Summer Shakeout amid Positive EPS Season The stock market in mid- to late-July experienced its worst stretch of the year, including its worst week since 2022. The strong start to the month sent the S&P 500 and the other major indices to all-time highs. Even following the late-month selloff, stocks entered the final partial trading week of July barely changed for the month. The stasis in the market is consistent with ongoing uncertainty. The nature of the presidential election changed dramatically over the past month. The Fed appears to be teeing up 50 basis points (bps) or possibly even 75 bps of rate cuts by the end of the year. However, no cuts appear likely until mid-September, leaving investors dangling. Consumers too are waiting for rate cuts, whether they know it or not, because a lower fed funds rate is the linchpin to getting the overall interest rate environment down from its multi-year peak. Amid the uncertainty, the second-quarter earnings season mostly has been a bright spot. While good past-quarter earnings are always important, investors hold their breaths regarding current-quarter outlooks. Companies have generally reaffirmed the moderately positive outlook for the full year, which is still trending toward high single-digit to low double-digit EPS growth for 2024. Up and Down in July The S&P 500, which came into mid-year up 14.5% for 2024, piled on an additional 3.8% in the first half of July. The index was up 18.8% for the year at its all-time closing peak of 5,667 on 7/16/24. By 7/19/24, the S&P 500 had shed over 100 points. And by 7/25/24, the index had lost more than 260 points from its all-time high, to close at 5,399. Given the strong start to the month, followed by equally strong selling, the S&P 500 entered the final partial trading week of July up 14.4% for the year - barely budged from where it stood at mid-year. The Trump assassination attempt and the switch in Democratic presidential contenders occurred in the space of two weekends. However, rather than point to political upheaval, most investors attributed the July selling to a much-needed correction in extremely overbought names in the Information Technology and Communication Services sectors. While some wealth flowed out of all equities in the late-July period, much of the proceeds from tech stock redemptions flowed into other sectors. With three trading days remaining in the month as of 7/26/24, Information Technology (IYW) was down 4% for the month of July; and Communication Services (XLC) was down just under 2%. Where did the money go? Lots flowed into the Financial sector (IYF), which was up 7% for the month. Upcoming cuts in the fed funds rate will pinch banks' net interest margins. However, the 2Q earnings season for the sector has been highly positive, featuring significant recovery in fee-based businesses such as investment banking. Those upcoming lower interest rates can also be expected to rekindle loan and mortgage growth, which have been an ongoing negative amid generally positive bank earnings results. Other winning sectors in July include Industrials (IYJ), up 4.5%; Utilities (IDU), up 3.3%; Healthcare, up 2.9%; Consumer Staples, up 2.5%; and Materials, up 2.4%. Most of these sectors rose with the market early in the month and then were able to hold onto their gains on generally positive second-quarter earnings results. As we prepared this report, the market on 7/29/24 was oscillating, rising in the morning on earnings optimism toward traditional growth leaders and then selling off by midday on fears those companies would disappoint. The market response to upcoming earnings and other major non-technology companies could determine not just the July outcome, but also the market's performance in August and into summer-end. Second-Quarter Earnings Season The above-cited July 29-through-August 2 period will be the biggest week in 2Q24 EPS season, with about one-third of S&P 500 components companies reporting results. We will be sure to weigh in on the biggest earnings week, which culminates with equally big economic news, the nonfarm payrolls for July on 8/2/24. In the interim, and based on 2Q24 EPS data through 7/26/24, the second-quarter earnings season has been a success so far. With just over 180 companies (36%) of S&P 500 component companies reporting, second-quarter 2024 earnings from continuing operations are up 9.1% on a share-weighted basis compared with 2Q23 EPS. According to Bloomberg, 2Q24 earnings are up 14.8% on a market-cap-weighted basis. This premium of market-cap-weighted to share-weighted EPS growth is consistent with recent quarters and is reflective of the earnings outperformance of the largest capitalization companies compared with small and mid-caps. According to the other earnings compiling agencies, FactSet reports 9.8% earnings growth for 2Q24 as of 7/26/24; and Refinitiv is reporting 12% earnings growth. Variation in performance measurements among FactSet, Refinitiv and Bloomberg reflect minor differences in calculating continuing operations earnings as well as different prior-year baselines. For the remainder of our 2Q earnings report card, we will mainly source Bloomberg data unless otherwise noted. An unusually high percentage of companies (31%) have reported negative earnings for 2Q24. The average EPS decline for the negative-earnings group, which is heavily weighted in Energy, Materials, and Real Estate, is 16%. For the 69% of companies reporting positive EPS, average earnings growth is a robust 22%. A key reason investors are optimistic about second-half 2024 earnings growth is that the negative drag from Energy, Materials, and Real Estate is expected to diminish in 3Q24 and particularly in 4Q24. About 79% of companies have reported positive EPS surprises in 2Q24, compared with (again) a high 14% of companies reporting negative surprises. According to FactSet, 78% of companies have reported positive EPS surprises. These percentage are above the 10-year average of 74%. For these companies, the median beat against consensus estimates is 5.2% (FactSet has it at 4.4%). For the first time in several quarters, the median beat against expectations is below the 10-year average of 6.8%. At the sector level, the strongest earnings growth is coming from Financial, Information Technology, and Utilities - all up in the 16%-17% range year over year. Communication Services 2Q24 earnings are up 15%. Other sectors reporting positive EPS growth include Healthcare, Consumer Discretionary, Consumer Staples, and Industrials, in descending order; all are up in the 2%-4% range. As noted, Energy, Materials, and Real Estate are all down; Materials is off in high single-digits, while Energy and Real Estate earnings are down 20%-21% from a year earlier. From a statistical standpoint, 36% would be considered a fairly reliable and predictive sample size. Timing of the remainder of 2Q24 earnings season, however, may introduce some variability. Over 61% of Financial companies have already reported, in what has been a better-than-anticipated season for the sector. Only 23% of Energy companies have reported; given similar sensitivity off all component companies to key commodities (oil and natural gas), the contribution from this sector will likely continue to pull down overall results. The swing sector is likely to be Information Technology. Fewer than 30% of tech companies have reported. Further, 2Q earnings from the heavy hitters (Apple, Microsoft, etc.) are not reflected in the data discussed above. Earnings from the big Healthcare, Industrial, and Consumer Discretionary (AMZN) companies could also play an outsized role. For 2Q24, Argus continues to model high-single-digit continuing-operations EPS growth for S&P 500 component companies. We see a higher likelihood that our forecast misses on the upside than on the downside. In other words, once all the component companies are tallied, we are more likely to see low-double-digit EPS growth for 2Q24 than we are to see mid-single-digit EPS growth. Conclusion Investors will veer away from earnings analysis for a few hours on the morning of 8/2/24 to assess the state of the labor economy. Argus Chief Economist Chris Graja, CFA, forecasts 185,000 new nonfarm payroll jobs for July, approximately in line with the 188,000 consensus forecast. The bigger focus will be on the unemployment rate, which was 4.1% in June. If July unemployment hits 4.2%, that would trigger the Sahm indicator. When unemployment rises 50 bps within a cycle, the Sahm rule posits, recession follows or has already begun. In this scenario, deteriorating labor markets become 'a self-reinforcing feedback loop,' according to former New York Fed president William Dudley. Secular and demographic factors may argue for structurally lower unemployment rates over the long term. This includes ongoing retirements from within the huge Baby Boomer cohort, and a smaller pool of workers from the generational cohorts that follow available to fill vacant boomer positions. Triggering the Sahm rule, nonetheless, would be a warning sign and presumably a wake-up call for the Fed to focus on the fight in front of it (preventing recession) and not the nearly won war against inflation.

U.S. stocks rose on Thursday ahead of the April jobs report due out on Friday. Apple (AAPL) rose 6% after hours when it announced a $110 billion stock buyback plan. The two-year Treasury yield fell to 4.889% while the 10-year yield was down to 4.58%. The Dow was up 0.9%, the S&P 500 gained 0.9% and the Nasdaq rose 1.5%. Crude oil traded above $79 per barrel and gold rose $3 to $2313 per ounce.

Monday Tee Up: A Super Week

The Vickers Top Buyers & Sellers is a daily report that identifies the five companies the largest insider purchase transactions based on the dollar value of the transactions as well as the five companies the largest insider sales transactions based on the dollar value of the transactions.

For a second week, insider-transaction data from Vickers Stock Research is generating bullish signals. Last week, insider-transaction volume was low as trading restrictions are in place during earnings season. But trades that did occur resulted in bullish insider-sentiment measures, especially open-market transactions (the most meaningful when considering sentiment).

The major indices finished slightly lower on Thursday as investors weighed a new round of earnings reports from Qualcomm, PayPal, and other major companies. Apple and Amazon also reported above-consensus sales and earnings after the close. On the employment front, first-time claims for state unemployment benefits rose by 6,000 to a seasonally adjusted 227,000 for the week ended July 29, in line with the Reuters consensus forecast. Continuing claims rose by 21,000 to 1.7 million. The data came ahead of the government's July employment report on Friday morning. The consensus calls for 200,000 new payroll jobs, down from 209,000 in June, and a steady unemployment rate of 3.6%. The Dow fell 0.19%, the S&P 0.25%, and the Nasdaq 0.10%. Crude oil rose nearly 3% to $82 per barrel, while gold fell $6 to $1969 per ounce.

Stocks fell on Thursday morning amid continued concerns about the health of regional banks and the approaching debt ceiling deadline. The losses extended the selloff on Thursday, when the Fed raised its benchmark interest rate by 25 basis points to the 5.0%-5.25% range. Fed Chair Jerome Powell signaled that the Fed would pause rate hikes for now as it assessed the impact of its rate hike campaign, but rejected the view that the central bank would cut rates later this year. The Dow fell 1.1%, the S&P 0.7%, and the Nasdaq 0.4%. Crude oil traded near $69 per barrel, while gold rose $19 to $2056 per ounce.

Stocks extended their Fed-driven rally on Thursday, led by strong gains in the Communication Services, Consumer Discretionary, and Technology sectors. Meta Platforms jumped 23%, despite disappointing 4Q earnings, as investors focused on the company's better-than-expected revenue, cost-cutting efforts, and new share buyback plan. On the employment front, first-time claims for state unemployment benefits fell by 3,000 to 183,000 for the week ended January 28, below the Reuters consensus forecast of 200,000. The data came ahead of the government's January employment report on Friday morning. The consensus estimate calls for 185,000 new payroll jobs, down from 223,000 in December, and an unemployment rate of 3.6%, up from 3.5% a month earlier. The Dow fell 0.11%, the S&P rose 1.47%, and the Nasdaq soared 3.25%. Crude oil traded near $76 per barrel, while gold fell $16 to $1927 per ounce.

While the volume of insider transactions reported by Vickers Stock Research remains relatively low because of restrictions placed on executives, beneficial owners, and directors during earnings season, the trading that is taking place has now been cautious for three consecutive weeks. New to the mix this week is a bearish pop in Vickers' NYSE One-Week Sell/Buy Ratio. That reading had been holding up, even as the Nasdaq one-week reading has been weak. But now, the NYSE reading also is showing some strain - and the combination of now-weakening NYSE sentiment combined with ongoing-weak Nasdaq sentiment is having a negative impact on Vickers' broader (eight-week) sentiment readings.

On Friday morning, investors will be focused on the Labor Department's July employment report. The current Reuters consensus calls for the addition of 250,000 payroll jobs, down from 372,000 in June, and a steady unemployment rate of 3.6%. Stocks were mixed on Thursday ahead of the report, as investors weighed slightly higher weekly unemployment claims and a narrower trade deficit, helped by strong growth in exports. The Dow fell 0.26%, the S&P fell 0.08%, and the Nasdaq rose 0.41%. Crude oil fell more than 2% to $88 per barrel, while gold jumped $33 to $1810 per ounce.

Sentiment is increasingly bearish, from market professionals to small investors. The five-day CBOE equity-only put/call (P/C) jumped to 0.76 on May 12, the highest reading since the correction started. The good news, though, is that it is not near prior peaks during corrections/bear markets (when it has reached 0.85 to over 1.00). The smallest option traders spent 30% or more of their volume buying put options to open. They also spent more on put premiums than on call premiums. Both measures are very rare -- and most times when this happens, the market is higher over the next year.

Fed Rate Hikes Present Challenges but Should Not Be Lethal for Stocks

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are Host Hotels & Resorts Inc (HST); NXP Semiconductors NV (NXPI); Western Digital Corp. (WDC); IQVIA Holdings Inc (IQV); American Electric Power Co Inc (AEP) and the Focus List deletions are Weyerhaeuser Co. (WY); Dell Technologies Inc (DELL); Qorvo Inc (QRVO); Anthem Inc (ANTM).

Stocks finished mostly higher on Thursday as investors weighed a new round of earnings reports and continued to assess the Fed's tapering plan. Employment data was strong. The Labor Department said that first-time claims for state unemployment benefits fell to 269,000 for the week ended October 30, down from 283,000 a week earlier and below the Bloomberg consensus of 275,000. Continuing claims of 2.105 million were also down from the prior week and below consensus. The data came ahead of the government's October employment report on Friday morning. The consensus calls for the addition of 450,000 new payroll jobs after an increase of 194,000 in September, and a decrease in the unemployment rate to 4.7%. The Dow fell 0.09%, the S&P rose 0.42%, and the Nasdaq rose 0.81%. Crude oil fell 2% to $79 per barrel, while gold rose $29 to $1793 per ounce.

Stocks finished mostly higher on Thursday as investors weighed a new round of earnings reports and continued to assess the Fed's tapering plan. Employment data was strong. The Labor Department said that first-time claims for state unemployment benefits fell to 269,000 for the week ended October 30, down from 283,000 a week earlier and below the Bloomberg consensus of 275,000. Continuing claims of 2.105 million were also down from the prior week and below consensus. The data came ahead of the government's October employment report on Friday morning. The consensus calls for the addition of 450,000 new payroll jobs after an increase of 194,000 in September, and a decrease in the unemployment rate to 4.7%. The Dow fell 0.09%, the S&P rose 0.42%, and the Nasdaq rose 0.81%. Crude oil fell 2% to $79 per barrel, while gold rose $29 to $1793 per ounce.

Small- and mid-cap stocks (SMID stocks) soared in 2019. They have underperformed large-caps over the past 12 months, but still may be in a better position to generate market-beating returns going forward. For one thing, SMID companies tend to focus on domestic markets, so their businesses could be poised to rebound more quickly once COVID-19 vaccines are more widely distributed and the domestic service economy recovers. As well, the prices of SMID stocks generally are lower than the prices of large-caps. That said, SMID stocks can be risky. Still, despite the risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. Investors used to use a $2 billion market-cap threshold to define a small-cap stock and a $10 billion threshold for a mid-cap. The Russell 2000 index now includes numerous companies with market capitalizations above $15 billion. For our purposes, we use a threshold of $20 billion to define a SMID stock.

Small- and mid-cap stocks (SMID stocks) soared in 2019. They have underperformed large-caps over the past 12 months, but still may be in a better position to generate market-beating returns going forward. For one thing, SMID companies tend to focus on domestic markets, so their businesses could be poised to rebound more quickly once COVID-19 vaccines are more widely distributed and the domestic service economy recovers. As well, the prices of SMID stocks generally are lower than the prices of large-caps, as the P/E ratio on the Russell 2000 Small-Cap Index is 18x compared to a P/E of 27x for the S&P 500. Finally, the long-term record has favored SMID stocks over large-caps. From 2003-2021, the Russell 2000 Index had climbed 488%, compared to an advance of 408% for the S&P 500 index. This week's list includes stocks with market caps below $20 billion that are on the Argus BUY list and are included in our Mid-Cap Model Portfolio.

The Technology sector started slowly in 2021 as investors focused on value stocks. But the sector has come on strong in recent months (up 22% year-to-date) and now is outperforming the market (up 20.7%) as well as value sectors such as Consumer Staples (+8%), Utilities (+10%), Materials (+17%), and Industrials (+18%). The sector is the largest in the U.S. market and now accounts for more than 28% of the S&P 500. Over the long term, we expect the sector to benefit from pervasive digitization across the economy, greater acceptance of transformative technologies, and the development of the Internet of Things (IoT). Healthy company and sector fundamentals are also positive. For individual companies, these include high cash levels, low debt, and broad international business exposure. We have an Over-Weight ranking on the Tech sector and think investors should look to allocate up to 30% of their diversified portfolios to the group. Here is how we use our analysts' Tech sector ideas in our Focus List and Model Portfolios.

The U.S. stock market tends to rise, and indeed is trading within a few points of all-time highs. The long-term upward trajectory has a foundation in the country's democratic political system and its market-based, capitalist economic system. In theory, the market efficiently allocates the nation's capital, generating solid returns. But then there is September. Our analysis of monthly returns going back to 1980 indicates that September is now the only month with an average loss. August used to be in that category, but after average 6% returns in the past two years is now positive. Not every September is negative. The month has a "win percentage" of 49%. But there have been bombs, including 1986 (-8.5%), 2001 (-8.2%), 2002 (-11%), 2008 (-14%) and 2011 (-7.2%). Last year, the S&P 500 fell 4.2% in the month. September is a transition month: the August doldrums are over and corporations get back into gear after Labor Day. The IPO market typically picks up. The Federal Reserve usually meets, which can add to volatility. And, sometimes ominously, the third-quarter earnings season approaches. By the end of 3Q, companies are pretty sure if they are on track to meet financial targets. If they are not, and they pre-warn about disappointing results, investors can be quick to sell not just a company but an entire sector.

Stocks rose on Thursday, led by the Financial and Energy sectors, as investors weighed new employment data. First-time jobless claims fell to 385,000, down from 399,000 a week earlier but slightly above the consensus forecast. Continuing claims fell to 2.930 million, down from 3.296 million a week earlier and below the consensus forecast of 3.255 million. The continuing claims reading was the first below 3 million since March 2020. The data came ahead of the government's July employment report on Friday morning. The Bloomberg consensus calls for the addition of 865,000 new payroll jobs after an increase of 850,000 in June, and a slight decrease in the unemployment rate to 5.7%. The Dow rose 0.78%, the S&P 0.60%, and the Nasdaq 0.78%. Crude oil rose to $69 per barrel, while gold fell $8 to $1807 per ounce.

The Argus Research Fundamental Universe of Coverage includes approximately 500 leading U.S. and international companies. We cover the waterfront -- from Technology to Utilities, from Energy to Healthcare. We generally follow the Top 200 most widely held stocks, sourced from our sister company Vickers Stock Research, which collects institutional ownership data from the US Securities and Exchange Commission. From there, we look to identify the next 200-300 leading U.S. and international companies to add to our list. Our Universe of Coverage is dynamic and growing. We are adding stocks to coverage continually and often get ideas from our clients. Here are five of our most-recent additions.

Argus has published its latest Portfolio Selector, which features its popular Focus List. Each month, Director of Research Jim Kelleher, CFA, surveys the team of Argus Research industry analysts for their timeliest recommendations out of the company's fundamental universe of over 500 stocks. The Focus List typically includes 30 stocks: turnover is high, as Director of Research Kelleher typically adds three or four new stocks per month. Below are the latest additions, all of which are rated BUY at Argus.

Breadth has been impressive so far this year, and every sector turned in a positive performance in 1H21 -- though last year's laggards generally were the leaders. Take Energy, for example. The sector fell 37% in 2020 and also lagged the market in 2019. This year? A different story. Energy is the leading sector, with a gain of 46%. The Financial Services sector also turned things around in 1H21, rebounding from a 4% slide in 2020 with a 25% advance so far in 2021. Other market-beating sectors in 2021 include Industrial (+16%, after underperforming the market last year), Communication Services (+19%), and Real Estate (+23%). The turnaround in sector performance hints at a shift in the market toward value investing and away from growth. Indeed, the three primary growth sectors -- Technology, Healthcare, and Consumer Discretionary -- are all up about 10% year-to-date. Our sector Over-Weights reflect a blend of growth and value, and include Technology, Healthcare, Industrials, Financial Services, and Communication Services.

Our bond/stock asset-allocation model indicates that stocks and bonds -- both of which are overvalued against their own metrics -- are near fair value against each other. Our model takes into account current levels and forecasts of short-term and long-term fixed-income yields, inflation, stock prices, GDP, and corporate earnings. The model output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks, of 0.15 sigma, with a standard deviation of 1.0. The current valuation level is 0.21 sigma discount for stocks. Generally, the model has done a good job of highlighting asset-class value. For example, stocks were very attractive compared to bonds in the late 1970s, when benchmark Treasury rates were in the high teens before heading consistently lower over recent decades. The model indicated that stocks were at a sharp premium to fair value prior to the "dot-com" crash of 2001 and also prior to the Great Recession in 2007-2009. Starting in 2009, the model favored stocks -- another good call. As our chart shows, the markets can manage with premiums and discounts for extended periods. Equity valuations likely will start to improve if corporate earnings continue to surprise on the upside.

A Look Ahead to the Second Half of 2021