Stocks set multiple new all-time highs last week, including on Friday when the S&P 500 closed at 6,388.64. Despite the broader index’s recent advances, sentiment remains restrained. Fundstrat Head of Research Tom Lee noted that anecdotally, “at Fundstrat, the feedback continues to be that many investors are skeptical of gains.”
Head of Technical Strategy Mark Newton concurred. “If you look at the overall levels of sentiment, it’s still pretty subdued,” he noted at our weekly research huddle. “We’re certainly not bearish anymore,” he acknowledged, “but we’re pretty much in neutral. We haven’t really gone to bullish territory yet, and we’re not really all that speculative.”
Even disregarding the new records set by the broader index, “the market continues to trade very well,” in Newton’s view. “In the last week, we’ve seen really good performance out of many of these groups that have not shown performance in quite some time. In general, this is a broadening out of the rally,” he said. Notably, “on an equal-weighted basis, tech actually hasn’t done as well as the others. There are other sectors that have actually started to outperform tech, which I think is a positive.”
We are about a third of the way into earnings season, and perhaps two of the most watched earnings reports last week were Alphabet (GOOG -1.52% ) and Tesla (TSLA -1.92% ). Tesla, of course, had faced some challenges since the beginning of the year, and many investors appeared to interpret Elon Musk’s remarks as subdued. From a technical perspective, however, Newton noted that “despite the gap down the day after its earnings report, I see the stock being a good intermediate-term risk/reward for the second half of this year.” As a caveat, he warned that a break of July lows at $288.77 might temporarily affect his current constructive view of the stock, but “at present, I don’t expect this to happen.”
As for Alphabet, the tech giant surged after reporting a 14% increase in second-quarter revenue. Investors appeared to find much to like in chief executive Sundar Pichai’s remarks, which included upbeat views about AI supporting the company’s cornerstone search-engine revenues and a $10 billion increase in its 2025 capex forecast to $85 billion.
That’s consistent with Lee’s continued view that AI demand remains strong, and AI itself is a multi-decade story. After attending a Hill & Valley Forum co-hosted by the All-In podcast (where President Trump on Wednesday signed three executive orders regarding AI), Lee also noted that, “To me, the key takeaway is that there are many instances of AI helping existing workers multiply their skills, so perhaps AI will not replace as many jobs as feared.” Looking into next week, with the release of June PCE data, a rate decision from the Federal Open Market Committee, and 163 earnings reports on deck, Lee “[expects] equities to end July on a high note. We do not think the final weeks of July are a concern.”
Chart of the Week
Although it was a relatively light week for fresh macroeconomic data, markets were buoyed by the announcement of three trade deals — Indonesia, the Philippines, and Japan, as seen in our Chart of the Week.
1-year Inflation swaps rolled over sharply today given the news of the US-Japan trade deal and are extending the drop given that US seems to be closing in on a similar deal with Europe. Meanwhile US Treasury yields are rising despite a very good 20-year auction today on very strong demand. The Bid/cover of 2.79 was the highest since last April. Thus inflation expectations are dropping & US Equities have managed to sustain the rally from this morning. This break in the one-month uptrend on Inflation swaps likely can continue to result in Inflation expectations falling given the nature of this technical break.
Despite some weakness in many Semiconductor names today, the ratio of QQQ 0.30% vs. SPY 0.42% still looks early to peak out by at least a few weeks. This has been persistently strong off the April lows, breaking out above a meaningful 5-Year cup and Handle pattern, and should be able to trend up for at least another month (and potentially three-months ) before much resistance. Thus QQQ 0.30% might be able to carry higher than many investors expect, and i anticipate a push up to 580-590 before much serious resistance and/or counter-trend exhaustion. Overall, despite a 1-day period of underperformance for Tech vs. the broader market, i don’t think it should prove too serious in July.
Many investors have noted that VIX is at a higher level now than back on 7/10 despite SPX being higher by roughly ~50 points. When looking at intra-day and Daily VIX charts for evidence of exhaustion signals that might point to a possible reversal, we see that this remains premature by at least 3-5 trading days, but could be generated on a pullback in VIX down to challenge VIX lows from 7/10. I am expecting that a “flush” in VIX should be approaching that likely represents a very attractive area for buying implied volatility for the next 2-3 months. I had discussed last month that 16.50 area was certainly an appealing level, but VIX very well might weaken to test and break 15.70 into late July. If this happens, then it would present an even better risk/reward opportunity. My expectations is that VIX likely will bottom out by late July/Early August and begin to trade higher to the mid-20’s at a minimum, but possibly reach the low 30’s into late September. At present though, my analysis suggests a bit lower VIX over next week ahead of a bottom.
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