We have written about how speed is accelerating in life and especially in the markets. Not just the speed of change, but the scale of the moves that can leave even this near-40-year veteran of the markets feeling a little whiplashed. But we still like stocks here, writes Jay Pelosky, founder and principal at TPW Advisory.
Across the cross-asset space, assets are flip-flopping around like a fish out of water. Maybe that’s it – maybe it’s the post-AI-nirvana vibe that has left us gasping for air. A prime example is the equity breadth expansion over the past month or so versus the index implosion of the past few weeks. Talk about flip flop from one week to the next.
We remain AI believers and note that the big tech stocks have plenty of money and plenty of opportunity to prove out their thinking on AI. We continue to believe the pick and shovel approach we have employed – with a focus on semiconductors and the AI-power nexus – will pay off over time.
VanEck Vectors Semiconductor ETF (SMH)
Meanwhile, the economic data is another thing that has been flip-flopping around – from good data on US growth (Q2 much better than forecast), inflation, and productivity (the latter of which should flow into EPS support) to bad data from the US ISM Manufacturing report and the weak US jobs number last Friday.
The net result seems to be that the equity rotation out of tech/into more economic sensitive sectors has been arrested by growing concerns over the viability of continued economic expansion both in the US and globally.
But one needs to be careful to not read too much into any one data point or stock, sector, or asset reaction. We continue to believe the rotation will win out over the correction impulse and that the US and global economy remain far from recession territory.
Furthermore, investors now have the central banks behind them, rather than a headwind in front of them. Central banks that have plenty of room to cut rates given the continued easing of inflation.
Perhaps most importantly from an equity risk point of view is that earnings continue to come in solid. JPMorgan Chase noted that with roughly 65% of US and European companies having reported, Q2 earnings continue to surprise with US earnings running at +12% year-over-year and EU EPS +1%. Both are significantly better than expected. The same holds true in Japan, which is a market that has taken a sharp tumble the past few days.
Where does all this leave us? Still believers in rotation rather than recession, in the US and globally. Does double-digit earnings growth, above-potential GDP growth, and Fed rate cuts ahead sound like a bad combo for risk assets? We don’t think so.
