“A lot of people, when they get negative on the market, put 50% in cash, but unfortunately a lot of times when you get to that position, it’s just about when the market’s going to rally.” -- Peter Lynch

Good evening:

At the end of 2022, Head of Research Tom Lee forecast that the S&P 500 would rise more than 900 points to end 2023 at 4,750. This week, the S&P 500 briefly broke past the 4,325 mark, putting us ahead of schedule as we head toward the year’s midpoint. Pundits have admitted that Lee has been right for months: We believe a bull market has been underway for months, and now it’s official, with the benchmark index up about 20% since the Oct. 12, 2022 low. 

In his 2023 Outlook, Lee called for Tech to lead the way, just as it has through the first five months of the year. Yet some, including our Head of Global Portfolio Strategy and Asset Allocation Brian Rauscher, have noted that although FAANG stocks have done well, the rest of the market had not shown similar strength in 2023. 

That has changed. As Head of Technical Strategy Mark Newton noted at our weekly huddle, “The key takeaway for this week is that the market has started to broaden out in terms of its rally. In recent months, it was largely just technology that had been participating off the March lows, and that is now changing.” He asserted, “That's actually a good thing.”

“Breadth has improved,” Newton observed. “The percentage of stocks above their 20-, 50- and 200-day moving averages have all shown really nice pickups in the last couple of weeks so that's also a good sign.”

Along with this has been a noticeable – if not extreme – change in sentiment. “This rally hasn't gone unnoticed. For the first time literally almost all year we now see more bulls than bears on AAII.”

“But when you look at CFTC data, when you look at the hedge funds, they're still shorting into this at the highest levels we've seen in two decades, so they still don't believe,” Newton added.

This reinforces Lee’s continued bullish conviction. The hedge-fund short positions, along with more than $5 trillion in cash investors have parked on the sidelines, make for a lot of dry tinder that can fuel an explosive response upwards once the data makes a clear,  positive shift – as Lee predicts it will.

When speaking of specific sectors, Newton noted that Materials, Industrials, Consumer Discretionary, and Energy have picked up the pace in the last week. Newton said, “Energy is a work in progress but XOP, which is the oil exploration and production part of Energy, has broken out as of Wednesday. So this is interesting because crude is trying to stabilize after the news about the Saudi output cut. This is the area you want to be in, if you want to be in energy.”

Rauscher was not quite as sanguine about the overall sector. Based on his work, “Energy continues to look weak,” he told us at our weekly huddle. Yet he was not completely bearish on it, either: “I still think before year-end it will kick in and be a full buy. But it does not look ready now.”

Industrials, another sector Lee has highlighted for this year, also did well this week. With global PMIs looking like they are bottoming, Lee believes that the sector is “getting new traction.” Newton and Rauscher both agree that the sector has rebounded. Even Rauscher had doubts about the sector’s fundamentals, he conceded that “Industrials are looking like they're acting well.” 

One Industrials company that stood out for all three: Boeing (BA 1.30% ). Boeing has had some “great moves in recent days,” Newton observed. Rauscher agreed: “I’ve liked Boeing all year.” Tom Lee also highlighted Boeing as one of the strongest Industrial stocks in the S&P 500 this week. 

Apple’s Latest 

Apple (AAPL 0.62% ) comprises 7% of the S&P, so it’s little surprise that the market paid close attention to the company’s Worldwide Developers Conference (WWDC) in Cupertino on Monday. Amidst the iterative improvements to iOS, Macbook, and watchOS, the star of the show was definitely Vision Pro, a headset/visor meant to spark wider adoption of what it calls “spatial computing,” with shades of augmented and virtual reality mixed in. 

The Street was not immediately excited (perhaps because the device’s $3,500 price tag will likely limit mass adoption). As Newton noted, “Apple made a new weekly and monthly all-time high, close as of the end of May, and now thus far has been last couple days have been churning.”

Still, Newton noted, “I don't make much of that. I think Apple goes to $190. That should be good for the S&P obviously if that continues to move up. My cycle on Apple shows a move up into the latter part of June before a pullback.”

Coinbase and Binance

Although bitcoin and other cryptocurrencies fell sharply after the SEC announced it was taking enforcement action against Binance and Coinbase in the first half of the week, they subsequently recouped much of that. “Both moves were pretty well-telegraphed,” explained Head of Crypto Strategy Sean Farrell. “The SEC is going to do what they can to stifle the onramps for crypto, but ultimately, it's up to the courts to decide whether there is legitimacy or constitutionality behind these lawsuits. One way or another – whether it's through Congress or by litigating these lawsuits – the good news is we'll finally have clear rules of engagement around crypto, and I think the markets will really like that.”

Other observations from Lee this week:

• What companies will benefit from AI in the next decade? Lee says, “It’s a challenging question. It’s not as easy as you’d think. Right now, people need GPUs, and that’s why Nvidia is doing so well. But let’s think back to 1999, 2000 and we said what companies are poised to benefit from the internet? I think a lot of people would have said, oh, well, it’s the companies that make the plumbing for the Internet that would do well. And they did well for a while, but then a lot fell to the wayside. .. the companies that made money were the ones that made the internet a lot more accessible. They were essentially on-ramps, companies like Amazon, which provided e-commerce.  So, in an AI world, there are going to be many winners. For now, I would stick with FAANG, and that’s been our recommendation.”
• On the looming commercial real estate crisis: “I think there is going to be a crisis in commercial real estate, but I don’t think it’s as clear that there’s a crisis for banks. We already have too many empty office buildings. Values have dropped. Banks have been somewhat protected [this time] because a lot of these loans haven’t been necessarily done by banks, but by private lending. So we think stocks can still do well.”
• The most important things: “The most important thing for the next month, in our view, is the Fed’s June FOMC rate decision on June 14. Their next most important economic data point is the June CPI. That’s what we’re going to be watching. As you get toward August 2023, you might see outright deflation coming out of Europe. That just underscores our view that inflation is tracking softer than expected…Also, consensus is starting to become more constructive. I think people are coming around to our view that we have a soft landing. Volatility is coming down. And you’re not fighting the Fed if the Fed’s on pause. The Fed may have completed its hikes for the year.” Our Chart of the Week shows the extent of the recent decline in volatility:

• Our top picks as we approach summer: “We still like FAANG, but we want to look at the FAANG laggards. Tesla, Netflix, Amazon, and Meta. That’s going to make sense. I think there’s still going to be a lot of leadership and heavy lifting done by large-cap FAANG, but we look at the laggards there as ones that will provide incremental returns: These have just started to outperform and shine. We also like industrials. They’re acting better this week as part of the market breadth expansion story.”
• The elevator pitch for more gains ahead: “Is there still a case for markets to build on these gains? I do believe that’s the case. Breadth is expanding. I think there’s a case for multiple expansion as well and the earnings outlook is improving…If we talk about earnings growth improving when the Fed could be pausing, and we know short interest rose 7% last week when we look at futures contracts,  it’s all-time high short positions by institutions. I think that’s fuel for the big stocks to stay where they are and the rest of the group to catch up, and I think that’s why markets can actually advance another 10%.”
  
• Battle-tested: “Companies have really proven themselves pretty battle-tested. They survived Covid and the global shutdown. They survived a bullwhip effect in the supply chain. They survived a massive inflation wave. And yet investors are saying, these companies didn’t go bankrupt in any of those cycles. To me, I think we should re-rate these companies higher. 

Elsewhere

UK Prime Minister Rishi Sunak met with President Biden in the White House this week, resulting in a trade deal that makes some of the green tax credits and subsidies in Biden’s Inflation Reduction Act available to British companies. The Atlantic Declaration falls short of the post-Brexit free trade agreement that Britons have sought, however. The two leaders also discussed other issues such as data protection and the Ukraine war. 

The World Bank projected global economic growth will decline this year to 2.1%, its slowest pace since the GFC. Among the factors inhibiting growth, according to the World Bank, are higher rates, inflation, and tighter credit conditions.

China’s exports in May fell by 7.5% YoY, far more than the 0.4% decline expected by economists. The statistic reinforces existing worries that the second-largest economy is struggling. The biggest contributor to the export decline was falling U.S. demand, down 15.1% YoY.

A drought in China’s Yunnan province (rainfall down 60%) has put the hydropower for much of Guangdong province’s manufacturing – and thus, the global supply chain – at risk. Coal- and wind-powered plants are planned as replacements for the short- and long-term, respectively, but a similar occurrence last year affected supplies of electric-vehicle batteries, semiconductor components, solar panels, and more. 

Turkish President Recep Erdogan appointed Hafize Gaye Erkan as the country’s central-bank governor – the first woman to serve in that role. Her appointment signals Turkey’s pivot away from unorthodox economic policy, which had included a belief that cutting interest rates would lower Turkiye’s 43.7% inflation rate. Dr. Erkan is a Goldman Sachs alumnus and previously served as co-CEO of First Republic Bank – she left in 2021, well before the bank’s collapse last month.)

And finally: Thanks to Argentina’s skyrocketing inflation and collapsing currency, tickets for Taylor Swift’s Buenos Aires show can be had for as little as $153 (compared to $1,500 in the U.S.) For many, it is less expensive to fly from the U.S. to Bueno Aires, attend the concert, and fly back than it is to see the show in the U.S. One caveat: the Buenos Aires show is standing room only.

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