. So that's what we'll be listening for there.

And then on Thursday, Disney is going to report. We'll be interested to hear what they have to say there. But after the close on Thursday, Applied Materials is going to report. And that's a position we have in the portfolio. It'll be very interesting to hear what they have to say about their outlook relative to some of the others that have already reported. Lam Research gave a very good report, in my opinion, but it was ASML that really throws some cold water on things.

But remember, remember, one of their largest customers is Intel. At Applied Materials, Intel is a far smaller customer-- sub 10%. Their larger customers are Taiwan Semiconductor and Samsung. So as we think about this, we'll want to pay close attention to it. I will say, and I'll cover this in an alert, on late Friday, Taiwan Semiconductor reported their October revenue up significant, up 25% sequentially, 29% on a year-over-year basis.

Clearly shows the strong demand for AI and data center. It probably supports the rebound in smartphone and PCs as well. I say probably because remember that when Taiwan Semiconductor delivers its monthly revenue, it doesn't give any end market breakdown. We only get that when they report. But when we take a look at the surge in the numbers, those are the top end markets for Taiwan Semiconductor.

So it stands to reason that there continues to be robust demand for those types of chips. That, of course, keeps us bullish on not only Marvell, but also NVIDIA. It's also nicely supportive for what we talked about with Qualcomm last week. And we expect to hear much more when it comes to Qualcomm on their upcoming Analyst Day.

So with that, folks, we do have another busy week ahead. Again, not as busy as last week, but still busy. Please be sure to check your emails, your alerts. We want to make sure you're getting our latest thoughts. And if we make any moves with the portfolio, we want you right there with us. Thanks for watching.

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At the time of publication, TheStreet pro Portfolio was long AMAT.