Solid start to June (YTD >10% now) but June Fed FOMC key. We still like FAANG and flag 3 (or 4) FAANG laggards we like.

NEW: Section (above)added identifying Key Recommendations and Super Grannies

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In case you missed our webinar “Super Granny” Shots last week

• we discussed “Super Granny” shots that are expected to tactically gain near-term
• and “Sleeping grannies” which we expect to tactically underperform

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Solid start to June but Fed FOMC decision is key

The S&P 500 is up 10% YTD (5 mos) and many investors simply “sat this out” — on sidelines given multiple overlapping uncertainties.

• Equities have been rising now for 8 months and if stocks rise again in June, that would be 9 months of gains — meaning, the rally since October 12, 2022 is longer than the 9 month drawdown -27%. And arguably, further solidifies the fact that October 12, 2022 was the end of the bear market. A new bull market has been underway.
• 2023 is tracking with our baseline view that the highest probability is the S&P 500 will gain >20% this year, reflecting a positive combination of Fed relenting (pause/done), EPS troughing and the associated valuation expansion seen at the start of the new cycle. And with 7 months left, the S&P 500 is tracking for ~25% gain, inline with our YE target of 4,750.
• The primary catalyst remains that inflationary pressures ease faster than consensus and Fed expect. For many this looks like a tall order, as many suggest inflation is now firmly entrenched in services inflation. But as we noted previously, PCE core services inflation has a 15% weight in Financial Services, thus, Fed hikes are contributing to the rise in PCE core services itself.
• Today’s May ISM manufacturing report brought mostly good news. The headline PMI came inline at 46.9 vs 47.0 consensus and 47.1 last month. But the “prices paid” surprised to the downside coming in at 44.2 vs 52.3 Consensus and 53.2 last month. The monthly drop of -9 is the largest since July 2022. So a sizable cooling in inflationary pressures and again, supporting a Fed pause in June. The May employment report (Friday 8:30am ET) will be particularly telling, but the key is average hourly earnings 4.4% or better.
• Lastly, JPMorgan’s Flows and Liquidity Team (flagged by @CarlQuintanilla) reported a sizable inflow into Technology ETF funds this past week. Retail investors are responding to the outperformance of Technology stocks. But this is good news. There remains a lot of retail cash on the sidelines and this firepower will eventually be invested. We think a lot goes into equities.
• Institutional investors remain skeptical. The latest COT (commitment of traders) show speculative short of S&P 500 futures is now -17%, the highest level in 16 years. This is despite fundamental drivers supporting higher equity prices. Again, this speaks to the widespread skepticism.
• And this skepticism also reflects the widely held view that the US is going to eventually tip into a recession. But a recession is a sudden and unexpected downturn in economic activity evidenced by falling employment, activity and inventory. But the rapid Fed hikes and the expected slowdown was well telegraphed by Fed last year. Thus, we think much of the contractionary impacts have already been felt.

BOTTOM LINE: June FOMC key this month, and sticking with FAANG OW

We remain constructive on stocks. While many want to take profits, arguing stocks are expensive. Recall, stocks outside of FAANG are not expensive with a median P/E of 15X. And the two expensive sectors are Staples (20X) and Utilities (19X). So cyclical and growth equities are not demanding on valuation.

• We continue to like FAANG despite FAANG +50% gains YTD achieved our target return. FAANG stocks are surging on improving fundamentals as AI and inflationary pressures are driving higher technology spend. Does Fed want to inhibit inflation-reducing spending? Perhaps the Fed doesn’t care but this would be counterproductive.
• 3 (maybe 4) FAANG laggards: Of the 9 FAANG stocks (see below), 3 and maybe 4 have lagged. What do we mean by lagging? Well, they have not regained by 20DMA and 200DMA. In other words, they have risen but not moved solidly into an uptrend.
• The 3 or 4 stocks are:
  – Amazon AMZN 1.41%   below 200D
  – Telsa TSLA 10.19%   below 20D + 200D
  – Netflix NFLX 0.89%   below 200D
  – Meta META 0.87%   below 200D
• We would be looking for a “catch up” trade from these 4 FAANG laggards. I realize the rationale is:
  (i) FAANG is the leadership
  (ii) FAANG therefore seeing inflows via ETF or baskets
  (iii) laggards will catch a bid

That’s it. Have a great day. We also continue to like tactically: (i) regional banks on Fed put KRE 0.84% ; (ii) Industrials on bottoming PMIs XLI 0.55%  and (iii) Super Grannies (see above).

The S&P 500 is up 10% YTD and at this pace, on track to >20% this year. This is consistent with our base case.

FAANG achieved our >50% YTD return target. We still like FAANG fundamentals though. And see above for buying the laggards.

The below tweet affirms that there is firepower moving into Technology stocks. As flagged by @CarlQuintanilla, cumulative ETF flows published by JPMorgan show a sharp upward move.

And institutional investors remain skeptical of this move as short positioning by COT shows highest net shorts since 2007.

Manufacturing PMI: Half-full

The ISM manufacturing PMI headline came inline (slight slight miss) at 46.9 vs 47.0 consensus. But as shown below, this still looks like March was the low at 46.3.

The upside surprise was prices paid. This fell below 50 to 44.2.

• the 9 point drop is the largest since July 2022
• and signs that inflationary pressures are indeed easing for businesses
• the soft data continues to show softer inflation than official/lagging CPI.

ECO: Important week ahead, JOLTS and May Employment Report…

Many economic reports this week, but few will likely be as market moving as inflationary reports. As shown below, the highlights are:

• 6/2 8:30am ET May employment report –> avg hourly earnings <4.4% YoY would be good

ECONOMIC CALENDAR: FOMC key

Key incoming data June

• 6/1 10am ET May ISM ManufacturingTame
• 6/2 8:30am ET May Jobs report
• 6/5 10am ET May ISM Services
• 6/7 Manheim Used Vehicle Value Index May
• 6/9 Atlanta Fed Wage Tracker April
• 6/13 8:30am ET May CPI
• 6/14 8:30am ET May PPI
• 6/14 2pm ET April FOMC rates decision
• 6/16 10am ET U. Mich. May prelim 1-yr inflation
• 6/27 Conference Board Consumer Confidence
• 6/30 8:30am ET May PCE

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection
• 5/2 10am ET Mar JOLTSSofter than consensus
• 5/3 10am ET April ISM ServicesTame
• 5/3 2pm Fed May FOMC rates decisionDovish
• 5/5 8:30am ET April Jobs reportTame
• 5/5 Manheim Used Vehicle Value Index AprilTame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared
• 5/10 8:30am ET April CPITame
• 5/11 8:30am ET April PPITame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutesDovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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34 Granny Shot Ideas: We performed our quarterly rebalance on 4/26. Full stock list here –> Click here

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