By John Lau, CPA, CFP®
October 31, 2023 – The S&P 500 fell to fresh five-month lows last week thanks not to rising yields (they fell), or geopolitical concerns, but instead because of earnings, as the number of companies reporting some sort of “miss” (whether on EPS, guidance, revenue, or margins) continued to grow. Notably, however, the selling was disproportionately centered on the tech names, and it is fair to say that tech weakness and earnings disappointment was the main driver of the declines in the S&P 500 last week.
To be clear, it is not that tech earnings have been outright bad. But rather, there is an expectation gap. Tech companies are not producing the kinds of growth that was assumed when the “AI” craze hit markets in May, and as such, we are seeing those AI-driven gains given back, as you would expect. The AI-driven ramp higher in stocks in May and early June was based on very aggressive growth assumptions, and disappointment in that space is now another headwind for markets to face going forward (although I do not see it as a bearish gamechanger— just an un-needed headwind at a time of increased investor anxiety). On an immediate term basis, our research is showing only the commodities asset class is outperforming cash, so we are systematically raising cash at the interim to smooth out volatility given my concerns about future growth and anxiety about stretched valuations in a high-rate environment, but I want to stress the medium- and long-term view for the technology sector is still leading the relative strength spectrum.
Bottom Line: What Can Stop This Selloff? Stocks have fallen to multi-month lows not because of a deterioration in fundamentals, but instead because an overly optimistic outlook has been rattled by geopolitical surprises, heightened U.S. political dysfunction and mega-cap tech earnings that have not met extremely lofty expectations (but weren’t bad in an absolute sense). As long as those factors (including higher yields) drive the market narrative, stocks will have a hard time rallying, like we saw last Friday. So, what gets this selloff to stop? A reminder that underlying fundamentals have not changed nearly as much as the decline in stocks would imply. And there are numerous opportunities for economic data and Fed speak to remind markets that underlying fundamentals haven’t deteriorated as much as the drop in the S&P 500 would imply. First, there is a lot of important economic data this week and if it prints Goldilocks that will be an important reminder that an economic slowdown isn’t likely anytime soon. Specifically, this week’s ISM PMIs[1] and jobs report have the opportunity to provide important Goldilocks data that can remind investors the underlying economy is still solid. Second, there are several important inflation metrics this week including Unit Labor Costs and the price indices in the ISM PMIs that can reinforce disinflation is ongoing and, importantly, remind markets that “Immaculate Disinflation” (inflation falls but growth stays resilient), allowing the Fed to cut rates to support growth, can still happen! Third, earnings results shift away from mega-cap tech and reinforce that a $240 2024 S&P 500 EPS estimate is still valid. Finally, the Fed clearly signals it’s done with rate hikes, giving the market the certainty it needs and taking upward pressure off Treasury yields. If we get those reminders this week, then a bounce in the S&P 500 is entirely reasonable, as the S&P 500 is currently trading about 17X 2024 S&P 500 expected EPS of $240 and that multiple is, in my view, simply too low given current fundamentals. Point being, the ingredients for a solid bounce/rebound are in place, now all markets need are some reminders that, broadly, the macroeconomic environment hasn’t materially changed. Beyond the near term, however, I think markets may receive a “growth scare” sometime in late 2023/early 2024, so, as mentioned earlier, we are strategically raising cash in anticipation of that possibility.
This week will be very busy as we have 1) A Fed decision, 2) A jobs report and 3) The most important growth numbers of each month and importantly these catalysts provide an opportunity for data and the Fed to post Goldilocks numbers, remind investors of a soft landing and break this current negative feedback loop in the markets. Starting with the Fed, markets are hopeful that the Fed will clearly signal that rate hikes are over and that now the Fed is in “wait and see mode.” I do not expect this to be a materially positive catalyst (the market already assumes that to be true) but the recognition that the most dramatic rate hike cycle in decades is over will be a general positive. Turning to the jobs report, the key here is to see a Goldilocks report that shows subdued, but still positive, job growth. Importantly, markets will not want to see another really hot jobs number like last month, nor will markets want to see a sudden drop in job additions that implies a sudden change in the economy. So, the risks to this jobs report remain decidedly two sided. Finally, on the growth front, we get the ISM Manufacturing PMI on Wednesday and Services PMI on Friday and the focus here will be, first, on the ISM Services PMI and making sure it stays above 50 (expansion territory) and, secondarily, if the ISM Manufacturing PMI can rise to or above 50. Those two measures of activity give us a solid comprehensive picture of economic growth, and markets will want at least one of those metrics to stay above 50 to push back on any hard landing concerns. Bottom line, this is a week full of potential, both positively and negatively. Positively, if the Fed confirms rate hikes are done and economic data is Goldilocks, that will be a needed positive reminder that while there are macroeconomic risks, the data is pointing to a soft landing. Conversely and negatively, if the Fed leaves a rate hike open and data is either “Too Hot” or “Too Cold” then yields will likely rise and pressure stocks or growth worries will spike and stocks will likely drop. Here’s the point: I won’t say it’s a “make or break” week but this week does have the potential to cause a substantial (greater than 1%) bounce in stocks or open up a decline towards 4,000 in the S&P 500. So, I will be watching for you.
Our clients rely on us for timely information, and our job is to deliver.
John Lau
Disclosure
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2023 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
[1] Institute of Supply Management Purchase Managers’ Indices
Why Tech Is Driving the Selloff and What Can Stop This Selloff?
By John Lau, CPA, CFP®
October 31, 2023 – The S&P 500 fell to fresh five-month lows last week thanks not to rising yields (they fell), or geopolitical concerns, but instead because of earnings, as the number of companies reporting some sort of “miss” (whether on EPS, guidance, revenue, or margins) continued to grow. Notably, however, the selling was disproportionately centered on the tech names, and it is fair to say that tech weakness and earnings disappointment was the main driver of the declines in the S&P 500 last week.
To be clear, it is not that tech earnings have been outright bad. But rather, there is an expectation gap. Tech companies are not producing the kinds of growth that was assumed when the “AI” craze hit markets in May, and as such, we are seeing those AI-driven gains given back, as you would expect. The AI-driven ramp higher in stocks in May and early June was based on very aggressive growth assumptions, and disappointment in that space is now another headwind for markets to face going forward (although I do not see it as a bearish gamechanger— just an un-needed headwind at a time of increased investor anxiety). On an immediate term basis, our research is showing only the commodities asset class is outperforming cash, so we are systematically raising cash at the interim to smooth out volatility given my concerns about future growth and anxiety about stretched valuations in a high-rate environment, but I want to stress the medium- and long-term view for the technology sector is still leading the relative strength spectrum.
Bottom Line: What Can Stop This Selloff? Stocks have fallen to multi-month lows not because of a deterioration in fundamentals, but instead because an overly optimistic outlook has been rattled by geopolitical surprises, heightened U.S. political dysfunction and mega-cap tech earnings that have not met extremely lofty expectations (but weren’t bad in an absolute sense). As long as those factors (including higher yields) drive the market narrative, stocks will have a hard time rallying, like we saw last Friday. So, what gets this selloff to stop? A reminder that underlying fundamentals have not changed nearly as much as the decline in stocks would imply. And there are numerous opportunities for economic data and Fed speak to remind markets that underlying fundamentals haven’t deteriorated as much as the drop in the S&P 500 would imply. First, there is a lot of important economic data this week and if it prints Goldilocks that will be an important reminder that an economic slowdown isn’t likely anytime soon. Specifically, this week’s ISM PMIs[1] and jobs report have the opportunity to provide important Goldilocks data that can remind investors the underlying economy is still solid. Second, there are several important inflation metrics this week including Unit Labor Costs and the price indices in the ISM PMIs that can reinforce disinflation is ongoing and, importantly, remind markets that “Immaculate Disinflation” (inflation falls but growth stays resilient), allowing the Fed to cut rates to support growth, can still happen! Third, earnings results shift away from mega-cap tech and reinforce that a $240 2024 S&P 500 EPS estimate is still valid. Finally, the Fed clearly signals it’s done with rate hikes, giving the market the certainty it needs and taking upward pressure off Treasury yields. If we get those reminders this week, then a bounce in the S&P 500 is entirely reasonable, as the S&P 500 is currently trading about 17X 2024 S&P 500 expected EPS of $240 and that multiple is, in my view, simply too low given current fundamentals. Point being, the ingredients for a solid bounce/rebound are in place, now all markets need are some reminders that, broadly, the macroeconomic environment hasn’t materially changed. Beyond the near term, however, I think markets may receive a “growth scare” sometime in late 2023/early 2024, so, as mentioned earlier, we are strategically raising cash in anticipation of that possibility.
This week will be very busy as we have 1) A Fed decision, 2) A jobs report and 3) The most important growth numbers of each month and importantly these catalysts provide an opportunity for data and the Fed to post Goldilocks numbers, remind investors of a soft landing and break this current negative feedback loop in the markets. Starting with the Fed, markets are hopeful that the Fed will clearly signal that rate hikes are over and that now the Fed is in “wait and see mode.” I do not expect this to be a materially positive catalyst (the market already assumes that to be true) but the recognition that the most dramatic rate hike cycle in decades is over will be a general positive. Turning to the jobs report, the key here is to see a Goldilocks report that shows subdued, but still positive, job growth. Importantly, markets will not want to see another really hot jobs number like last month, nor will markets want to see a sudden drop in job additions that implies a sudden change in the economy. So, the risks to this jobs report remain decidedly two sided. Finally, on the growth front, we get the ISM Manufacturing PMI on Wednesday and Services PMI on Friday and the focus here will be, first, on the ISM Services PMI and making sure it stays above 50 (expansion territory) and, secondarily, if the ISM Manufacturing PMI can rise to or above 50. Those two measures of activity give us a solid comprehensive picture of economic growth, and markets will want at least one of those metrics to stay above 50 to push back on any hard landing concerns. Bottom line, this is a week full of potential, both positively and negatively. Positively, if the Fed confirms rate hikes are done and economic data is Goldilocks, that will be a needed positive reminder that while there are macroeconomic risks, the data is pointing to a soft landing. Conversely and negatively, if the Fed leaves a rate hike open and data is either “Too Hot” or “Too Cold” then yields will likely rise and pressure stocks or growth worries will spike and stocks will likely drop. Here’s the point: I won’t say it’s a “make or break” week but this week does have the potential to cause a substantial (greater than 1%) bounce in stocks or open up a decline towards 4,000 in the S&P 500. So, I will be watching for you.
Our clients rely on us for timely information, and our job is to deliver.
John Lau
Disclosure
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2023 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
[1] Institute of Supply Management Purchase Managers’ Indices
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