“I just - I love my job. I love doing it. It's a passionate endeavor. And sometimes you can get close to something that you believe is the truth. The truth of something. Not all the time, but sometimes.” ~ Donald Sutherland (July 17, 1935 - June 20, 2024)

Good evening,

Stocks continue to advance, and a number of Wall Street equity strategists have responded by revising their year-end targets for the S&P 500 upwards. As Fundstrat Head of Research Tom Lee observed wryly earlier in the week, the 5,200 target he set in December 2023 during his annual outlook webinar has thus gone from being one of the most bullish targets to one of the least bullish. “That doesn’t mean we think the market’s already peaked this year,” he assured us. “We’re probably going to update our target in the middle of the year, which is a little less than two weeks away.”

He also pointed out that despite the rise in the broader indices – nearly a third of the stocks in the S&P 500 are up 10% or more YTD, stocks have not become expensive. “The P/E multiples haven’t even gone up yet,” he pointed out, noting that “the S&P 500, excluding FAANG, is still trading at 16.7 times forward earnings, roughly the same as it was at the start of the year. And to me, 16.7x is quite reasonable.”

With this week’s gains, the S&P 500 is up around 4% for the month so far, and Lee told us that stocks are rising “for the right reasons.” By this, he meant that stocks are rising in response to inflation continuing to track lower than consensus expectations. 

Lee cites automobile prices as just one example. “New car inventory has surged back to pre-pandemic levels as auto production has improved and consumer demand has waned,” he said, noting that Ford (F 1.03% ) now has a 100-day supply of cars ready to be sold. “These are high levels and this is not just Ford,” he pointed out. In his view, this foreshadows a decline in new car prices, particularly given an ongoing decline in used car prices (down 10% from their 2023 peak) and a rise in auto insurance prices that is making car purchases less affordable.

“The drop in new car and used car prices impacts Core CPI more than many appreciate,” Lee said. Our Chart of the Week illustrates this point. Auto-related components (cars plus insurance, etc) are 17% of the Core CPI basket. And more startlingly, they constitute 31% of all core inflation since 2019.” 

Retail sales data came in soft during this holiday-shortened trading week, and Lee noted it “supports the idea that the economy is softening.” In his view, such data raises the probability that the Federal Reserve will cut rates more than once this year, a possibility that markets appear to have recently become more willing to consider (based on Fed funds futures trading).

Head of Technical Strategy Mark Newton agreed that “we have reached a point where a lot of the data is just coming in weaker and weaker.” He said, “I don’t have a lot of insight as to why its coming in that way, but the key takeaway when you look at what markets are doing from a technical perspective is that we're starting to see just a tremendous amount of bifurcation between how Technology is doing compared to the rest of the market. Tech has really been the only sector that's been higher over the last month if you look at equal weighted terms. When you look at the QQQ 0.08% , you can see what a lot of people would describe as growing very stretched. But being stretched does not necessarily equate to ‘sell’. That's key when you study technical analysis. It's really proper to stay with trends until the end.”

"When you look at the S&P 500 on an equal-weighted basis you can see how choppy it's been since March," noted Newton. "For portfolio managers who use the S&P as their benchmark, it’s been very difficult to keep up. Energy, Financials, and Industrial just have not been doing anything, and if you need to include them in your portfolio, you’re seeing a lot of underperformance simply because the S&P 500 is so heavily Tech-weighted.” 

That said, Newton noted that “in the last few days, we have seen some progress in this regard. Financials showed a minor breakout earlier this week, and we saw the same thing in Industrials. Those are good signs. We're starting to see these other sectors starting to gain traction, which I view as actually a pretty big positive, but we still need to see bigger breakouts of equal weighted indices.”

On Nvidia

Nvidia on Tuesday briefly surpassed Microsoft to become the most valuable company in the world, achieving a market cap of $3.341 trillion before the stock price pulled back. Newton said, “I don't sense that Friday’s weakness in NVDA -1.48%  is all that important technically. I fully expect that Nvidia could very well regain $135 and possibly test $140 again into next week. Although I suspect that this gradual waning in momentum will eventually be a bigger deal for the stock, in the immediate-term, it's hard to shake the momentum in this year's best performing NDX stock, or think that Thursday marked ‘the top’. Rather, it's more likely that a bounce starts again next week for NVDA. Larger weakness will still take more time, and might prove to be a July event, rather than one for late June."

Elsewhere 

New car sales in the U.S. hit a temporary but significant slowdown this week after two cyberattacks at CDK Global, providers of software used by roughly 15,000 dealerships. CDK was forced to suspend most services, and with CDK Global’s platform providing many car dealerships with recordkeeping and scheduling functionality, some dealerships were forced to write out sales by hand or suspend deal closings altogether. 

The U.K. headline inflation rate fell to 2% YoY in May, hitting the Bank of England’s target rate as food prices fell. Core inflation (which the UK defines as excluding food, energy, alcohol, and tobacco), however, remained above target at 3.5%, with goods inflation negative but services inflation at 5.7%.

President Biden announced plans to completely ban the sale of Kaspersky Lab antivirus products in the U.S., citing Moscow’s influence over the company and a policy restricting technology from “foreign adversary” nations. (This is the same policy governing mandates for China’s ByteDance to sell TikTok. Biden’s decision expands on a ban enacted by then-President Donald Trump in 2017, who banned Kaspersky Labs products from all U.S. government and military networks. 

The U.S. Treasury on Thursday said no major trading partner appeared to manipulate its currency last year, but it added Japan to a foreign exchange "monitoring list," alongside China, Vietnam, Taiwan, Malaysia, Singapore and Germany, which were on the previous list.

Japan’s TDK Corp announced a breakthrough in small solid-state batteries that could mean significantly longer operating times for small electronic devices such as smartwatches. However, TDK’s more fragile all-ceramic battery would likely be unsuitable for smartphones and automobiles. 

And finally: The U.S. Surgeon General publicly asked Congress to require written warnings on social media platforms that caution users that social media usage “is associated with significant mental health harms for adolescents.” Dr. Vivek Murthy argues that the warnings, akin to those placed on cigarette packs, would serve as a reminder and raise awareness of what many experts say is a growing public-health problem for young people.