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Technology Stocks : Semi Equipment Analysis
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Market Snapshot

Dow 32952.99 +41.52 (0.13%)
Nasdaq 12436.66 +55.40 (0.45%)
SP 500 4138.71 +9.91 (0.24%)
10-yr Note

NYSE Adv 1946 Dec 1182 Vol 728 mln
Nasdaq Adv 2640 Dec 1884 Vol 3.8 bln

Industry Watch
Strong: Energy, Real Estate, Industrials, Consumer Discretionary

Weak: --

Moving the Market
-- Uncertainty ahead of Fed Chair Powell's speech at Jackson Hole symposium Friday

-- Rising oil prices

-- Disappointing earnings results from consumer facing companies

-- Rising Treasury yields

Closing Summary
24-Aug-22 16:25 ET

Dow +59.64 at 32971.11, Nasdaq +50.23 at 12431.49, S&P +12.04 at 4140.84
[BRIEFING.COM] Today's trade had a positive bias that left the major indices with modest gains, snapping a three-session losing streak. The market was stuck in a narrow range as participants await Fed Chair Powell's speech at the Jackson Hole symposium on Friday. Rising Treasury yields and oil prices acted as a limiting factor.

Notwithstanding the modest gains, buying interest was relatively broad-based. Advancers lead decliners by a 5-to-3 margin at the NYSE and a 14-to-9 margin at the Nasdaq.

All 11 S&P 500 sectors closed in the green with gains ranging from +0.04% (information technology) to 1.2% (energy).

The mega caps stocks edged ahead of the broader market with the broader market and growth stocks edged ahead of value stocks. The Vanguard Mega Cap Growth ETF (MGK) closed up 0.4% versus a 0.3% gain in the S&P 500. The Russell 3000 Growth Index was up 0.5% and the Russell 3000 Value Index was up 0.3%.

Small cap and mid cap stocks stood out as the Russell 2000 (+0.8%) and S&P Mid Cap 400 (+0.5%) closed ahead of their peers.

On an individual basis, Nordstrom (JWN 18.57, -4.63, -19.96%) and Intuit (INTU 465.77, +16.21, +3.6%) were notable standouts after the companies reported quarterly results. Both names beat top line estimates but the former cut its full-year guidance while the latter issued pleasing full-year guidance.

WTI crude oil futures had a volatile session and settled up 1.1% at $94.83/bbl. This propelled the energy sector (+1.2%) to first place on the day. Natural gas futures rose 0.1% to $9.26/mmbtu.

Separately, President Biden announced a plan to forgive up to $10,000 in federal student loan debt for borrowers earning less than $125,000 per year (or less than $250,000 per year for married couples filing jointly).

Hawkish Fed speak drove Treasury yields higher today. Minneapolis Fed President Neel Kashkari (2023 FOMC voter) said he thinks the Fed needs to remain vigilant with tightening efforts, lest it run a risk of inflation expectations becoming unanchored, according to The Wall Street Journal. The 2-yr note yield rose nine basis points to 3.37% while the 10-yr note yield rose five basis points to 3.11%.

Ahead of Thursday's open Abercrombie & Fitch (ANF), Dollar General (DG), Dollar Tree (DLTR), and Peloton (PTON) all report earnings.

Looking ahead to Thursday, market participants will receive the Q2 GDP second estimate ( consensus -0.9%; prior -0.9%), Q2 GDP Deflator second estimate ( consensus 8.7%; prior 8.7%), weekly Initial Claims ( consensus 253,000; prior 250,000), and Continuing Claims (prior 1.437 mln) at 8:30 am. ET. Weekly natural gas inventories (prior +18 bcf) are out at 10:30 a.m. ET.

Reviewing today's economic data:

  • Weekly MBA Mortgage Applications Index -1.2%; Prior -2.3%
  • July Durable Orders 0.0% ( consensus 0.6%); Prior was revised to 2.2% from 1.9%; July Durable Orders, Ex-Transportation 0.3% ( consensus 0.1%); Prior 0.3%
    • The key takeaway from the report is that business spending continued to increase, evidenced by the 0.4% increase in nondefense capital goods orders excluding aircraft, which followed increases of 0.9% in June and 0.5% in May.
  • July Pending Home Sales -1.0% ( consensus -3.0%); Prior was revised to -8.9% from -8.6%
Dow Jones Industrial Average: -9.3% YTD
S&P 400: -10.2% YTD
S&P 500: -13.1% YTD
Russell 2000: -13.8% YTD
Nasdaq Composite: -20.5% YTD

Market modestly higher into close
24-Aug-22 15:30 ET

Dow +76.17 at 32987.64, Nasdaq +73.90 at 12455.16, S&P +15.85 at 4144.65
[BRIEFING.COM] The market is trending modestly higher into the close.

Autodesk (ADSK), NetApp (NTAP), NVIDIA (NVDA), Salesforce (CRM), Snowflake (SNOW), Splunk (SPLK), and Williams-Sonoma (WSM) all report earnings after the close.

Ahead of the open Abercrombie & Fitch (ANF), Dollar General (DG), Dollar Tree (DLTR), and Peloton (PTON) all report earnings.

Market participants will receive the Q2 second estimate ( consensus -0.9%; prior -0.9%), Q2 GDP Deflator second estimate ( consensus 8.7%; prior 8.7%), weekly Initial Claims ( consensus 253,000; prior 250,000), and Continuing Claims (prior 1.437 mln) at 8:30 am. ET. Weekly natural gas inventories (prior +18 bcf) is out at 10:30 a.m. ET.

Market trends sideways
24-Aug-22 15:05 ET

Dow +41.52 at 32952.99, Nasdaq +55.40 at 12436.66, S&P +9.91 at 4138.71
[BRIEFING.COM] As President Biden speaks about his student loan debt forgiveness plan, the major indices remain in a narrow range.

Small cap stocks are outpacing the broader market with the Russell 2000 showing the biggest gain, up 0.7%.

Meanwhile, only the S&P 500 materials sector trades in negative territory, down 0.1%.

WTI crude oil futures settled this volatile session up 1.1% to $94.83/bbl. Natural gas futures rose 0.1% to $9.26/mmbtu.

Separately, the CBOE Volatility Index is down 4.9% to 22.94.

Illumina, Netflix outperform in S&P 500
24-Aug-22 14:30 ET

Dow +34.32 at 32945.79, Nasdaq +59.05 at 12440.31, S&P +9.28 at 4138.08
[BRIEFING.COM] The benchmark S&P 500 (+0.22%) is firmly in second place to this point on Wednesday afternoon.

S&P 500 constituents Illumina (ILMN 211.75, +16.91, +8.68%), Norwegian Cruise Line (NCLH 13.91, +1.06, +8.25%), and Netflix (NFLX 230.89, +6.34, +2.82%) pepper the top of the standings despite a dearth of corporate news.

Meanwhile, Georgia-based household products firm Newell Brands (NWL 20.00, -0.77, -3.71%) is today's second-worst performer.

Gold ends little changed on Wednesday
24-Aug-22 14:00 ET

Dow +18.63 at 32930.10, Nasdaq +55.96 at 12437.22, S&P +7.32 at 4136.12
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (+0.45%) remains in front among the major averages.

Gold futures settled $0.30 higher (flat) to $1,761.50/oz), little changed a day after snapping a six-session losing streak.

Meanwhile, the U.S. Dollar Index is up less than +0.1% to $108.67.

oll Brothers' earnings report looks like a fixer upper, but closer look reveals some promise (TOL)

After a spate of recent bad news for the housing market, expectations for Toll Brothers' (TOL) Q3 earnings report were subdued, as evidenced by the stock's 7% drop since last week. As anticipated, the luxury home builder encountered a challenging environment as rising mortgage rates, macroeconomic uncertainty, and a volatile stock market weighed on demand. Consequently, deliveries decreased by 7% yr/yr to 2,414, causing TOL to come up short versus Q3 revenue expectations. Perhaps even more troubling, quarterly cancellations as a percentage of signed contracts in the quarter skyrocketed to 13.0% from 3.1% in the year-ago quarter.

That surge in cancellations came even as TOL ramped up its incentives for home buyers. Specifically, the company disclosed that August incentives averaged about $30K, compared to $22K in July, and $15K in June. The more generous incentives had a limited effect on cancellations, though, and they also didn't spark much demand -- at least not initially. Net signed contracted homes in Q3 plunged by 60% yr/yr to 1,266. Furthermore, TOL trimmed its FY22 delivery guidance for the second time this year. After lowering its delivery forecast to 11,000-11,500 from 11,250-12,000 last quarter, TOL is now guiding for deliveries of 10,000-10,300.

Despite the weakening demand and revenue miss, TOL still managed to beat EPS expectations. It's worth noting that the size of the beat was TOL's smallest over the past ten quarters. However, the earnings outperformance is still a positive takeaway because it highlights the company's ability to drive strong margins in a tough market. Even while facing labor shortages, rising raw material costs, and a shift towards a buyer's market, adjusted home sales gross margin expanded by 230 bps yr/yr to 27.9%. Although the company became more promotional later in the quarter, the average price per home in backlog grew by 17.9% yr/yr to $1.04 mln, pushing margins higher.

The improved home sales gross margin, and accompanying EPS beat, seem to be the lone bright spots in an otherwise dismal report. Therefore, it seems strange that TOL is trading higher, but there are a couple explanations for the stock's strength.

  • Most importantly, CEO Douglas Yearley commented that TOL is seeing signs of increased demand in recent weeks as sentiment improves and as buyers return to the market. He added that average weekly deposits during the first three weeks of August were up 25% versus July. This is an encouraging development, indicating that the easing of inflationary pressures is boosting home buyer sentiment.
  • TOL is projecting adjusted home sales gross margin to increase by another 130 bps sequentially to 29.2% in Q4. That bodes well for TOL's earnings expectations, especially if deliveries begin to accelerate.
Like a teardown home that's in need of major renovations, TOL's quarterly report had plenty of blemishes and delinquencies. However, also like a teardown home, there is a promise for better days ahead, thanks to a recent strengthening of demand.

Intuit is "QuickBooking" higher on strong JulQ report, easing concerns about macro headwinds (INTU)

Intuit (INTU +6%) shares are nicely higher after the financial software giant reported a strong Q4 (Jul) earnings beat. It also provided in-line guidance for FY23, but its Q1 (Oct) guidance was below analyst expectations.

With its focus on small businesses and consumers (TurboTax, QuickBooks, Mint, Credit karma, Mailchimp), we had some concerns that its clients may pull back on subscriptions as they face macro headwinds like inflation etc. However, its business seems to be performing well overall. In addition, Intuit increased its dividend by 15% and added $2 bln to its share repurchase program, which was very reassuring to investors.

  • Intuit saw a yr/yr decline in EPS and revenue, but that was more of a timing issue because in 2021, the IRS pushed the tax filing deadline to May 17, which led to much higher TurboTax sales in last year's JulQ. Small Business and Self-Employed Group was the best performing segment with revenue up 41% yr/yr, and up 20% organically (excluding Mailchimp).
  • Intuit calmed some nerves by addressing the elephant in the room: the resiliency of its business amid a slowing macroeconomic environment and amid its high exposure to small business customers (51% of revs). Intuit stresses that it is a significantly different company than it was during the last recession more than a decade ago. It now enjoys highly predictable recurring revenue, and much of its business is now subscription-based.
  • INTU also says its tax businesses are very resilient, and it does not expect a mild recession to have any significant impact. Outside of tax, INTU says QuickBooks and Mailchimp are mission-critical for its customers whose livelihoods depends on its platform. Notably, approximately 80% of its Small Business and Self-Employed Group revenue is subscription-based.
  • An area of possible concern is Credit Karma, which INTU concedes may become impacted by higher rates and lenders possibly tightening access to credit. However, this business represents just 14% of FY22 revenue and personal loans are just a third of segment revenue. Also, its credit cards unit has not seen any significant impact. Credit Karma revenue in Q4 grew 17% to a record $475 mln, which backs up INTU's mostly positive outlook.
Overall, INTU closed out FY22 on a high note. The Q1 guidance is a bit worrisome, but we think investors are focusing more on the solid FY23 overall guidance. Intuit does have a lot of exposure to small businesses, but the company counters that its platform is deeply embedded with these people and their business is their livelihood, so a significant cutback seems unlikely. The area we will watch most closely is in the coming quarters is Credit Karma. INTU was more positive on that segment's outlook than we were expecting, which is helping the stock today. Finally, the dividend raise and share buyback increase are boosting the stock as well and are a sign of INTU's near term confidence.

Nordstrom shares hit the sales rack after it cuts outlook as low-priced inventory piles up (JWN)

Hopes that Nordstrom (JWN) would follow the same path as Macy's (M) and rally after delivering a better-than-feared Q2 report were dashed last night when the company's results and outlook were released. While JWN managed to edge past EPS expectations, sales significantly slowed late in the quarter, prompting the company to cut its FY23 guidance.

The lowered outlook doesn't come as a surprise after Macy's, Kohl's (KSS), and Target (TGT) also revised their fiscal year forecasts lower. However, the severity of the EPS guidance cut may be catching investors off-guard, especially in light of the solid results from Macy's higher-end Bloomingdale's brand.

Macy's earnings report was far from pristine, but one notable bright spot was the 8.8% comparable sales increase (owned basis) for Bloomingdale's. The solid performance was viewed as a bullish sign for JWN, indicating that inflation wasn't preventing more affluent consumers from updating wardrobes and shopping for discretionary items. That presumption was indeed accurate as sales at JWN's Nordstrom banner increased by nearly 15%, although a timing shift for its Anniversary Sale did positively impact sales by 400 bps.

Overall, though, the Nordstrom banner posted healthy results with both men's and women's apparel generating double-digit growth over last year, led by suiting, dresses, shoes, and occasion-based items. The problem is that JWN's discount banner, Nordstrom Rack, experienced a more meaningful deceleration in demand than anticipated, especially towards the end of Q2.

  • In July, sales decelerated by nine percentage points at Nordstrom Rack, compared to the first two months of the quarter. CEO Erik Nordstrom attributes this softening to the lower-income customer profile at Rack, relative to the Nordstrom brand. The fact that higher-priced premium products substantially outperformed lower-priced products in Q2 lends credence to that assertion.
  • Like many other retailers, including Macy's, JWN is contending with higher inventory levels (+9.9% yr/yr), forcing it to become more promotional in order to clear product from its shelves. During the earnings conference call, Erik Nordstrom stated that the company will take aggressive action to remove excess inventory in 2H23.
    • The "ripping the band-aid off" approach is the right move, in our view, but it will have a considerable near-term negative effect on JWN's financials.
    • In the second half of the year, JWN expects that its clearance and markdown activity will reduce gross profit by about $200 mln, resulting in an EBIT margin that's 200 bps below last year's Q3 EBIT margin of 3.5%.
    • Accordingly, the company slashed its FY23 EPS guidance to $2.30-$2.60 from $3.20-$3.50 and dropped its revenue growth forecast to 5-7% from 6-8%.
  • From a big picture perspective, unless JWN can improve the performance at Rack, the company will struggle to meet its potential. Rack accounts for over 30% of JWN's total sales, so, righting the ship is a priority.
    • A major component of the turnaround plan is to shift away from lower price point items and to bring in more premium brands, including those that are currently sold at Nordstrom.
Although both Macy's and JWN lowered their FY23 guidance, JWN is not receiving the same positive treatment that Macy's received yesterday. The primary reason why is that JWN's Rack brand -- which attracts a similar customer base as KSS -- continues to cast an overhang on the stock. Investors have more confidence that Macy's will recover faster and more easily than JWN since it's not attempting to execute a turnaround for one of its major brands.

Advance Auto stalls out following an EPS and sales miss in Q2 along with reduced FY22 guidance (AAP)

By registering its second consecutive earnings miss in Q2, growing sales by less than analysts expected, and trimming its FY22 outlook, Advance Auto (AAP -9%) is stalling out today. The auto parts retailer's Q2 report closely emulates competing firm O'Reilly Automotive (ORLY), which missed earnings and sales estimates in Q2 and lowered its FY22 projections.

Much of the woes that troubled AAP in Q2 showed up for ORLY, including inflationary pressures dampening consumer sales. On the flip side, AAP received a lift from some of the same positives ORLY experienced. However, part of AAP's struggles in the quarter was its own doing, which is not resonating with investors today.

  • Headline numbers were mild; adjusted EPS grew by just 10% yr/yr to $3.74, barely missing estimates, which was also true for AAP's revenue growth of 1.9% to $2.7 bln. Meanwhile, comparable store sales fell by -0.6%.
  • Soft sales growth in Q2 was primarily fueled by consumers deferring more discretionary repairs, dinging DIY sales. For example, less discretionary repairs, what AAP classifies as failure DIY categories, such as batteries and brakes, performed relatively well in the quarter. However, repairs that could be more easily deferred, such as appearance chemicals and accessories, lagged in Q2.
    • ORLY endured a similar scenario in Q2 but expressed optimism that very little of the demand in the automotive aftermarket industry is genuinely discretionary, and less important repairs can only be put off for so long.
  • As expected, AAP's professional business partially offset the weakness from DIY in Q2. Recall that one of the standouts from ORLY's Q2 report was double-digit professional comps. However, AAP's deliberate move to increase its own-brand penetration, which commands a lower price point, reduced total comp growth by roughly 1 point, with a disproportionate impact on the professional business.
  • AAP's private labels acted as a double-edged sword in Q2. Despite taking a bite out of comp growth, they boosted adjusted gross margins 166 bps yr/yr to 48% and adjusted operating margins 34 bps to 11.7%.
    • However, AAP still trimmed its FY22 adjusted operating margins guidance to 9.8-10.0%, from 10.0-10.2%.
  • Looking ahead, AAP expects continued softness in DIY discretionary categories despite a recent moderation in fuel prices and overall inflation, which remains considerably higher on a yr/yr basis. As a result, the company slashed its FY22 guidance, forecasting earnings of $12.75-13.25, down from $13.30-13.85, revs of $11.0-11.2 bln, from $11.2-11.5 bln, and comps of negative 1% to flat, a reduction from its previous target of +1-3% growth.
Overall, despite a lowered bar following ORLY's underwhelming Q2 numbers earlier this month, AAP's Q2 numbers did not spark much confidence that the worst of its headwinds were in the rear-view mirror. It also does not help that AAP was not overly confident in achieving its 2023 operating margin target of 10.5-12.5%. Management stated that it believes it can reach its FY23 margin goal but cautioned that it will be challenging given the current inflationary environment.

J.M Smucker spreads on another earnings beat, fueled by strong pricing power and brand loyalty (SJM)

J.M. Smucker (SJM) may be getting sandwiched between inflationary pressures and the ongoing impact from its Jif peanut butter recall, but that didn't prevent the company from posting a solid beat-and-raise quarterly report. The packaged food company, which owns other well-known brands like Folgers coffee, Smucker's Jam, and Milk-Bone dog treats, navigated around these headwinds by implementing price increases across its portfolio. SJM's ability to raise prices is a reflection of the durability of the eat-at-home trend. It also highlights a healthy degree of brand loyalty since consumers could easily trade down to lower-cost private label brands.

Despite the challenges facing SJM, expectations were still relatively high heading into the print, as illustrated by the stock's 12% run higher since late June. Raising the bar for the company was a strong earnings report from General Mills (GIS) on June 29, followed by a beat-and-raise report from Kellogg (K) on August 4. The results from those two competitors confirmed that the eat-at-home movement was alive and well. Additionally, the impressive performance of GIS's Blue Buffalo Pet segment, which generated organic sales growth of 22%, provided a bullish signal for SJM.

  • SJM's Retail Pet Foods segment is currently the company's largest business at 39% of total 1Q23 net sales. In this inflationary environment, that works in SJM's favor because pet owners are willing to absorb higher prices for their pets. Accordingly, the Retail Pet Foods segments posted net sales growth of 13%, while segment profit margin expanded by 420 bps yr/yr to 16.5%.
    • Higher net price realization increased net sales by 20 percentage points, more than offsetting a 3-percentage point drop in volume/mix.
  • Across the entirety of the business, volume/mix slid by 9 percentage points, resulting in SJM's top-line growing by a paltry 0.8% to $1.87 bln. This volume/mix decline is attributable to the Jif peanut butter recall from last May, which also resulted in manufacturing downtime and production inefficiencies. Consequently, non-GAAP gross margin contracted by 340 bps yr/yr to 31.4%.
  • The Jif recall is wreaking havoc on the U.S. Retail Consumer Foods segment. Net sales plunged by 29% to $311.1 mln and segment profit margin collapsed by 960 bps yr/yr to 17.6%. Unfortunately, SJM expects the recall to impact its results for the remainder of the fiscal year, even though it resumed manufacturing of Jif products at the affected Lexington facility in June.
  • However, since the issues revolving around the recall are already well-known, many investors are looking beyond this issue. Instead, SJM's better-than-expected bottom-line performance and the accompanying improved FY23 guidance are the main focal points. The company now expects to generate EPS of $8.20-$8.60 and net sales growth of 4-5%, compared to its prior forecast of $7.85-$8.25, and 3.5-4.5%, respectively.
    • Along with positive net price realizations, especially in the pet food business, SJM's earnings are benefiting from solid expense management in a rising cost environment. In Q1, Marketing expenses declined to 5.1% of total sales from 5.3% in the year-earlier quarter. Total sales were up a manageable 6% yr/yr to $343.8 mln.
The main takeaway is that SJM is displaying solid pricing power, which showcases the strength of the company's brands and enables it to overcome rising commodity costs. With the Jif peanut butter recall still battering the retail foods business, SJM is far from firing on all cylinders. As the impact of the recall gradually subsides, though, SJM's earnings performance looks poised to substantially improve as the eat-at-home trend continues, and as strength in the pet food category fuels its growth.

Last Updated: 19-Aug-22 15:49 ET | Archive
Fundamental support factors still lacking
When publishing updated market views, we sometimes pick up where we left off. That is precisely what we will do today.

Here is the parting thought from the Market View we published on May 20:

Stock prices have come down a lot, which leaves them ripe for a tactical rally effort, yet earnings estimates have not come down at all. They will, which is why today's discounted P/E multiple can't be looked at unequivocally as being cheap and why sentiment-driven rallies will eventually hit a wall of fundamental resistance.

Following that post, the S&P 500 declined another 6.8% to its intraday low on June 17, leaving it down 23.7% for the year. In other words, the expected tactical rally effort was deferred, but as everyone knows, it was not denied.

The S&P 500 is now down "just" 11.2% for the year, having rallied off the June 17 low in a fast and furious manner but leaving it on a collision course with a wall of fundamental resistance.

Looking Back at Forward-Thinking Market

Before moving forward with our market view, it is imperative that we look back at why there was such a shift in sentiment.

The succinct answer is that there was a collective acceptance of the idea that the market got too bearish during the selloff in the first half of the year. The acceptance of that view had three, proximate catalysts.

The first was a belief that the Federal Reserve might not have to get as restrictive with monetary policy as had been previously feared. Ironically, that was because the incoming economic data was exposing a clear deterioration in economic activity. GDP was negative in both the first and second quarters.

The second catalyst was a BofA Global Fund Manager Survey that revealed the most underweight position in equities since the Lehman Bros. crisis in 2008 and the highest cash levels since 2001. That was contrarian fuel poured on a rebound fire that was already burning.

The third catalyst was an emerging belief that the Federal Reserve might be able to manage a soft landing for the economy after all. That view was aided by the arrival of better-than-feared earnings results for the June quarter, a welcome dose of disinflation in July, and a remarkably good employment report for July that featured a 528,000 increase in nonfarm payrolls.

The confluence of these forces got the rebound streams flowing. The current then ran faster on the peak inflation/peak Fed narratives which filtered trading excitement into many tributaries that included mega-cap stocks, cryptocurrencies, growth stocks, and meme stocks.

Almost nothing has been left behind. All 11 S&P 500 sectors are higher quarter-to-date and 89% of S&P 500 stocks are above their 50-day moving average (88% of S&P 500 stocks were trading below their 50-day moving average when we published our Market View in May). The CBOE Volatility Index, which hit 33.31 on June 17, fell below 20.00 a few weeks ago.

It has been a rush of rebound excitement, exacerbated by short-covering activity and "flat squeezes," which is to say sidelined investors sitting on cash have been compelled to put it to work out of fear of missing out on further gains.

Generally speaking, since June 17 it has not paid to be bearish. The S&P 500 hit 3,636.87 that day and late last week it hit 4,325.28, stopping just shy of key technical resistance at its 200-day moving average.

What's Next?

The question on everyone's mind is, what's next? Is there a breakout or a breakdown? It is conceivable that we will see neither. The market could display more lateral movement, taking some extra time to consolidate its recent gains. Fundamentally, though, the support factors for a breakout are lacking.

    The Federal Reserve, with a stated aim of weakening demand, is going to continue to raise policy rates.The CPI and PPI inflation rates are still far too high, and have been matched, or exceeded, in other parts of the world.

    Quantitative tightening (i.e., an effort to reduce the size of the Fed's balance sheet) is going to ramp up.Excluding the Bank of Japan and the People's Bank of China, central banks around the world are aggressively raising policy rates to fight inflation. Earnings estimates have not been cut sufficiently to account for a more challenging economic environment.Real disposable personal income is negative at a time when the personal savings rate is at its lowest since 2009.

    A growing list of companies have announced plans to slow their hiring activity or to cut jobs.China continues to embrace a zero-COVID policy, which creates a persistent risk of manufacturing shortfalls, weaker trade activity, and supply chain bottlenecks.The U.S. dollar continues to be a force against other major currencies, which is a headwind for U.S. multinational companies and emerging market economies.

    The housing sector is cooling off rapidly as rising mortgage rates have created added affordability pressures.(Geo)political uncertainty is rising with the mid-term elections approaching and the U.S. and China at odds over Taiwan.Europe continues to be confronted with an energy crisis, and possible recession, given Russia's ongoing war with Ukraine.Consumer confidence and business confidence have deteriorated, weighing on spending plans.The market is not cheap at 18.2x forward 12-month earnings estimates. That is a modest premium to the 10-year average (17.0), according to FactSet data, before any additional cuts to earnings estimates and with market rates expected to press higher.

Not Your Average Year

There has been some welcome improvement with energy prices, particularly gasoline prices. They have pulled back noticeably, which is helpful for consumers' psyche if not entirely for their budget. The current national average for regular gasoline is $3.918/gallon, according to AAA. That's down 12.8% from $4.495/gallon a month ago and down 21.9% from the highest recorded average of $5.016 on June 14, but it is still up 23.3% from the year-ago average.

Costs for most goods and services are still up significantly from a year ago, which is why various Fed officials have emphasized that the Fed is a long way from declaring victory over inflation.

The current target range for the fed funds rate sits at 2.25-2.50%. The projections provided by the Fed following its June 15 meeting show a median fed funds rate of 3.80% for 2023, meaning there could be at least another 125-150 basis points worth of rate hikes on the way.

The debate right now is whether the Fed will raise by 50 basis points or 75 basis points at its September 20-21 FOMC meeting and when it will ultimately pivot to a rate-cut cycle. The prevailing mantra at the Fed seems to be "higher for longer," whereas the stock market wants to believe the target range for the fed funds rate will only be "higher for shorter."

The Treasury market isn't wrapped up in that idea so much as it appears to be wrapped in concerns about the economic outlook. The inverted yield curve reflects a belief that there will be a significant slowdown in the economy, if not an actual recession, that is sparked by the Fed's aggressive rate hikes.

How that translates for stocks remains to be seen, but if the Treasury market is right, then it will become clear that earnings estimates are too high.

Those estimates have come down some, yet it has been a fairly stubborn downward revision. The forward 12-month EPS estimate reached $238.15 on June 27, according to FactSet. Today, it sits at $230.79, down just 3.1% from that peak. For calendar year 2022, S&P 500 EPS growth is still projected to be 6.0% versus 9.2% when the year began.

The point is that current earnings growth projections are a long way from recession territory, meaning they would have much more room to fall if a recession came to pass.

Frankly, a projection for 6.0% growth is closer to an average year, and we would submit that this is anything but an average year with the inflation rate still at 8.5%, Russia at war with Ukraine, natural gas prices hitting a 15-year high, consumer sentiment recently hitting an all-time low, the yield curve inverted, and the Fed wanting to use its rate hikes to create some softness in the labor market.

What It All Means

The stock market scaled a wall of worry off its June 17 lows. It did so helped in part by a recognition that things were not as bad as feared on the economic and earnings fronts.

Of course, that is different than saying things are good on the economic and earnings front. They are not. There are cracks in both that will create more challenging conditions on further climbing efforts.

This stock market needs the Fed on its side. It does not have that yet. This stock market needs confidence that the prevailing earnings revision will be higher. It does not have that yet. This stock market needs a positively sloped yield curve. It does not have that yet. This stock market needs an inflation rate closer to 2.0%. It does not have anything close to that yet. This stock market needs further energy price relief. It does not have that yet.

Sentiment has taken this stock market a long way in a short period of time, but this stock market needs a lot more fundamental support to achieve a sustainable breakout from here. That support is still lacking.

-- Patrick J. O'Hare,

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