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Tag: Equity Markets

  • What the ‘mysterious shrinking’ of Wall Street’s fear gauge means for stocks, according to DataTrek

    What the ‘mysterious shrinking’ of Wall Street’s fear gauge means for stocks, according to DataTrek

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    Wall Street’s so-called fear gauge has been subdued this year, in a “mysterious shrinking” pattern, that’s a bullish signal for equities, according to DataTrek Research.

    Declines for the Cboe Volatility Index
    VIX
    fear gauge come despite continued worries over inflation and elevated interest rates.

    “We’ve been saying for several months that a low VIX is a sign that U.S. stocks are in a bull market rather than being excessively delusional about the obvious challenges ahead,” said Nicholas Colas, co-founder of DataTrek, in a note emailed Monday. “We still believe the next few weeks will be choppy, however.”

    The gauge, known by its ticker VIX, has dropped more than 35% so far this year and is trading below its long-term average, according to FactSet data. Its trading levels are derived from options contracts tied to the S&P 500, the U.S. stock benchmark that has rallied 16% in 2023 through Monday.

    Last week the VIX made “a new post-pandemic crisis low,” finishing below 13 on Sept. 14 in a “rare occurrence” for the index that was a positive sign for stocks over the next three months, Colas’s note shows. That’s even if it suggests near-term “choppiness” will continue, he said.

    On Monday the VIX closed at 14, well below its long-run average of around 20. The measure ended Sept. 14 at 12.8.

    “At first glance, this makes little sense,” Colas said. “The VIX is supposed to be Wall Street’s ‘Fear Index’ and it would appear “there’s plenty to be fearful of just now.”

    ‘Cloudy picture’

    Colas cited several areas of concern, including uncertainty surrounding inflation, the recent jump in oil prices
    CL00,
    +1.08%
    and “a cloudy picture” of how long the Fed Reserve will keep interest rates elevated, for his rationale as to why investor might feel fearful. 

    The Fed has been trying to slow the rise in the cost of living in the U.S. via its restrictive monetary policy, lifting its benchmark rate aggressively over the past 18 months.

    There also has been the recent climb in Treasury rates that has weighed on stocks lately, with 10-year Treasury yields looking “set on making new decade-plus highs,” said Colas. 

    The yield on the 10-year Treasury note
    BX:TMUBMUSD10Y
    finished Monday at 4.318%, according to Dow Jones Market Data. That’s around levels seen in late 2007, FactSet data show.

    ‘Seasonal peaks’ in volatility

    The VIX had kicked off 2023 trading below its long-run average, with Colas saying in January that it was looking a lot more like 2021, a year in which stocks rallied, rather than 2022, when equities tanked as the Fed rapidly hiked rates. 

    See: Wall Street’s ‘fear gauge’ VIX shaping up more like 2021 than 2022, as U.S. stocks rally this year, says DataTrek

    Meanwhile, September and October are known for “seasonal peaks in equity market volatility,” according to Colas.

    U.S. stocks have slumped so far this month, after falling in August. The S&P 500, which dropped 1.8% last month, is down 1.2% in September through Monday, FactSet data show.

    The S&P 500
    SPX
    closed 0.1% higher on Monday while the Nasdaq Composite
    COMP
    and Dow Jones Industrial Average
    DJIA
    each finished about flat, as investors digested fresh data showing a drop in confidence among homebuilders this month amid elevated mortgage rates. 

    Stock-market investors also have been monitoring the U.S. Treasury market’s inverted yield curve, or when shorter-term yields climb above long-term rates, as that historically has preceded a recession.

    There’s also some concern over the increased popularity of zero-day options in the stock market, as “you’d think their growing usage would push anticipated volatility higher, not lower,” Colas said.

    “We doubt options desks have just walked away from trading 30-day options” on S&P 500 futures, he said. “If there is money to be made in a financial asset, someone invariably trades it.”

    The Cboe Volatility Index measures 30-day expected volatility of the U.S. stock market. 

    “What the ultra-low VIX is telling us is that none of these concerns matter enough to offset a fundamentally strong picture for U.S. corporate earnings and the belief that the Federal Reserve is largely done hiking rates,” said Colas. “Equities are dismissing the possibility of a recession over the next 1-2 years, no matter what an inverted yield curve has historically said on that point.”

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  • Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

    Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

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    Getting staff back to the office is only part of the battle.

    Regional banks that went big lending on office properties also face a ticking time bomb of maturing debt that they helped create, particularly if the Federal Reserve holds its policy rate near the current 22-year high well into next year.

    “The area of greatest concerns for banks is office space,” says Tom Collins, senior partner focused on regional banks and credit unions at consulting firm firm West Monroe. Should rates stay high, “borrowers are going to face a tough decision of whether they refinance or default,” he said.

    The fight to bring more staff back to half-empty office buildings comes as an estimated $1 trillion wall of commercial real-estate loans is set to mature through 2024. While tenants haven’t shied away from signing up to pay top rents at trophy buildings, the same can’t be said for the rows of lower-rung properties lining financial districts in big cities.

    See: Labor Day is just a ‘milestone’ in the marathon to get workers back to the office

    The Fed embarks on a two-day policy meeting on Tuesday, with expectations running high for rates to stay steady, giving more time to study the impact of earlier rate increases.

    The central bank’s rate hikes have further complicated matters for landlords, and fresh debt for office buildings no longer looks cheap nor abundant. Regional banks also have been piling back on lending after Silicon Valley Bank and Signature Bank collapsed in March and as deposits fled for yield elsewhere.

    Related: FDIC kicks off $33 billion sale of seized assets from Signature Bank

    Loan volumes from Wall Street similarly have been anemic. This year it has produced slightly more than $10 billion in “conduit,” or multi-borrower, commercial mortgage-backed securities deals through the end of August, the least since 2008, according to Goldman Sachs. Coupons, a proxy for mortgage rates, have climbed above 7%, the highest since the early 2000s.

    “I don’t think this is a wash out here,” Collins said of the threat of more regional bank failures, but he does anticipate pain for lenders heavily exposed to lower quality class B and C office buildings in urban areas.

    Banks can help mitigate the wall of debt coming due by stepping up the pace of loan modifications to help borrowers keep properties, but Collins said he also anticipates lenders will need to increase loan sales, write downs and mergers or acquisitions.

    “There is no doubt there will be private equity and other investors that will be interested in buying some of these loans, taking them off the balance sheets of banks,” Collins said.

    “The obvious question there is at what discount?” he said, adding, “I think investors will wait until things get more dire to try to get a better deal.”

    Another offset to banks’ office exposure has been the relatively stable performance of hotels, industrial and other property types. But Collins said that if rates stay high and the economy falters, those sectors are likely to face challenges as well.

    The 10-year Treasury yield,
    BX:TMUBMUSD10Y
    a benchmark lending rate for the commercial real estate industry, was near 4.32% on Monday, hovering around a 16-year high ahead of the Fed meeting, while the policy-sensitive 2-year Treasury rate
    BX:TMUBMUSD02Y
    was near 5.06%. Stocks
    SPX

    DJIA
    were edging higher.

    Office distress intensified in August, with the special servicing rate of loans in bond deals hitting 7.72%, compared with a 6.67% rate for all property types, according to Trepp, which tracks the commercial mortgage-backed securities market. A year ago, the rate of problem office loans was 3.18%.

    “If I was an investor, I would be patient around this, because values are only going to come down, I would imagine,” Collins said.

    Check out: Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

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  • Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

    Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

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    The past six weeks have left investors with more questions than answers about the outlook for U.S. monetary policy and, by extension, financial markets.

    And although the Federal Reserve is expected to leave its policy interest rates on hold Wednesday, Chairman Jerome Powell could still rattle markets as he’s probed for clues about the central bank’s thinking.

    Powell’s statement is expected to hew to what he said at the Jackson Hole, Wyoming, symposium in August and before that, during the central bank’s July press conference, but market analysts say the question-and-answer session with reporters and the updated “dot plot” of policy makers projections for interest rates could potentially furnish market-moving news.

    See: U.S. economy is trending in the Fed’s direction, so expect Powell to tread carefully next week

    “Just because this meeting isn’t widely considered to be ‘in play’ doesn’t mean it is insignificant,” said Steve Sosnick, chief strategist at Interactive Brokers, during a phone interview with MarketWatch.

    “The fact is, the Vix is relatively low. That indicates a very sanguine, if not complacent market. And a complacent market can sometimes be more susceptible to a negative shock.”

    The Cboe Volatility Index
    VIX,
    better known as “the Vix” or Wall Street’s “fear gauge,” finished below 14 on Friday, even as the Nasdaq Composite
    COMP
    and S&P 500
    SPX
    logged back-to-back weekly losses. Markets have seesawed recently as inflation has reaccelerated while the U.S. labor market and broader economy have slowed.

    What will investors be looking for, exactly? Presently, investors expect the Fed could start cutting interest rates again by the middle of next year. Anything that could disabuse them of this notion could undercut U.S. stocks while boosting Treasury yields and the U.S. dollar, analysts said.

    Liz Ann Sonders, chief market strategist at Schwab, said clues could potentially surface during the Q&A at the post-meeting press conference, which often has more of an impact on markets than Powell’s statement.

    “It is that 45 minutes to an hour that tends to be more market moving,” Sonders said during a phone interview with MarketWatch. “It is what they say about higher for longer and expectations around rate cuts in 2024, and whether Powell pushes back against that.”

    Since the beginning of August, more data has emerged to suggest that the U.S. economy might finally be starting to respond to the pressure from the Federal Reserve’s most aggressive campaign of interest-rate hikes since the 1980s. Corporate and personal bankruptcies have climbed.

    See: Bankruptcies spiked in August — the post-COVID rebound ‘is becoming a reality’

    There have also been indications that the torrid postpandemic labor market might be starting to cool. The Labor Department’s monthly jobs report showed fewer than 200,000 jobs were created in August, while figures from the prior two months were also revised lower, and the unemployment rate ticked higher to 3.8%.

    At the same time, consumer-price inflation has accelerated for two months in a row. Some on Wall Street have started to worry about stagflation, and financial markets are now pricing in about even odds that the Fed will leave interest rates on hold.

    A report earlier this week showed consumer prices rose 3.7% over the 12 months through August, while the rise for the month was 0.6%, the biggest increase in 14 months.

    Adding to the complicated picture, the resumption of student loan payments in October has revived concerns about the consumer despite relatively robust retail-sales data released earlier this week, while an auto worker strike involving all of the “Big Three” U.S. carmakers and the threat of a government shutdown are also sowing fears about a hit to the economy.

    “The triple threat from the resumption of student loan payments, a government shutdown and a strike by auto union workers could significantly weigh on GDP growth in Q4,” said EY Chief Economist Gregory Daco in emailed commentary.

    Powell could be asked to weigh in on any or all of these. He also could be asked to directly address investors’ expectations for the timing of the Fed’s initial rate cut of the cycle. Expectations for a policy pivot already proved premature last summer, which caused a brief but powerful bear-market rally to fizzle.

    A repeat of this could again create problems for stocks, Sosnick said.

    “Let’s see if the Fed agrees with the market’s assumptions about rate cuts,” he added.

    Traders expect the central bank to keep interest rates on hold Wednesday, with market-based odds seeing a pause as a virtual certainty, according to the CME’s FedWatch tool, which measures expectations based on trading in Fed funds futures. Expectations for another hike later this year are roughly split.

    See also: 4 things to watch for at next week’s Fed policy meeting

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  • Stocks finish lower; S&P 500 gives up weekly gain as investors await Fed

    Stocks finish lower; S&P 500 gives up weekly gain as investors await Fed

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    Stocks ended lower Friday as investors assessed the start of a United Auto Workers strike against Ford
    F,
    -0.08%    ,
    General Motors
    GM,
    +0.86%
    and Stellantis
    STLA,
    +2.18%
    and awaited next week’s Fed decision. The Dow Jones Industrial Average
    DJIA,
    -0.83%
    declined nearly 290 points, or 0.8%, to close near 34,619, according to preliminary data. The S&P 500
    SPX,
    -1.22%
    shed 0.8% and the Nasdaq Composite
    COMP,
    -1.56%
    slid 1.6%. The declines left the Dow with a weekly gain of 0.1%, while dragging the S&P 500 to a 0.2% drop and leaving the Nasdaq down 0.4%.

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  • H&M shares fall as retailer misses sales expectations; CAC 40 leads advance

    H&M shares fall as retailer misses sales expectations; CAC 40 leads advance

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    H&M shares slumped Friday as the Swedish retail chain missed expectations for sales growth in a quarter in which it said it focused on profitability.

    H&M stock
    HM.B,
    -5.62%
    dropped 4% in early action, though it has rallied 47% this year.

    In a brief statement, H&M said fiscal third-quarter sales in local currencies was “flattish,” missing analyst estimates for 5% sales growth. It said its goal of reaching a 10% operating margin next year “is going in the right direction” and that profitability and inventory levels have been priortized in the quarter.

    Analysts at RBC said weather may have dampened sales, but that it also has become more expensive this season — for instance, pricing 10% below average in the U.K., versus 20% traditionally. Its publicly traded rivals — Inditex
    ITX,
    +0.58%    ,
    the Primark unit of Associated British Foods
    ABF,
    +0.24%
    and Next
    NXT,
    +0.64%
    — have each reported stronger sales growth.

    The broader tone in European markets was positive, except for tech stocks, with ASM International
    ASM,
    -5.44%
    shares losing 5% and ASML Holding
    ASML,
    -2.51%
    down 2%.

    The French CAC 40
    FR:PX1
    led the major regional indexes with a 1.3% rise, as the U.K. FTSE 100
    UK:UKX
    and German DAX
    DX:DAX
    also rose. Better-than-expected Chinese retail sales figures helped Paris-listed luxury plays.

    Stellantis shares
    STLAM,
    +0.69%
    fell 1% as the United Auto Workers began a strike at an Ohio plant, along with one plant each at fellow Big Three automakers Ford and General Motors.

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  • Stocks are trapped in a trading range. Something’s got to give.

    Stocks are trapped in a trading range. Something’s got to give.

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    The U.S. stock market, as measured by the S&P 500 Index SPX, is trapped in a trading range, and volatility seems to be damping down considerably. The significant edges of the trading range are support at 4330 and resistance at 4540. Both of those levels were touched in the latter half of August. A breakout from this range should give the market some strong directional momentum. 

    Since Labor Day, prices have hunkered down into an even narrower range. Typically, the latter half of September through the early part of October…

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  • Here’s the ‘triple power play’ that may rule stock-market returns, other assets for next 5 years

    Here’s the ‘triple power play’ that may rule stock-market returns, other assets for next 5 years

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    Three powerful dynamics in the global economy are expected to play a significant role in investors’ multi-asset allocations over the next five years, according to a 132-page report from Rotterdam-based asset manager Robeco.

    The first is labor’s likely increased bargaining power, with the outcome of any tussle between businesses and their workers probably being determined by wages in a sticky inflation environment, based on the report compiled by strategists Laurens Swinkels and Peter van der Welle on behalf of the multi-asset team at Robeco, which manages $194 billion in assets. The second is the end of monetary-policy leniency and the potential for central banks to lock “horns” with governments over the appropriate level of borrowing costs. The third is the dawn of “multipolarity” as the U.S. and China struggle for power.

    Taken together, this “triple power play” is already starting to unfold, shifting investors into a world of higher risk-free rates and lower expected equity risk premiums, according to the asset manager. Risk premium is a gauge of relative value for stocks, helping investors understand what their short-term gain might be when taking on the additional risk of buying equities or investing in stock funds.

    Robeco provided its forecasts for five-year annualized, projected returns on a range of assets held by euro- and dollar-based investors — including developed- and emerging-market equities, bonds, and cash.

    The firm’s base-case scenario, which Robeco’s team refers to as a “stalemate,” calls for a mild recession in 2024, consumer-price inflation in developed economies to remain around 2.5% on average heading toward 2029, and real GDP in the U.S. to average 2.3% or below what the S&P 500 index
    SPX
    currently implies.

    That benign growth outlook is expected to be accompanied by macroeconomic volatility, plus a “tug of war” between central bankers reluctant to lower interest rates and governments in need of low borrowing costs — which “means there is not enough monetary policy tightening to remove demand-pull inflation.” Under such a scenario, developed-market equities are likely to underperform their emerging market counterparts and domestic bonds should offer a higher return than cash for dollar-based investors, according to Robeco.


    Source: Robeco. Returns shown are annualized.

    “Looking ahead, a key question is: are we eyeing the start of a new bull market that will broaden and pave the way for another streak of above-historical excess equity return?” the Robeco team wrote in the report released on Tuesday. “In our base case, we expect developed markets’ earnings growth to end up below current 5Y forward consensus projections, which are high single-digit or even still low double-digit for the U.S. and eurozone.

    “The reason we foresee a decline in profitability is linked to our overarching macro theme, the triple power play. Equities will likely bear the brunt of the power play in geopolitics,” according to the report. In addition, efforts by global corporations to shift production toward geopolitically-friendly powers or closer regions “will prove more costly and lower efficiency.” Plus, “further pressure from margins will come from a lagged response from past policy rate hikes.”

    Under Robeco’s bull-case scenario, early and rapid adoption of artificial intelligence across sectors and industries would likely spawn above-trend growth and push inflation back to central banks’ targets. The result is “an almost Goldilocks scenario in which things are running neither too hot nor too cold,” central banks could take a break from tightening policy, and developed- and emerging-market equities may both be able to come out with double-digit annualized returns from 2024 to 2028.

    The firm’s bear-case scenario envisions a world in which mutual trust between the world’s superpowers hits rock bottom, governments are “in the crosshairs” of central banks, and labor loses bargaining power in the services sector. A “stagflationary environment emerges, intensifying the policy dilemma for central bankers” as inflation stays stubbornly high at 3.5% on average and growth comes in at just 0.5% annually for developed economies. In that situation, developed-market equities would eke out an annualized return of 2.25% for dollar-based investors over the four-year period, which would be below the expected return on cash.

    On Thursday, all three major U.S. stock indexes
    DJIA

    SPX

    COMP
    finished higher as investors digested a batch of better-than-expected U.S. data and continued to expect no action by the Federal Reserve next week. Officials are seen as likely to leave their main policy rate target at a 22-year high of 5.25%-5% on Wednesday.

    As investors continued to monitor the possibility of a strike by United Auto Workers, 2-
    BX:TMUBMUSD02Y
    and 10-year Treasury yields
    BX:TMUBMUSD10Y
    ended at one-week highs and the ICE U.S. Dollar Index
    DXY
    jumped 0.6%. In a separate development earlier this week, Air Force Secretary Frank Kendall warned that China is preparing for a potential war with the U.S.

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  • Dow posts back-to-back drop, S&P 500 climbs after inflation gauge ticks higher

    Dow posts back-to-back drop, S&P 500 climbs after inflation gauge ticks higher

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    The Dow posted a back-to-back loss on Wednesday after a gauge of consumer inflation for August rose on the back of higher energy costs, while the S&P 500 and Nasdaq Composite ended with modest gains. The Dow Jones Industrial Average
    DJIA,
    -0.20%
    shed about 70 points, or 0.2%, ending near 34,565, according to preliminary FactSet data. That marked its second day in a row of declines. The S&P 500 index
    SPX,
    +0.12%
    added 0.1% and the Nasdaq Composite Index
    COMP,
    +0.29%
    finished at a 0.3% gain. Both the Dow and S&P 500 struggled for direction earlier Wednesday, with both indexes flipping between small gains and loss as investors considered whether the Federal Reserve will be promoted to increase its policy rate any further this year to tamp down inflation further. Its benchmark rate was increased to a 22-year high in July. The consumer price-index for August showed the yearly rate of inflation climbed to 3.7% from 3.2% in July, and up from a 27-month low of 3% in June.

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  • When will inflation cool to the Fed’s 2% target? By late next year, says JP Morgan strategist.

    When will inflation cool to the Fed’s 2% target? By late next year, says JP Morgan strategist.

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    Inflation is likely to fall below the Federal Reserve’s 2% annual target by late next year, according to David Kelly, chief global strategist at JP Morgan Asset Management.

    Consumer prices rose again in August to reach a 3.7% yearly rate, based on Wednesday’s release of the monthly consumer-price index. That marked its biggest jump in 14 months and a higher reading than the recent 3% low set in June (see chart) as the toll of the Fed’s rate hikes kicked in.

    U.S. consumer prices rose in August, after touching a recent low of 3% yearly in June, as energy prices shot up.


    AllianceBernstein

    The catalyst for increased price pressures in August was a roughly 30% surge in energy prices
    CL00,
    +1.32%
    this quarter, according to Eric Winograd, director of developed market economic research at AllianceBernstein.

    West Texas Intermediate Crude, the U.S. benchmark, settled at $88.52 a barrel on Wednesday, as traders focused on supply concerns following decisions by Saudi Arabia and Russia to cut crude supplies through year-end. WTI was trading at a low for the year below $65 a barrel in May.

    “I don’t think that today’s upside surprise is sufficient to trigger a rate hike next week and I continue to expect the Fed to stay on hold,” Winograd said, in emailed commentary. “But with inflation sticky and growth resilient, the committee is likely to maintain a clear tightening bias—the dot plot may even continue to reflect expectations of an additional hike later this year.”

    Federal Reserve officials increased the central bank’s policy rate to a 5.25%-5.5% range in July, the highest in 22 years.

    Higher gasoline prices, however, also could act as a counterweight to inflation, according to JP Morgan’s Kelly. “Indeed, to the extent that higher gasoline prices cool other consumer spending, the recent energy price surge could contribute to slower growth and lower inflation entering 2024,” Kelly wrote in a Wednesday client note. 

    “We still believe that, barring some further shock, year-over-year headline consumption deflator inflation will be below the Fed’s 2% target by the fourth quarter of 2024.”

    Kelly isn’t expecting the Fed to raise rates again in this cycle.

    U.S. stocks ended mixed Wednesday following the CPI update, with the Dow Jones Industrial Average
    DJIA
    down 0.2%, the S&P 500 index
    SPX
    up 0.1% and the Nasdaq Composite Index
    COMP
    up 0.3%, according to FactSet.

    But with oil prices well off their lows for 2023, Winograd said further progress on cooling headline inflation is unlikely this year, even though he expects core inflation to gradually decelerate, a process that will “keep the Fed on high alert.”

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  • ‘Complicated’ inflation report produces wavering U.S. stocks, keeps higher-for-longer theme in rates intact

    ‘Complicated’ inflation report produces wavering U.S. stocks, keeps higher-for-longer theme in rates intact

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    Investors were evaluating a less-than-straightforward take on U.S. inflation Wednesday, with August’s consumer price index coming in close to or in line with expectations while providing reasons for the Federal Reserve to hike again by year-end.

    U.S. stocks
    DJIA

    SPX

    COMP
    were higher, though wavering, in New York afternoon trading as traders weighed the chances of another rate hike in November. Three-month through 1-year T-bill rates were up slightly, though 2- through 30-year Treasury yields slipped. And the ICE U.S. Dollar Index
    DXY,
    which moves according to the market’s expectations for U.S. rates relative to the rest of the world, swung between gains and losses.

    Rising gas prices in August had Wall Street anticipating higher headline inflation figures of 0.6% for last month and either 3.6% or 3.7% year-on-year ahead of Wednesday’s session, and on that score August’s CPI report met expectations. The as-expected headline readings appeared to offer some comfort to many investors, even though the monthly gain was the biggest increase in 14 months and the annual rate jumped versus the prior two months.

    Still, Ed Moya, a senior market analyst for the Americas at OANDA Corp. in New York, said “this was a complicated inflation report” and price gains are failing to ease by enough for the central bank to abandon its hawkish stance. Core readings which matter most to Fed policy makers came in a bit above expectations at 0.3% for last month, driven partly by a jump in airline fares, as the annual core rate dipped to 4.3% from 4.7% previously. According to Moya, “inflation will likely still be running well above the Fed’s 2% target for the rest of the year.”

    “Today’s uptick in CPI could slightly increase the likelihood of a November interest rate hike and potentially delay the timing of any rate cuts until deeper into 2024,” said Joe Tuckey, head of FX analysis at London-based Argentex Group, a provider of currency risk-management and payment services.

    As of Wednesday afternoon, however, August’s CPI wasn’t putting much of a dent in expectations for fed funds futures traders. They see a 97% likelihood of no rate hike next Wednesday, which would keep the fed funds rate at between 5.25%-5.5%, and a more-than-50% chance of the same in November and December, according to the CME Fed Tool. They also continued to price in the likelihood of no rate cuts through the early part of 2024.

    While August’s CPI report failed to move the needle in stocks, the dollar, or fed funds futures, there was one corner of the financial market where the data did make more a difference: Traders of derivatives-like instruments known as fixings now foresee five more 3%-plus annual headline CPI readings starting in September, after adjusting their expectations to include January.

    If those expectations play out, that would bring the total number of 3%-plus readings to six months, including August’s data, and produce a scenario that investors may not be entirely prepared for — the possibility that headline inflation doesn’t meaningfully budge from current levels soon.

    Read: Why financial markets may be unprepared for a fourth-quarter ‘inflation surprise’

    Central bankers care more about less-volatile core readings, but pay attention to headline CPI figures because of their potential to affect household expectations.

    “While these numbers do not change our, and the market’s, expectations that the Fed will hold the target fed funds rate unchanged at the September meeting, the slightly stronger number can influence the tone of the press conference and Summary of Economic Projections,” said Greg Wilensky, head of U.S. fixed income at Denver-based Janus Henderson Investors, which manages $322.1 billion in assets.

    “We continue to expect some reduction in the number of participants projecting further hikes, but probably not enough to move the median projection of one more rate hike,” Wilensky said in an email. “That said, we believe that we have likely seen the last rate hike for this cycle, as the economic data that the Fed will see over the coming months will keep them on hold and allow the impact of 5.25% of prior hikes to slow the economy and inflation.”

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  • Nasdaq ends 1% down, leading stocks lower as tech shares slump

    Nasdaq ends 1% down, leading stocks lower as tech shares slump

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    U.S. stocks closed lower on Tuesday, with the Nasdaq Composite leading the way down, as Apple’s unveiling of its new iPhone and watch failed to boost appetite for equities. The Dow Jones Industrial Average
    DJIA,
    -0.05%
    shed about 16 points, or about 0.1%, to end near 34,647, while the S&P 500 index
    SPX,
    -0.57%
    closed 0.6% lower and the Nasdaq Composite Index
    COMP,
    -1.04%
    slumped 1%, according to preliminary FactSet data. That was the biggest daily percentage drop in about a week for the Nasdaq. Shares of Apple Inc.
    AAPL,
    -1.71%
    were a focus Tuesday as it rolled out a lineup of new consumer products, including its iPhone Pro Max, which will now start at $1,199 instead of $1,099, while its Pro model’s price stays the same. Investors also remain focused on the inflation data, including the release on Wednesday of the consumer-price index for August, before the U.S. stock market’s open. Apple shares fell 1.9% on Tuesday. Climbing bond yields can pressure high-growth stocks as borrowing costs rise. The benchmark 10-year Treasury yield
    TMUBMUSD10Y,
    4.297%
    edged down 2.4 basis points to 4.263% Tuesday, but was still near its highest level of the year.

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  • The economy is doing better than anyone thinks, but these troubles are in the pipeline, says Bill Ackman

    The economy is doing better than anyone thinks, but these troubles are in the pipeline, says Bill Ackman

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    Stock investors are showing some hesitancy for Tuesday, with big signals on the economy coming this week via consumer prices and retail sales. Ahead of that, Apple is expected to tempt consumers with yet another new iPhone on Tuesday.

    How much should investors be worrying right now? Our call of the day from Pershing Square Capital Management manager Bill Ackman says that in the near term, we can relax a little, but it isn’t all roses.

    Read: Hedge funds have bailed on the U.S. consumer in a big way, Goldman Sachs data finds

    He told the Julia La Roche Show in an interview where he felt like he had a “crystal ball of what was going to happen,” starting in January 2020 with the COVID-19 outbreak, and that carried on through interest rates and the economy. Indeed, the manager reportedly made nearly $4 billion on a couple of pandemic-related bets.

    “I would say the crystal ball has clouded a bit in the last period. I think these are unusual economic times and perhaps we always say that, but I don’t think this is a pattern that has been repeated…or it hasn’t been for more than 100 years,” he said.

    But he remains near-term upbeat. “For two years, people have been saying that recession’s around the corner and you know we’ve had a very different view, and continue to have this view that I think people are coming around to, that the economy is actually still quite strong,” he said.

    And while those on lower-income rungs have burned through a lot of COVID savings, he thinks the economy has yet to really see impact from the big fiscal stimulus seen in recent years.

    Looking down the road though, Ackman has got a stack of concerns over the economy. He sees about a third of federal debt due to get repriced meaning that over a relatively short period of time, “interest expense will become a much bigger part of the deficit that is not going to be a contributor to the economy.”

    And while higher interest rates do help savers, ultimately that will be a big drag on the economy, he said, adding that rising inflation, mortgage rates, car payments and credit card rates, are all set to slow the economy.

    “We’re still in the midst of a war and there’s political uncertainty you know with an upcoming election,” he said. That partly explains Pershing Square’s hedge via a short position on the 30-year Treasury bond
    BX:TMUBMUSD30Y
    that he laid out in a tweet in early August.

    For roughly a year, long-term Treasury yields have been trading below short-dated ones, which is known as an inverted yield curve, a phenomenon that’s often seen as a precursor to recession.

    “I don’t see inflation getting back to 2% so quickly, if at all, and if in fact we’re in a world of persistent 3% inflation, you know it doesn’t make sense to have a 4.3%, 4.25% Treasury yield,” he said.

    Other risks? Ackman remains worried about regional banks following the spring crisis, as many have big fixed-rate portfolios of assets that have gotten less and less valuable as rates rise. “I would say the commercial real estate picture has not gotten better, if anything, you know, you’re going to start seeing real defaults, particularly with office assets,” he said.

    “Regional banks have the most exposure to construction loans so they are going to be a lot of construction loans that won’t be able to repaid. There will be a lot of restructurings, so either the investors groups are gonna have to put in a lot more equity or the banks are going to start taking some losses,” he said.

    Ackman says investors also face a presidential campaign that could add some stress. The hedge-fund manager said he’s surprised there have not been “more and better alternative candidates” for the 2024 campaign over President Joe Biden and former President Donald Trump.

    He’d like to see JPMorgan Chase & Co. CEO Jamie Dimon toss his hat in the ring and believes Biden is “beatable,” by a strong candidate.

    Ackman himself said it’s “possible,” he himself could run someday, but he’s more focused on having a better investment track record over Berkshire Hathaway Chairman and CEO Warren Buffett — and needs some 30 years to match the Oracle of Omaha.

    Read: Here’s an easy way to make a more concentrated play on the ‘Magnificent Seven’ stocks

    The markets

    Stock futures
    ES00,
    -0.36%

    NQ00,
    -0.45%
    are tilting south, led by tech, with Treasury yields
    BX:TMUBMUSD02Y

    BX:TMUBMUSD10Y
    steady to a touch lower and the dollar
    DXY
    recovering some ground.

    Read: Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says

    For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

    The buzz

    Oracle shares
    ORCL,
    +0.31%
    are down 10% in premarket trading after disappointing guidance from the cloud database group.

    Apple’s
    AAPL,
    +0.66%
    big event kicks off at 1 p.m. Eastern, with the launch of the pricier iPhone 15 expected to be on the agenda.

    Hot ticket. Arm Holdings’ IPO is already 10 times oversubscribed and bankers will stop taking orders by Tuesday afternoon, Bloomberg reports, citing sources.

    Tech’s wild week: How Apple, Google, AI, Arm’s mega IPO could set the agenda for years

    Upbeat results are boosting shares of convenience-store operator Casey’s General Stores
    CASY,
    -1.02%    .

    Packaging giant WestRock
    WRK,
    -1.48%
    and rival Smurfit Kappa
    SK3,
    -8.87%
    have announced a stock and cash tie up. WestRock shares are up 8% in premarket.

    Read: U.S. budget deficit will double this year to $2 trillion, excluding student loans

    Best of the web

    No better than gambling? Amateur investors are piling into 24-hour options.

    Demand for oil, coal, gas to peak this decade, IEA chief says

    U.S. takes on tech giant Google in landmark case.

    The chart

    Bank of America’s global fund manager survey for September sees investors still bearish, but no longer on the extreme side. Here’s the chart:

    Read: Fund managers just made their biggest shift ever into U.S. stocks — and out of emerging markets

    The tickers

    These were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern:

    Ticker

    		 Security name
    TSLA,
    +10.09%         		Tesla
    AMC,
    +2.23%         		AMC Entertainment
    CGC,
    +81.37%         		Canopy Growth
    NVDA,
    -0.86%         		Nvidia
    GME,
    -3.90%         		GameStop
    AAPL,
    +0.66%         		Apple
    ACB,
    +72.17%         		Aurora Cannabis
    NIO,
    +2.89%         		Nio
    MULN,
    +5.77%         		Mullen Automotive
    AMZN,
    +3.52%         		Amazon

    Random reads

    “Worst investment ever.” Brady Bunch fan buys original house for cut-price $3.2 million.

    And the house from the “Halloween” slasher films just sold for $1.8 million.

    China may ban clothes that hurt people’s feelings.

    Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

    Listen to the Best New Ideas in Money podcast with MarketWatch financial columnist James Rogers and economist Stephanie Kelton.

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  • Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says

    Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says

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    Neuberger Berman, an asset manager with eight decades under its belt, is on the lookout for cracks in credit markets from the Federal Reserve’s rate-hiking campaign.

    Erik Knutzen, chief investment officer of multi asset, worries that several factors could be a tipping point for the economy, from an economic slowdown in China to U.S. consumers finally becoming exhausted by higher rates.

    Yet Knutzen expects the high-yield, or junk bond, market to serve as the “canary in the coal mine” for broader market volatility, acting as “perhaps the most visible threat, and therefore one we think could be priced in sooner than later.”

    The Bloomberg U.S. High Yield Bond Index has returned 6.4% through the end of August, producing one of the year’s highest gains in fixed income, helped along by a “resilient U.S. economy coupled with still-available financial liquidity,” according to the Wells Fargo Investment Institute.

    But Knutzen worries that as the high-yield maturity wall draws closer, “the first policy rate cuts get priced further and further out, raising the threat of expensive refinancings.”

    The 10-year Treasury yield’s
    BX: TMUBMUSD10Y
    climb to a multidecade high in August of almost 4.4% left many major U.S. corporations in early September hesitant to borrow beyond 10 years.

    Starting next year, some $700 billion of high-yield bonds are set to mature through the end of 2027, with a big slice of the refinancing need coming from companies with riskier credit ratings below the top BB ratings bracket.

    The junk-bond maturity wall.


    Bloomberg, Wells Fargo Investment Institute, Moody’s Investors Service

    The two big U.S. exchange-traded funds linked to junk bonds are the SPDR Bloomberg High Yield Bond ETF
    JNK
    and the iShares iBoxx $ High Yield Corporate Bond ETF
    HYG,
    both up 1.8% and 1.5% on the year through Monday, respectively, while offering dividend yields of more than 5.8%, according to FactSet.

    Of note, fixed-income strategists at the Wells Fargo Investment Institute also said they see risks emerging in junk bonds for companies rated B and below, particularly with spread in the sector trading less than 400 basis points above the risk-free Treasury rate since July. Spreads are the premium that investors are paid on bonds to help compensate for default risks.

    Top corporate executives appear hopeful that the Federal Reserve will cut rates sooner than later. Fed Chairman Jerome Powell said in Jackson Hole, Wyo., in August that the central bank is prepared to keep its policy rate restrictive for a while to get inflation down to its 2% target.

    To that end, Neuberger Berman, which has roughly $443 billion in managed assets, sees several sources of volatility lurking through year’s end, and has a “defensive inclination” in equity and credit, favoring high-quality companies with plenty of free cash flow, high cash balances and less expensive long-term debt.

    U.S. stocks booked gains on Monday after a week of losses, with the S&P 500 index
    SPX
    and Nasdaq Composite Index
    COMP
    scoring their best daily percentage gains in about two weeks. The Dow Jones Industrial Average
    DJIA
    advanced 0.3%.

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  • Wall Street’s most bullish strategist warns of choppiness in stocks, still sees the S&P 500 touching a record high this year

    Wall Street’s most bullish strategist warns of choppiness in stocks, still sees the S&P 500 touching a record high this year

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    Recent weakness in the U.S. stock market is likely to persist over the near-term, according to Wall Street’s most bullish strategist, who still thinks the S&P 500 is on a path to a record high this year.

    John Stoltzfus, chief investment strategist at Oppenheimer Asset Management Inc., in late July projected the S&P 500 would rise above 4,900 by the end of 2023. That is the highest price target for the large-cap index among 20 Wall Street firms surveyed by MarketWatch in August.

    It implies the S&P 500 would rise above its earlier closing record high of 4,796 reached on Jan. 3, 2022 by the end of the year. The path up, however, could get bumpy.

    “Bullishness [in the stock market] is relatively high while the Fed remains shy of its inflation target,” said a team of Oppenheimer strategists led by Stoltzfus in a Sunday note. They also said, “we persist in suggesting that investors curb their enthusiasm [in the stock market] for a long rate pause or even a rate cut and instead right-size expectations.”

    Expectations that the Federal Reserve is nearing an end to its current interest-rate hiking cycle, as well as optimism around artificial intelligence boosted the U.S. stock market in the first seven months of 2023. However, the rally came to a brief halt in August as investors worried the Fed could be forced to keep rates elevated as a batch of stronger-than-expected economic data and rising oil prices fueled concerns that still-sticky inflation would mean that borrowing costs will stay higher for longer.

    Investors should not brush off those pressures, even through the Fed appears to be nearing the end to its current rate-hike cycle, Stoltzfus and his team said. “The stickiness evidenced in food, services, energy and other prices warrants the Fed remaining vigilant along with a potential for one more hike this year and perhaps another next year,” they said.

    See: When will consumers stop buying more stuff? It’s a key question for the stock market.

    However, Stoltzfus doesn’t see current headwinds for stocks as something that would prevent the S&P 500 from achieving his team’s new peak target.

    Stock-market investors expect this week’s August inflation report to offer more clarity on whether the central bank will continue to ratchet up its fight against inflation. The headline component of the consumer-price index is forecast to accelerate to 0.6% in August from July’s 0.2% gain, while the core measure that strips out volatile food and fuel costs is expected to rise a mild 0.2% from a month earlier, according to a survey of economists by The Wall Street Journal. 

    Meanwhile, a key Wall Street volatility index also pointed to “some choppiness” in the stock market in the near term to keep investors on their toes, said Stoltzfus. The CBOE Volatility Index
    VIX,
    at a level of 13.82 on Monday, hovered around its 12-month low and traded about 30% below its one-year average level of 19.9, and 37% below its two-year average of 21.88 (see chart below). 

    Stoltzfus and his team suggest that investors use market weakness to seek out “babies that get thrown out with the bath water” in periods of volatility. They said the S&P 500 Energy Sector
    XX:SP500.10
    looks increasingly attractive as policy makers in the U.S. and abroad strive to contain inflation and manage economic growth. 

    “We believe that prospects are looking better that the Fed’s success thus far in bringing down the rate of inflation could lead to a [rate] pause next year, thus lessening pressures on economic growth,” the strategists said. An improved economic growth, along with fiscal stimulus from investment in stateside infrastructure projects and stateside chip manufacturing efforts, could contribute to profitability in the energy sector into 2024, the team added. 

    The Energy Select Sector SPDR Fund
    XLE,
    which is seen as a proxy of the energy sector of the S&P 500, has advanced 3.9% year to date versus a 8.5% increase in the price of the U.S. benchmark West Texas Intermediate crude oil
    CL00,
    +0.03%

    CL.1,
    +0.03%    ,
    according to FactSet data.

    Oil futures
    CLV23,
    +0.03%
    BRNX23,
    -0.03%
    traded at their highest levels of the year on Monday morning, a week after Russia and Saudi Arabia caught markets off guard with their output cut extension announcements, but they settled modestly lower on Monday afternoon.

    See: Energy ETFs are outshining the S&P 500, but it’s not just because of the oil rally

    Stoltzfus in late July projected the S&P 500
    SPX
    would rise above its record high by the end of 2023, lifting his year-end price target for the large-cap index to 4,900 from an earlier 4,400 projection from December. It implies a 9.2% advance from where the S&P 500 settled on Monday, at around 4,487.

    See: S&P 500 has a new record high 2023 price target. Here’s a look at Wall Street’s official stock-market outlook.

    U.S. stocks finished higher on Monday, boosted by technology shares as Nasdaq Composite
    COMP
    advanced 1.1%. The S&P 500 was up 0.7% and the Dow Jones Industrial Average
    DJIA
    ended 0.3% higher, according to FactSet data. 

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  • Here’s an easy way to make a more concentrated play on the ‘Magnificent Seven’ stocks

    Here’s an easy way to make a more concentrated play on the ‘Magnificent Seven’ stocks

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    Investors in index funds have been well rewarded by a high concentration in the largest technology companies over the past decade. But there are also continuing warnings about the risk of such heavy concentrations, even in index funds that track the S&P 500. Solutions are offered to limit this risk, but if you expect Big Tech to continue to drive the broad market returns over the coming years, why not make an even more focused bet?

    Comparisons of three index-fund approaches highlight how successful concentration in the “Magnificent Seven” has been.

    The Magnificent Seven are Apple Inc.
    AAPL,
    +0.16%    ,
    Microsoft Corp.
    MSFT,
    +0.72%    ,
    Nvidia Corp.
    NVDA,
    -2.03%    ,
    Amazon.com Inc.
    AMZN,
    +2.17%    ,
    Alphabet Inc.
    GOOGL,
    -0.27%

    GOOG,
    -0.32%    ,
    Tesla Inc.
    TSLA,
    +9.37%
    and Meta Platforms Inc.
    META,
    +1.67%    .
    We have listed them in the order of their concentration within the Invesco S&P 500 ETF Trust
    SPY,
    which tracks the S&P 500
    SPX.
    The U.S. benchmark index is weighted by market capitalization, as is the Nasdaq Composite Index
    COMP
    and the Russell indexes.

    SPY is 27.6% concentrated in the Magnificent Seven. One way to play the same group of 500 stocks but eliminate concentration risk is to take an equal-weighted approach to the index, which has worked well for certain long periods. But here, we’re focusing on how well the concentrated strategy has worked.

    Let’s take a look at the group’s concentration in three popular index approaches, then look at long-term performance and consider what happened in 2022 as rising interest rates helped crush the tech sector.

    Here are the portfolio weightings for the Magnificent Seven in SPY, along with those of the Invesco QQQ Trust
    QQQ,
    which tracks the Nasdaq-100 Index
    NDX
    and the Invesco S&P 500 Top 50 ETF
    XLG
    :

    Company

    		 Ticker

    		 % of SPY

    		 % of QQQ

    		 % of XLG
    Apple Inc.

    		 AAPL,
    +0.16%         		7.05%

    		 10.85%

    		 12.46%
    Microsoft Cor.

    		 MSFT,
    +0.72%         		6.65%

    		 9.53%

    		 11.76%
    Amazon.com Inc.

    		 AMZN,
    +2.17%         		3.30%

    		 5.50%

    		 5.84%
    Nvidia Corp.

    		 NVDA,
    -2.03%         		3.02%

    		 4.44%

    		 5.33%
    Alphabet Inc. Class A

    		 GOOGL,
    -0.27%         		2.17%

    		 3.12%

    		 3.83%
    Alphabet Inc. Class C

    		 GOOG,
    -0.32%         		1.88%

    		 3.11%

    		 3.32%
    Tesla Inc.

    		 TSLA,
    +9.37%         		1.79%

    		 3.10%

    		 3.17%
    Meta Platforms Inc. Class A

    		 META,
    +1.67%         		1.77%

    		 3.60%

    		 3.12%
    Totals

    		  

    		 27.63%

    		 43.25%

    		 48.83%
    Sources: Invesco Ltd., State Street Corp.

    The same group of seven companies (eight stocks with two common share classes for Alphabet) is at the top of each exchange-traded fund’s portfolio, although the top seven for QQQ aren’t in the same order as those for SPY and XLG. QQQ’s weighting was changed recently as the underlying Nasdaq-100 underwent a “special rebalancing” last month.

    Here’s a five-year chart comparing the performance of the three approaches. All returns in this article include reinvested dividends.


    FactSet

    QQQ has been the clear winner for five years, but it is also worth noting how well XLG has performed when compared with SPY. This “top 50” approach to the S&P 500 incorporates many stocks that aren’t listed on the Nasdaq and therefore cannot be included in QQQ, which itself is made up of the largest 100 nonfinancial companies in the full Nasdaq Composite Index
    COMP,
    +0.45%    .

    Examples of stocks held by XLG that aren’t held by QQQ include such non-tech stalwarts as Berkshire Hathaway Inc.
    BRK.B,
    +0.77%    ,
    Johnson & Johnson
    JNJ,
    +0.79%    ,
    Procter & Gamble Co.
    PG,
    +0.94%    ,
    Home Depot Inc.
    HD,
    -0.12%
    and Nike Inc.
    NKE,
    -0.42%    .

    Now let’s go deeper into long-term performance. First, here are the total returns for various time periods:

    ETF

    		 3 Years

    		 5 Years

    		 10 Years

    		 15 Years

    		 20 Years
    SPDR S&P 500 ETF Trust
    SPY     		40%

    		 69%

    		 223%

    		 370%

    		 531%
    Invesco QQQ Trust
    QQQ     		41%

    		 113%

    		 430%

    		 882%

    		 1,158%
    Invesco S&P 500 Top 50 ETF
    XLG     		41%

    		 85%

    		 262%

    		 404%

    		 N/A
    Source: FactSet

    Click on the tickers for more about each ETF, company or index.

    Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

    There is no 20-year return for XLG because this ETF was established in 2005.

    For five years and longer, QQQ has been the runaway leader, but for 5, 10 and 15 years, XLG has also beaten SPY handily, with broader industry exposure.

    Something else to consider is that during 2022, when SPY was down 18.2%, XLG fell 24.3% and QQQ dropped 32.6%.

    For disciplined long-term investors, the tech pain of 2022 may not seem to have been a small price to pay for outperformance. And it may have been easier to take the pounding when holding SPY or even XLG that year.

    Here’s a look at the average annual returns for the three ETFs:

    ETF

    		 3 years

    		 5 years

    		 10 years

    		 15 years

    		 20 years
    SPDR S&P 500 ETF Trust
    SPY     		11.8%

    		 11.0%

    		 12.4%

    		 10.9%

    		 9.6%
    Invesco QQQ Trust
    QQQ     		12.0%

    		 16.3%

    		 18.2%

    		 16.4%

    		 13.5%
    Invesco S&P 500 Top 50 ETF
    XLG     		12.2%

    		 13.1%

    		 13.7%

    		 11.4%

    		 N/A
    Source: FactSet

    So the question remains — do you believe that the largest technology companies will continue to lead the stock market for the next decade at least? If so, a more concentrated index approach may be for you, provided you can withstand the urge to sell into a declining market, such as the one we experienced last year.

    Here is something else to keep in mind. In a note to clients on Monday, Doug Peta, the chief U.S. investment strategist at BCA, made a fascinating point: “The only novel development is that all the heaviest hitters now hail from Tech and Tech-adjacent sectors and are therefore more prone to move together than they were at the end of 2004, when the seven largest stocks came from six different sectors. “

    Nothing lasts forever. Peta continued by suggesting that investors who are tired of big tech taking all the glory “need only wait.”

    “[I]f history is any guide, their time at the top of the capitalization scale will be short,” he wrote.

    Don’t miss: These four Dow stocks take top prizes for dividend growth

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  • Just how much is the AI discourse helping stocks? An analyst scoured earnings calls for clues

    Just how much is the AI discourse helping stocks? An analyst scoured earnings calls for clues

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    Talking about AI alone has been pixie dust for big technology stocks this year. And as executives look for any way to shoehorn AI into their business plans, more S&P 500 index companies during their second quarter earnings calls mentioned “AI” than at any point since at least 2010, according to a report published on Friday.

    What’s more, according to the report from FactSet, the companies talking about AI — even the ones that aren’t the big, obvious tech names — have seen their stocks fare better than shares of companies that haven’t.

    For S&P 500 companies that mentioned “AI” on their second-quarter earnings calls, shares on average since June 30 dipped 0.8%, while rising 13.3% since Dec. 31, FactSet said. For companies that didn’t talk about AI on those calls, shares on average fell a bit more since the end of June — 2.3% — while inching only 1.5% higher since the end of last year.

    “Even excluding the ‘Magnificent Seven’ (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla), the S&P 500 companies that cited ‘AI’ still outperformed the S&P 500 companies that did not cite ‘AI’ on average during these periods,” FactSet Senior Earnings Analyst John Butters said in the report.

    Meanwhile, Wall Street has long believed corporate America’s profits would rebound for the second half of 2023, after a year ruled by anxieties over inflation’s impact on the economy. Still, that collective bounce-back, as it has through this year, will hinge on strong results from the world’s biggest tech players.

    Wall Street analysts expect S&P 500 companies to eke out a 0.5% gain in per-share profit growth during the third quarter, according to the FactSet report. If that number holds, it would be the first quarter of earnings growth since the third quarter of last year.

    Those potential gains, however, will largely depend on results from Amazon.com Inc.
    AMZN,
    +0.28%    ,
    Meta Platforms Inc.
    META,
    -0.26%
    and Alphabet Inc.
    GOOG,
    +0.73%

    GOOGL,
    +0.83%
    — outsized companies with outsized influence on markets and S&P 500 company financials overall. Financials for those companies have rebounded this year, after big tech retrenched amid a drop-off in pandemic-related digital demand from people spending more time at home and online.

    This week in earnings

    Three years of supply disruptions have upended the economy and driven prices higher, forcing the Federal Reserve to embark on a delicate effort to bring them lower by discouraging borrowing and spending through a series of interest-rate hikes. But what about the impact on bowling? For answers, we turn to results this week from bowling-alley chain Bowlero Corp.
    BOWL,
    -3.43%    ,
    which saw a jump in demand following the economy’s reopening but now faces questions about that demand as it shows signs of returning to Earth. Convenience-store chain Casey’s General Stores Inc.
    CASY,
    +0.85%
    and homebuilder Lennar Corp.
    LEN,
    +0.50%
    also report.

    The call to put on your calendar

    Adobe results: Digital-media, analytics and design firm Adobe Inc. reports quarterly results on Thursday. But Mizuho analyst Gregg Moskowitz said his focus was on the company’s broader digital transformation.

    He cited stronger Web traffic, the potential for more deals with bigger customers, signs of improving trends in Adobe’s
    ADBE,
    -0.02%
    analytics segment, as well as the segment that includes design tools like Photoshop. But he said the company’s moves in generative AI could be “a significant growth driver.” Adobe this year unveiled Firefly, an AI image and text-enhancement model that can be incorporated into Adobe’s software. Moskowitz said that “while very early, our checks indicate an already high level of large customer interest in GenAI projects, including Firefly for Enterprise.” However, he said the company’s $20 billion acquisition of online design platform Figma was still “a big question mark,” as costs and regulatory scrutiny accumulate.

    The number to watch

    Oracle results, supply situation: Cloud and IT-network developer Oracle Corp.
    ORCL,
    +0.98%
    reports results on Monday. Like much of the tech world, Wall Street sees the company as an AI play. But UBS analysts said that as businesses race to secure the components that power AI, Oracle could have an “underappreciated edge” over rivals.

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  • These 6 Food Stocks Have Gotten Hit Hard. It’s Time to Chow Down.

    These 6 Food Stocks Have Gotten Hit Hard. It’s Time to Chow Down.

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    This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com.

    https://www.barrons.com/articles/6-beaten-down-food-stocks-buy-c93ad194

    • Order Reprints
    • Print Article

    Food stocks are worth a nibble after their worst showing relative to the


    S&P 500


    in …

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  • Nasdaq snaps four-day losing streak, but U.S. stocks book worst week in three

    Nasdaq snaps four-day losing streak, but U.S. stocks book worst week in three

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    U.S. stocks finished modestly higher on Friday, but Wall Street still suffered a losing week amid renewed concerns that the Federal Reserve may keep interest rates higher for longer. The S&P 500
    SPX,
    +0.14%
    booked a 1.3% weekly loss, while the Dow Jones Industrial Average
    DJIA,
    +0.22%
    fell 0.8% and the Nasdaq Composite
    COMP,
    +0.09%
    dropped 1.9% for the week. All three major indexes logged their worst weekly decline since August 18, according to Dow Jones Market Data. Meanwhile, investors looked ahead to inflation data, with readings on the consumer-price index and producer-price index next week expected to offer further clues on the central bank’s rate decision at its next policy meeting.

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  • Canopy Growth stock soars on heavy volume again, amid cannabis investor optimism over possible favorable legislation

    Canopy Growth stock soars on heavy volume again, amid cannabis investor optimism over possible favorable legislation

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    Shares of Canopy Growth Corp.
    CGC,
    +22.61%
    shot up 21.7% toward a near four-month high in very active afternoon trading, putting them on track for the fifth double-digit percentage gain in seven sessions. The stock has rocketed 130% over the past seven session. Trading volume was 107.7 million shares as of Friday afternoon, to mark the fourth 100+-million-share volume day in the past six sessions, while the average volume over the past 30 days was about 36.3 million shares. The stock’s surge comes as Senate Banking Committee chair Sherrod Brown said Wednesday that there is “an agreement imminent” on the SAFE Banking Act, according to a Politico report, which could make it easier for the financial industry to work with cannabis companies. Among other cannabis stocks, shares of Tilray Brands Inc.
    TLRY,
    +2.03%
    gained 2.4%, of Cronos Group Inc. climbed 6.0% and of Aurora Cannabis Inc.
    ACB,
    +14.75%
    jumped 12.5%. The AdvisorShares Pure US Cannabis ETF
    MSOS,
    +3.88%
    rose 7.5% on volume of 13.9 million shares, compared with the full-day average of about 5.6 million shares, while the S&P 500
    SPX,
    +0.14%
    slipped 0.1%. The cannabis ETF has soared 77% over the past seven sessions.

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  • Stock market’s 2023 run may hit roadblock after August’s energy-led boost to U.S. CPI

    Stock market’s 2023 run may hit roadblock after August’s energy-led boost to U.S. CPI

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    August was a hot month and it wasn’t just about the weather. Financial markets are now bracing for what’s likely to be a rebound in headline U.S. inflation next week, fueled by higher energy prices.

    Barclays
    BARC,
    +0.18%    ,
    BofA Securities
    BAC,
    +0.62%    ,
    and TD Securities expect August’s consumer price index to reflect a 0.6% monthly rise, up from the 0.2% monthly readings seen in July and in June. In addition, they put the annual CPI inflation rate at 3.6% or 3.7% for last month, which compares with the 3.2% and 3% figures reported respectively for the prior two months.

    While Federal Reserve policy makers and analysts are loath to read too much into one report, August’s CPI has the potential to disrupt expectations that getting back to the central bank’s 2% target will be easy. Inflation has instead been nudging back up since June, with the likely rebound in August being regarded as primarily driven by the energy sector. What now remains to be seen is how much longer energy prices will remain elevated and whether they’ll begin to feed into narrower measures of inflation that matter most to the Fed.

    Read: Stock-market investors just got reminded that the inflation fight isn’t over

    “We’re going to see a spike in gas prices and other commodity prices driven by supply cuts, which means headline CPI goes back up,” said Alex Pelle, a U.S. economist for Mizuho Securities in New York. Via phone on Friday, Pelle said that prospects for a hotter August CPI report have already been factored in by financial markets, with all three major U.S. stock indexes heading for weekly losses.

    How investors react to next Wednesday’s data will likely come down to whether the rebound in headline figures is seen as “a one-off” or something that gets repeated, and “what that means for the bottoming off of inflation,” Pelle said. “The equity market is going to have some trouble in the fourth quarter after a pretty impressive first half. Earnings expectations are still pretty high, but the macro-driven backdrop is challenging.”

    Rising energy prices in August have already spilled into the month of September, with gasoline reaching the highest seasonal level in more than a decade this week. Voluntary production cuts by Saudi Arabia and Russia are a major contributing factor curtailing the supply of crude oil into year-end, and Goldman Sachs has warned that oil could climb above $100 a barrel.

    In financial markets, there’s one group of traders which is telegraphing that the final mile of the road toward 2% inflation won’t be smooth.

    Traders of derivatives-like instruments known as fixings anticipate that the next five CPI reports, including August’s, will produce annual headline inflation rates above 3%. Though policy makers care more about core readings that strip out volatile food and energy prices, they’re aware of how much headline figures can impact the public’s expectations.


    Source: Bloomberg. The maturity column reflects the month and year of upcoming CPI reports. The forwards column reflects the year-ago period from which the year-over-year rate is based.

    At BofA Securities, U.S. economist Stephen Juneau said August’s CPI won’t necessarily change his firm’s view that inflation is likely to move lower next year and fall back to the Fed’s target without the need for a recession. BofA Securities expects just one more Fed rate hike in November and will maintain that view if August’s CPI report comes in as he expects, Juneau said via phone.

    After stripping out volatile food and energy items, BofA Securities, along with Barclays and TD Securities, expects August’s core CPI readings to come in at 0.2% month-over-month — matching June and July’s levels — and to fall to 4.3% on an annual basis.

    Based on core measures, August’s report wouldn’t “change the narrative all that much: Everything points to a moderation in price growth,” Pelle said. “There’s a reason why food and energy are typically excluded,” and “we don’t want to put too much stock into one month.”

    As of Friday afternoon, all three major U.S. stock indexes were headed higher, with the S&P 500 attempting to snap a three-day losing streak. Dow industrials
    DJIA,
    the S&P 500
    SPX
    and Nasdaq Composite
    COMP
    were respectively on track for weekly losses of 0.7%, 1.2%, and 1.7%. They’re still up for the year by more than 4%, 16% and 31%.

    Meanwhile, Treasury yields turned were little changed on Friday as fed funds futures traders priced in a 93% chance of no action by the Fed at its next policy meeting in less than two weeks, and a more-than-50% likelihood of the same for November and December — which would leave the Fed’s main policy rate target between 5.25%-5.5%.

    “There is a risk that investors are too complacent about the inflation report,” said Brian Jacobsen, chief economist at Annex Wealth Management in Elm Grove, Wis. “We might not get to 2% inflation as quickly as many hope.”

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