“I think if you have a passion for what you do then there are no limitations on how long or how much you can accomplish.” ~Tony Bennett (1926 - 2023)

Good evening:

Earnings season has begun in earnest, and investors likely paid more attention than usual to the results this week due to the relative dearth of macroeconomic news competing for their attention until the FOMC meeting on July 26. Banks kicked things off, with Head of Research Tom Lee suggesting that they might produce some pleasant surprises. “Banks and Financials might be the breakaway sector this earnings season,” he suggested, partly because “expectations are low due to headwinds from rate action and the regional bank crisis earlier in the year. So they’re still cheap and underowned,” he asserted.

Though Lee generally described their results as “in line” during our weekly huddle, banks rallied this week. In addition to the aforementioned low expectations, Lee also attributed this to “a recognition that the Fed is shifting away from ‘higher for longer’ because inflation isn’t as strong. That’s good for banks and their margins, and their deposits as well.” Also, he said, “the economy looks to be slipping into expansion, which is better for the credit-loss outlook.” 

We still have most of Tech due to report their quarterly results, but Tesla (TSLA) and Netflix (NFLX) gave us a slight preview on Wednesday. “I think they actually had good numbers,” observed Lee. “But they also had a huge runup into earnings season so they're both selling off pretty significantly.” 

Head of Technical Strategy Mark Newton was not particularly concerned. “I don't suspect that Technology is going to weaken all that materially,” he suggested.

For followers of our work, the week was also punctuated by the quarterly rebalance of the closely watched Granny Shots stock list, which has outperformed the S&P 500 by 3.4% so far this year. This quarter’s rebalance included eight new names. Seven previous Granny Shots were dropped from the list, but FAANG stocks continued to feature prominently. Among them: Meta (META), which was one of just two companies to appear on both the June and July “Super Grannies,” a list of Granny Shots viewed as likely to see near-term outperformance. 

Some Granny Shots changes had to do with seasonality, to which both Lee and Head of Technical Strategy Mark Newton pay close attention. As Newton discussed during our weekly research huddle, “Seasonality concerns are in place now for August and September. Those are bad months for pre-election years.”

The first two quarters of a pre-election year have historically been the best of the four-year presidential cycle, so the YTD rally has been no surprise to Newton. “It's been a very healthy rally that’s exceeded almost everybody's expectations. Markets are up nearly 10% just since the middle of May, when the market started to broaden out. We are only about 200 points from an all time high on the S&P.”

So can this continue until year-end? Yes, but probably not in a straight line, according to both Lee and Newton. This week’s huddle featured a discussion about how much choppiness we might see, and what retail-investor sentiment suggests about its possible arrival time.

“While we have seen a breakout, I do feel that upside is limited going into the end of July, due to some warning signs that have begun to show up,” Newton said. One example he cited: Based on the AAII’s (American Association of Individual Investors’) survey, “the percentage of bears is now right back down to about 20%. This is the lowest level of bears we've seen since June of 2021, and the level of bulls is the highest we've been since April of 2021. We're at about a 30% spread now between bulls and bears, so that's not insignificant,” he said.

Fundstrat seeks to beat consensus, so excess bullishness would be viewed as a warning signal, Lee agreed. But he was skeptical that overall sentiment had become as bullish as Newton suggested. “I might be slightly inclined to discount the AAII right now because it had such a sustained negative reading for 52 weeks,” he pointed out. “So to me, bearishness just moving back into positive doesn't erase the magnitude of bearishness that had been in place for 2022.” Comparing a rolling-average of AAII sentiment to S&P 500 movements in the past illustrates Lee’s point, seen here in our Chart of the Week:

And in contrast, there’s still institutional-side sentiment to consider. Lee cited several statistics to show a decided lack of bullishness, including a JPMorgan survey of institutional investors and the Bank of America Global Fund Manager Survey (FMS).

Newton acknowledged this, adding that “I personally don't sense the exuberance in my conversations. People don't seem like they're making money hand-over-fist. I think the retail side has climbed up more quickly than the institutional.” And although “the equity put-call ratio has gotten pretty compressed in the last month, it’s still not in the bullish range.”

Given that, Newton’s view was that “the correction likely is going to happen in August, but I think it's going to prove short-lived. What keeps me very optimistic is just the widespread strength that we're seeing across different sectors.” 

In Newton’s view, “I don't think it's wrong to be a little cautious next month, but I don't think we’ll get much of a pullback. In the bigger scheme of things, I don't expect it to be that severe and I think markets are still going to push higher in the second half.” 

Lee didn’t dismiss Newton’s concerns, particularly given recent gains in Defensives. He conceded that “there’s a wobble underway.” But in Lee’s opinion, it is still too soon to conclude that a correction is imminent. “The next two to three weeks should have positive fundamental catalysts that we believe could positively surprise markets. Thus, the correction path has a somewhat narrow window,” he said. 

A final note: The Dow squeaked up a little on Friday, managing to notch a 10-day win streak. That’s something it has not done since August 2017.

Elsewhere 

Seven leading tech companies have voluntarily agreed to abide by safeguards in the development and promulgation of artificial intelligence, in response to a request from the White House. The signatories – Amazon, Anthropic, Google, Inflection, Meta, Microsoft and OpenAI – agreed to independent security testing and regular reporting about their systems’ capabilities, security risks, and potential biases. They also pledged to ensure that content generated by AI will be easily identified as such and to conduct ongoing research into the risks of bias, invasion of privacy, and discrimination posed by their technologies.

China’s worryingly high youth unemployment rate continues to rise, with the jobless rate in the 16-24-year-old demographic rising to 21.3% in June. China’s GDP grew on an annualized rate of 6.3% in Q2 2023, missing expectations but still higher than in Q1.

Israeli President Isaac Herzog addressed Congress to rousing applause as he sought to reassure those concerned about Prime Minister Benjamin Netanyahu’s proposals to limit his country’s judiciary. Herzog was just the second Israeli president to address Congress – the first was his father, Chaim Herzog, who did so in 1987. Prime Minister Netanyahu addressed Congress in 2015 and has been invited to visit the U.S. again later in the year.

Grain prices rose this week after Russia ended its participation in the Black Sea grain deal, destroyed 60,000 tons of Ukrainian wheat, and threatened to target ships bound for Ukrainian ports and treat their flag countries as participants in the war.  The odds of higher global food prices went up further after India banned non-basmati rice exports due to a difficult growing season marked by unusually heavy rains. India accounts for 40% of global rice shipments.

Microsoft broadened its AI offerings beyond OpenAI’s ChatGPT, announcing on Tuesday that it would offer Llama 2, an AI large language model developed by META, available on the Redmond tech giant’s Azure cloud-computing service. Llama 2 will also be available through Amazon Web Services. 

The FTC and Department of Justice announced new proposed guidelines for reviewing proposed M&A deals that would also consider their potential impact on workers, not just the market. The proposed revisions would also include assessments of the impact of a series of deals, not just one-off transactions. 

And finally: It is no longer trademark infringement to commercially use the phrase “Taco Tuesday,” which the chain Taco John had previously claimed to own. Taco John lost a lawsuit against Taco Bell, which argued that the phrase was so commonly used that it should be freely available to anyone.

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