VIDEO: Setting the Stage for the Second Half of 2024
We’ve made several moves quarter to date; here’s how we’ll gauge what could be next.
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In today’s Daily Rundown video, Chris Versace explains why we’re focusing on earnings growth prospects for the second half of the year, and how we’ll approach any near-term pullback in the market.
Transcript
CHRIS VERSACE: Hey, everybody. Chris Versace here. It is Friday, June 14, the end of yet another trading week. And we only have two weeks to go in the current quarter. So far, the current quarter has been a very strong one for the market, but it's been especially strong for the portfolio. What we've been able to do is to capitalize on a number of moves that we've made, some in the March quarter, but also those earlier in the current quarter, not to mention some of the recent ones we've made as well.
What have those been? Well, quarter to date we've bulked up on the portfolio's position in Nvidia. We also exited the portfolio's position in our inverse ETFs in early May. A good time because that was ahead of the market, moving about 8% higher over the last several weeks. We also started positions in Labcorp and Trade Desk. And in the last two weeks, we started positions in ServiceNow, which is already paying some nice dividends for the portfolio, as well as our most recent addition earlier this week with Builders FirstSource.
Now, the market, as I said, has been strong. But as I noted in our opening comments today with you, S&P 500, NASDAQ composite, overbought. We ran through the RSI levels well above that 70 mark. And again, it's been a very strong performance quarter to date.
But even this week, we've had a string of record closes. And as we think about that, odds are we're going to see some folks take profits, most likely traders or more short-term-oriented investors. Remember, our strategy here with the portfolio is kind of a rolling four to six, four to eight months.
And when we look at the portfolio's components, we still see a number of tailwinds blowing for our holdings, telling us that we will indeed see them move higher over the coming quarters. So we're not inclined to do anything rash with the portfolio. But we do have to be mindful that we could see a pullback. And we have to remember as well that about three times a year on average, some more, some less, the S&P 500 tends to see drawdowns of about 5%.
Now, given the strength that we've seen in the market year-to-date and even a little further back, we go to it's bouncing off the late November levels, it's been a substantial move in the market. And there are some good reasons for that. But we also have to recognize, again, that it's a little frothy. And I say that as the S&P 500's forward PE is really bumping up, once again, the high levels that we saw in 2022 and 2023.
So we put all this together. And it says if we do see a pullback, it's likely to be a healthy one. I can say this because when we look at the backdrop of the economy, its pace remains solid. We continue to see good job growth. Real wage gains are happening. We're that much closer to the Fed incrementally loosening monetary policy. We talked all about that this week.
And the backdrop for that, again, for those who might have missed it, the May CPI report, May PPI report, and, of course, the conservatism that the Fed noted during Fed Chair Powell's press conference, and then the fall in May input prices that we got earlier today. So these are telling us that the metrics are moving in the right direction. We'll want to see more confirmation. But again, when we put it all together, these are all reasons to be incrementally positive on the backdrop. And if we see a pullback in the market, that could give us the opportunity to put our shopping list to work.
So the question that we're going to be thinking of over the next two weeks, three weeks, especially as we lean into the upcoming June quarter earnings season, is what are the prospects for earnings growth in the second half of the year for the S&P 500, both on a year over year basis and a sequential basis? And current expectations right now are for both to grow somewhere between 11% and 12%.
What we want to wrestle with is, what's the potential upside to those expectations? Because again, the market is kind of trading around the high PE ratio for 2022 and 2023. So in order to see substantial upside in the market, we will need to see better than expected earnings growth unfold for the second half of the year. So that's going to be, again, what we're kind of putting pencil to paper, trying to figure out how much upside there is.
That also gives us a nice yardstick by which we can measure potential candidates for the portfolio. But it also gives us another reason and way to take stock on some of the existing positions, particularly as we move into the seasonally strongest part of the year for a number of our holdings, everyone from Amazon, Costco, PepsiCo, Coty, Apple, and, of course, Qualcomm. We can also toss Universal Display in there as well. So we'll be taking stock of all of these.
I do think that we might see some incremental earnings growth. We might see some incremental price target increases as well. But we'll also be keeping our eye on some of our winners. As you know, we're not shy to take profits, particularly when we see significant moves in a position or multiple positions. Typically, they land on our radar screen when they cross the 4% level in terms of percentage of the portfolio's assets as they move higher. We continue to watch them closely.
Typically, if they cross that 4.5% level, that's where we'll really have to decide if we're going to take some action. But we'll be mindful of the underlying backdrop of the market as well. So with that, I would say even though we are closing out the week, please remember, check your emails, check your alerts. We want to make sure you're getting our latest thinking. And if we make any moves with the portfolio, we want you right there with us. Thanks for watching.
