VIDEO: This Market Setup Looks Similar to April. Here's Why That's Good.

In today’s Daily Rundown video, Chris Versace lays out the events the portfolio will be focusing on this week, including more from Fed Chair Powell, June inflation data, and the start of the June-quarter earnings season.

Because of the stretched P/E valuation and overbought status of the S&P 500, Chris explains why we could be seeing a market setup similar to that from April and why that could be a good thing.

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Transcript

CHRISTOPHER VERSACE: Hey, folks. Christopher Versace here, Monday, July 8. Last week, another positive one for the markets and for the portfolio. But make no mistake, we do have a big week this week. And it's not just folks coming back from an extended July 4th Independence Day holiday with low volumes on Friday.

No, we've got a bunch of things that are going on this week. And if I had to sum it up, I would say it is going to be Powell, inflation data, GDP revisions, and the start of the June quarter earnings season. So let's break it all down and share our roadmap for the week ahead.

Now, today, we don't really have a lot, no real earnings. We will get the latest consumer credit report this afternoon. But the topic du jour for today is likely going to be the market valuation as we look for any potential earnings pre-announcements, both positive and negative, ahead of the start of the June quarter earnings season.

So let's talk about the market valuation for a second. Friday, the stock market, viewed as the S&P 500 and even the NASDAQ composite, closed at new record highs. So what does this mean?

Well, it means that the S&P 500's PE, meaning it's price divided by expected earnings-- market consensus forecasts, for example-- it's trading around 22.8 times. Now, OK, that's a number, but let's put some context around that.

It is bumping up against the 2021 high of around 23.1 times. And here's the big deal. In order to find a market peak multiple, we have to go back to 2002 where it peaked out at 24 times. So it's kind of fair to say that the S&P 500 PE multiple is a little stretched.

At the same time, as I shared in Friday's roundup with you both, the S&P 500 and the NASDAQ composite, based on their relative strength indices, are overbought. Now, stretched valuations, technically overbought. We've seen this before.

And at times like that, it doesn't take a lot to upset the market applecart in the short term. So it's going to be important that we pay attention to the number of things that are really coming at us this week. And as I said, Powell, inflation data, GDP expectations, and the start of the June quarter earnings season.

So we pretty much say today is going to be a slow day. But tomorrow, Fed Chair Powell will testify in front of the Senate. Is he going to say anything new? Probably not.

To the extent he might tip his hands, he did so last week-- and we shared those comments with you-- where he kind of said, yes, we are continuing to see some good data, but the Fed is kind of between these two points of not wanting to act too soon and reignite inflation, and not act too late and turbo charge-- or not turbo charge, sorry, torpedo-- sorry, that's the word I wanted-- torpedo the economy.

So let's just reflect real quick on what we saw last week. We got a rash of June PMIs, the ones from that get factored into GDP calculations showed the manufacturing economy continued to contract, but it also showed and surprised with what it found for the services economy. Remember, the services side of the economy has been kind of carrying the overall economy. And consensus expectations were that it would continue to do so in the month of June.

ISM found something wildly different. Whether we looked at the headline data or the new order data for the services side of the economy, it contracted. And that led the Atlanta Fed's GDP now rolling forecast model to fall to 1.5% ahead of the Independence Day holiday, compared to, say, 2.8% to 3% towards the end of June.

And remember, that 1.5% reading is for the second quarter. So, a slowdown is kind of what the data is showing. This has the market thinking that the Fed might have a little bit of room to maneuver sooner than people were thinking.

And it's thinking-- just looking at the CME Fedwatch tool-- that there could be a rate cut as soon as September, with another one in November. Now, our view has been that we would get one rate cut late in the year. But recent data, as I've kind of signaled to you, has a softening, thinking that maybe we could get two. Whether or not it as soon as September, we're going to have to wait and see what the data brings to us.

So, two pieces of economic data that we want to be watching this week will be, of course, the June CPI and PPI data that we'll get Thursday, Friday. What we saw in the June ISM data, PMI reports, positive, suggesting that we should see further improvement in that CPI and PPI data when we get it later this week. But we're also going to want to get the latest update to the Atlanta Fed GDPNow model again for the second quarter.

This next update comes on Wednesday. What are we looking for here? Well, the big adjustment is going to be what we saw in Friday's employment report where unemployment jumped up to 4.1% higher than expected. But we also saw private sector job creation really just tumble down a hill, still growing around 130, 135,000, but far slower than what the overall market was looking for.

We also saw some negative revisions in recent months data as well. So that's going to be all reflected when we get the update in the Atlanta Fed GDPNow model for the June quarter on Wednesday. And if it moves lower, it's going to kind of foster this notion of bad news is good news for the market.

Bad news, meaning the economy is growing slower than expected. Good news because it means that the Fed could be that much closer to the start of its rate-cutting cycle. So we're going to want to pay attention to that data extremely closely.

But as we move past that GDPNow update, get ready for the June CPI, PPI. We also have the start of the current earnings season. And we're going to be hearing from companies Thursday and Friday-- Pepsico, Delta, Conagra, BNY Mellon, Citi, JP Morgan, Wells Fargo, Ericsson, Fastenal.

Now, across these nine reports, we're going to be wanting to be listening for what they have to say about demand, pricing, margins, investment banking, loan activity, the consumer, AI, and a whole host of things. Pretty much, these nine reports are going to start to lay the groundwork for what we're going to hear over the next several weeks when hundreds and hundreds of companies report their June quarter and, more importantly, guide either for the September quarter or potentially for the back half of the year.

And as we think about this, it's no secret. A handful of stocks, big tech AI have really been driving the market higher. But as we know, there are other drivers out there, other tailwinds that are unfolding.

But here's the deal, all told, since mid to late April, the S&P 500 is up about 12%. It's a pretty big move. And arguably, a pullback, whether it's something that Powell has to say, something that we see in the inflation data coming up later this week, or even what companies say in the upcoming earnings season, any one of those could kind of lead the market to give back some of its gains that we saw-- again, that big 12% move since late April.

But here's the thing, that's not necessarily a bad thing. I say that because let's just take a look at what happened recently. The stock market exploded higher in late October all the way to March, moving significantly higher. And then, we had a moment like we have now where we did see the market pull back because of its expectations were arguably overextended.

But that gave us some opportunities to pick up shares of Labcorp, Trade Desk, 7 Universal Display, NVIDIA, and even some additional Microsoft. So as we go through the week, the message that I want to share is that we are mindful that the market is arguably a little ahead of itself, a little overextended. That there could be a couple things that upset the Apple cart, as I said earlier, leading the market to trade off.

But we do have our shopping list, and we will be revisiting that as we get some of these signals from the companies that will be reporting later this week. And we'll be updating that as we move through. Because, remember, the goal that we have is to continue to position the portfolio for what lies ahead, not necessarily the next week or two, but really the coming quarters.

So if we start to see some opportunities out there, either with the existing shopping list or some stocks pull in that we might have an opportunity to buy, remember, we did that with ServiceNow several weeks ago. It turned out to be a great pickup. Boy, I wish we could have picked up more, but we just grabbed it at the right time before it rebounded-- to say sharply would be an understatement.

But would we love to pick up more ServiceNow? Yes, we would because it is kind of the AI enterprise company. So we want to continue to look for opportunities like that-- perhaps with ServiceNow but maybe with other companies.

So again, we'll be kind of dusting off the shopping list. We'll be sharing that with you throughout the week as we make some adjustments and into next week as well. So the message at the end here, folks, is please remember, be sure to check your emails, your alerts. We want to make sure you are right there with us. We also want to make sure that if we make any moves with the portfolio, you are right there with us as well. Thanks for watching. Have a great week.