Stock "Resilience" Continues With Sixth Straight Weekly Advance

Our Views

Tom Lee, CFA
Tom Lee, CFA
AC
Head of Research
  • The larger backdrop for earnings remains positive. We are still early in the 3Q24 earnings season and it has been very good, in our view. The standout is that revenue growth is tracking +5%, consistent with 4% to 6% growth for each of the past 5 quarters.
  • This is notable because “core inflation” has fallen like a rock from 7% in 3Q22 to 3% 3Q24. The fact that revenue growth has held steady despite this decline means that “real” revenue growth – S&P 500 revenues less core CPI – is accelerating. To me, this constitutes a positive surprise.
  • We are initiating a “tactical overweight” on homebuilder equities this week as we enter what is known as the “Golden 6 Months” for homebuilder stocks. This is a seasonal-base trade we have recommended for the past decade – buying homebuilders from October 20 to April 28 while ignoring/avoiding them from April 29 to Oct 19. This year, the Fed’s rate cuts provide what we view  as a compelling fundamental backdrop for homebuilder stocks as well.
Read the Latest First Word
Mark L. Newton, CMT
Mark L. Newton, CMT
AC
Head of Technical Strategy
  • Equity trends remain bullish, yet SPX is close to several projected targets near 5900, which should slow this rally down as it nears the end of October. This might happen during/directly after Friday’s expiration, or could be postponed briefly until end of month. However, the drying up in breadth and volume seems to be a warning sign to pay attention to following an extended run.
  • Technology has underperformed this week, and it’s thought that the path for equities between now and mid- to late-November could be lower given the combination of cyclical- and sentiment-based issues. While the intermediate-term bullish thesis remains very much intact, it’s doubtful to me that U.S. equities continue to push up into and post-election without any consolidation.
  • However, November’s expected weakness should represent a short-term correction only, not the start of a larger decline. Risk/reward seems poor in the short run, and SPX seems unlikely to exceed 6000 right away but could find resistance near 5900-5935. Meanwhile, in my view, QQQ should find resistance at 503-505.
Read the Latest Daily Technical Strategy
Sean Farrell
Sean Farrell
AC
Head of Crypto Strategy
  • Small Cap Correlations: The recent breakout of IWM and the broadening out of the equity market rally is a positive sign for crypto.
  • Election Odds: The best-case scenario for crypto—a GOP sweep—has climbed to 45% odds on Polymarket.
  • Trade Idea: Grayscale’s GDLC, along with Bitwise’s similar fund, BITW, present a compelling opportunity ahead of the election, we believe.
  • Buying More SOL: We view now as a good time to deploy the rest of the stablecoins in our Core Strategy and think that SOL is a good place to park this capital, a perspective that is buttressed by soaring DEX volumes and capital flows into the network.
  • Core Strategy: As year-end approaches, we remain optimistic about the crypto outlook. With hard landing risks fading after the Fed’s dovish but reassuring stance, we believe now is the time to take calculated risks in one’s crypto portfolio. Our focus remains on the majors, with selective exposure to altcoins like HNT, MKR, STX, BNB, and CORE.
Read the Latest Crypto Strategy
L . Thomas Block
L . Thomas Block
Washington Policy Strategist
  • Recent polling in the Presidential race seems to show a shift in momentum toward former President Donald Trump, though not so much as to suggest anything other than a race that remains too close to call.
  • Early voting has begun, and both candidates continue to focus on four swing states.
  • Israel’s allies continue to eye the situation in the Middle East warily: Israel has achieved a major victory against Hamas, but it has yet to retaliate for Iran’s recent missile attack.
Read the Latest US Policy

Wall Street Debrief — Weekly Roundup

Key Takeaways

  • The S&P 500 rose 0.85% this week to close at 5,864.67. Nasdaq saw a similar 0.80% gain, closing at 18,489.55. Bitcoin was at $68.464,67 on late Friday afternoon, up almost 9% for the week.
  • Fundstrat Head of Research Tom Lee sees liquidity and cash on the sidelines as keys to watch for equity investors.
  • Head of Technical Strategy Mark Newton remains constructive but warns of a potential short-term correction.

"When we have a good balance between thinking and feeling ... our actions and lives are always the richer for it." ~Yo-Yo Ma

Good evening,

The market continued to show signs of resilience this week, with the S&P 500 notching its sixth consecutive up week to close on Friday at a new all-time high. For Fundstrat Head of Research Tom Lee, this was more evidence of the fortitude that the market has shown in recent months: stocks have risen on numerous occasions, even after investors were given reasons to sell off. They have advanced despite higher-than-expected inflation prints, weaker jobs numbers, geopolitical turmoil, and election-related uncertainty. "We also have challenging seasonality and an elevated VIX, while [the 10-year yield] is back to above 4%. Yet, the S&P 500 is rising," he noted. 

As Lee previously anticipated, the dovish Fed, a recent "bazooka" of Chinese stimulus, and the prospects of a no-landing economy have all arguably acted as tailwinds to bolster stocks. However, in his view, the main reason for the market's resilience is cash on the sidelines. "I think the resilience hints at the fact that investors are under-allocated," he explained, "and I think liquidity is becoming the driver as we head into year-end." Though macro data remains important because the Fed is still watching it, "for the moment I think it's become secondary."

To be unambiguously clear, "This doesn't mean I think stocks go up forever," Lee warned. 

That's certainly a view he shares with Head of Technical Strategy Mark Newton. "I still see the broader U.S. stock market as being in good shape, with not many intermediate-term warnings," he reassured us, but "in the nearer term, U.S equity trends have reached areas of resistance.  Various breadth, sentiment, and cyclical-based indicators lead me to suspect that a near-term correction will happen starting at some point between now and the end of October that could result in a 5-7% correction in stock indices into mid-November before the next leg higher gets underway."

In other words, while Newton would characterize current U.S. stocks as "over their skis," and perhaps in need of consolidation, he views any such pullback as "a short-term correction only, not the start of a larger decline." That will "likely make the road between now and mid-November a bit trickier," he admitted, "but for those focused on an intermediate- or longer-term time horizon, any weakness heading into November should represent an attractive risk/reward opportunity for dip buying of U.S. stocks for a technical December rally into year-end." 

Lee sees fundamental reasons to view a rally into the end of 2024 as likely as well. While stock skeptics view the indices' advances through the year as evidence of overvaluation from a P/E standpoint, Lee disagrees. "Keep in mind that corporate revenue growth has remained steady at 4% to 5% even as inflation fell from 7% to about 3%. This means that the real rate of corporate revenue growth is rising, and I think that therefore, higher P/E's are justified." 

As our Chart of the Week below shows, if we look at "real revenues" – S&P 500 revenues minus core CPI – we see this trend:

  • 2Q23 –> -3.4%
  • 3Q23 –> -1.9%
  • 4Q23 –> +0.2%
  • NOW –> +2.0%

"That is a huge swing" in Lee's view, "and it implies that the quality of 3Q24 EPS growth is stronger than a year ago." In fact, he hypothesized, "perhaps this explains why stocks have shown such strength and resilience in 2024."

On small caps

Lee has been constructive on small-caps throughout 2024, arguing that once the Fed began to cut rates, they would arguably be the group best positioned to benefit. This week, Newton saw signs that – roughly a month after the Fed's 50 bp cut, small caps could be making their move.

On Wednesday, "IWM 0.10%  finally accomplished what it’s tried and failed to do several times since the initial breakout happened in July of this year. IWM 0.10%  exceeded July peaks, successfully breaking out of its triangle pattern that had been ongoing for the last three months," Newton said. Though the small-cap proxy might not test 244 right away, "this is a very bullish move," he added. For those with a bit more patience, "my time of importance for small-caps lies from November into next May. This should represent a time of broad-based rally for the small-cap sector and possible outperformance."

Elsewhere

The European Central Bank announced its third rate cut for the year, as headline inflation fell more than economists expected and to below its 2% target. The ECB reduced rates from 3.5% to 3.25%, a move many pundits described as sorely needed stimulus as major member-state economies such as Germany's and France's slowed. 

The Department of Transportation fined Lufthansa $4 million, imposing its largest penalty to date on the German airline for discriminating against Orthodox Jewish passengers. The regulator imposed the penalty for a May 2022 incident in which 128 Orthodox Jews were barred from boarding a connecting flight in Frankfurt after a small, unspecified number of them allegedly had refused to comply with the airline's rules to wear a mask during the initial leg of the trip from New York. The passengers had not been traveling as a group and did not necessarily know each other.

Almost 12 million pounds of meat that found its way into products at many major retailers have been recalled on fears of Listeria contamination. The contamination originated in meat processed by BrucePac, which then found its way into ready-to-eat meals in brands sold at Walmart, Trader Joe's, Costco, Wegman's, 7Eleven, and elsewhere. The full 348-page list of products affected can be found here.

Holiday sales are projected to grow between 2.5% to 3.5% this year, according to the National Retail Federation. They notched 3.8% growth in the 2023 winter holiday season.

Amazon Web Services disclosed it would invest around $500 million to fund nuclear-power initiatives in Washington state and Virginia. Amazon signed a contract with Dominion Energy to explore the possibility of building small modular reactions (SMRs), which are not just smaller than traditional reactors (as the name suggests) but can be constructed and brought online more quickly. Google also signed an SMR agreement with Kairos power, hoping to bring multiple reactors online between 2030 and 2035.

UK headline inflation cooled more than expected, falling to 1.7% – its lowest levels of the year. This cooler number, which was led by lower prices for gas and airfares, bodes well for a Bank of England rate cut in November.

Walgreens announced plans to close 1,200 stores around the U.S. The move comes amidst struggles for brick-and-mortar pharmacies as a whole: CVS is enroute to closing about 900 locations, while Rite Aid filed closed 1,300 locations while in bankruptcy proceedings. 

The International Monetary Fund projects that aggregate global government debt will exceed $100 trillion this year for the first time. That would amount to 93% of global GDP, according to the IMF, and if this metric continues on this course, global aggregate government debt could reach roughly 100% of global GDP by 2030. 

Boeing took steps to revitalize its cash flow amid an ongoing strike, securing a $10 billion line of credit and announcing plans to raise another $25 billion by issuing either shares or debt. Both tactics were announced in regulatory filings, but details of the share and/or debt offering were not immediately available. 

And finally: Lilly Ledbetter, whose activism against gender discrimination in the workplace resulted in the law that bears her name, has died at age  86. Ledbetter sued after discovering that male coworkers in the same supervisory position doing the same work at Goodyear were making significantly more that she was. Her activism led to the Lilly Ledbetter Fair Pay Act, which President Barack Obama signed into law in 2009.

Important Events

Federal Reserve Beige Book, October
Wed, Oct 23 2:00 PM ET
S&P Global Manufacturing PMI, October prelim
Thu, Oct 24 9:45 AM ET

Prev.: 47.3

S&P Global Services PMI, October prelim
Thu, Oct 24 9:45 AM ET

Prev.: 55.2

New Home Sales MoM, September
Thu, Oct 24 10:00 AM ET

Est.: -0.4% Prev.: -4.7%

U. Mich. 1-Year Forward Inflation Expectation, October final
Fri, Oct 25 10:00 AM ET

Prev.: 2.9%

Stock List Performance

Strategy YTD YTD vs S&P 500 Inception vs S&P 500
Upticks
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+8.51%
+38.94%
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