This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
- We see the November rally extending into yearend.
- Whether it is a grind or more surges are in store depends on whether the upcoming jobs and inflation reports add fuel to the fire.
- Retailers seem to be finally getting their houses in order after struggling with supply chain and inventory problems over the past year.
- It is a light week volume-wise for earnings reports, with only 18 companies reporting. But given that one of them is AI superstar Nvidia (NVDA), it could be a tectonic-plate-moving week for the nascent AI sector.
- Given the tone of many retail earnings reports, we reiterate our view that the post-Covid headwinds facing small cap companies are finally easing.
- We think the Russell 2000 (RTY) can outperform the S&P 500 in coming months and quarters. We like to be overweight in the RTY ETF IWM.
What We Learned Last Week
Another solid week for equities on the back of a soft CPI print and subsequent rally in the 10Y Treasury. The NASDAQ 100 (NDX) is up 11.7% since the 27 October low; the S&P 500 (SPX) and Russell 2000 (RTY) are up just shy of 10%.
We expect equities can keep grinding higher going into yearend. Whether there are more spurts like the past two weeks will depend on whether the December jobs and inflation reports add fuel to the fire or turn out to be speed bumps.
If the tone remains good, we expect to start hearing more talk about whether SPX and NDX can reach the highs of 2021. At this point they are within 5.9% and 4.4% of this, respectively, so it is doable.
RTY is another story. It has been stuck in a stubborn trading range for the past one-and-a-half years and is 26% below its August 2021 high. We laid out a case last week why RTY could start outperforming versus SPX in coming months and quarters. In essence, our view is that the many issues that hit large cap SPX companies as the economy reopened after Covid lockdowns – supply chain woes, inflation, geopolitical tensions with China, among other things – were like a bad cold; most companies were able to manage around these problems. But for small cap companies all these adverse developments were like getting hit with full-blown Covid. These many complications finally seem to be receding.
Retail Earnings Hint at Turnaround
The latest batch of earnings from major retailers gave some indication that they are getting their problems under control. Target (TGT) and Macy’s (M), for example, got caught with too much inventory suitable for a lockdown economy in 2021 and have struggled to work off the excess and right-size their businesses. Supply chain and transportation hiccups just added to the mess. Both reported much better-than-expected earnings and indicated that they were better positioned for the coming holiday season. Both rallied more than 10% after relentless declines during 2023 (Chart 3).
The remarks from TGT and M echo what we have been reading from other companies – namely that the supply chain and inflation issues of the past year are easing. This is a plus for Russell 2000 companies.
The big outlier among retail reports was Walmart (WMT). It also reported a solid beat, but offered a tepid outlook, and sold off by 8.5%. Granted, WMT has been on a roll in 2023, up 16.6% in 2023 (before the latest earnings report) while the retail ETF XRT was little changed, and many retailers struggled.
We also note that WMT has offered eccentric guidance recently. In early October, it said the rise of weight suppression drugs were causing people to buy less food. This put a chill into junk food purveyors such as PepsiCo (PEP) and Coca-Cola (KO). Both reported in the following week and both said they had not noticed any adverse impact from people taking these drugs. We have read elsewhere that suppression drugs account for less than 1% of prescription drug sales.
More likely, investors are switching to retailers that are cheap if they have indeed turned the corner on addressing their post-Covid problems.
Is Cisco on to Something or Is it an Outlier?
The other interesting market intelligence was Cisco (CSCO), which reported a slowdown in new orders and cut its outlook over the next few quarters. It sold off 13%. Other suppliers of network and IT gear also sold off on concerns about flagging industrial demand.
The performance of companies that provide goods and services to other companies has been mixed this earning season, but on balance, our sense is that more companies are seeing a pickup in demand.
Currently, we see CSCO as more of a one off. It benefited earlier this year from the AI hype and rode a story of rising demand for network gear to implement AI strategies. It is not completely clear why network gear is essential for building out AI – the need has been more for powerful chips and data centres to process and train AI systems. Many companies have tried to spin their business models as AI-friendly this year, so it is hardly surprising to see a bit of a shakeout among companies with a less than substantial stake in the industry. In any case, CSCO said the demand is still there – it is more of a timing issue.
The Week Ahead
We will get the acid test of the state of the AI market on Tuesday afternoon when Nvidia (NVDA) reports quarterly earnings. Indeed, one can make the case that this is the only report that matters in the holiday-shortened week. While there are other interesting reports coming, NVDA is the only one that could scramble valuations among the companies that have ridden the AI bandwagon.
In total 18 companies report this week, including several major retailers, and global farm equipment manufacturer Deere & Co.
- Agilent Technology (A).
- Zoom Video Company (ZM).
- Best Buy Co. (BBY).
- Dick’s Sporting Goods (DKS).
- HP Inc. (HPQ).
- Nordstrom Inc. (JWN)
- Nvidia Corp. (NVDA).
- Deere & Co. (DE).
Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.