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![featured](https://macrohive.com/wp-content/uploads/2023/03/Depositphotos_26142151_S.jpg)
Summary
- The economy is starting 2024 with a bang – but company earnings reports show that weak spots remain in industrials and commodity chip makers.
- Another cautionary note is that the small cap Russell 2000 remains 5% below December highs even as the S&P 500 (SPX) and NASDAQ 100 (NDX) bump up against all-time highs.
- The major indices are priced for perfection. From what we have seen of earnings so far, they will struggle to rally much from current levels.
- The key bellwether company report this week is heavy equipment maker Caterpiller. Meanwhile, Disney faces the challenge of matching Netflix’s momentum, and several consumer discretionary companies will reveal what consumer are purchasing.
Market Implications
- We are marketweight on the SPX and NDX given the strong labour market – but expect volatility on any majorly disappointing news.
- We still favour the Russell 2000 over the intermediate term.
What We Learned Last Week
PMI reports and the robust labour market update give every indication that 2024 is off to a crackerjack start. And with SPX and NDX bumping up against new all-time highs, there is a lot to like.
Not to be a Cassandra, but there are niggling concerns out there.
- As we have noted, several rail and trucking companies in the transportation sector saw activity rise in December, apparently on a stronger-than-expected holiday shopping season, but have little visibility on whether it will continue.
- Many industrial companies that provide raw and intermediate products to other companies still report sluggish demand. These include Dow Chemical (DOW), DuPont de Nemours (DD), Illinois ToolWorks (ITW), and Whirlpool among others.
- Tech companies close to the AI ecosystem report strong outlooks, but those in the commodity chip and electronics sectors say their customers are still working off excess inventories. These include Texas Instruments (TXN), Intel (INTC), MicroChip Technology Inc. (MCHP).
You might expect small caps to benefit from this economic surge, but the Russell 2000 (RTY) remains rangebound 5% below its December high – and 24% below its all-time high in November 2021 (Chart 1). We now expect an RTY rally will resume as US Treasury rates keep falling. We think RTY is attractive over the medium term. Investors can hold it via the IWM ETF.
And to pile on, New York Community Bancorp (NYCB) reminded investors that commercial real estate is still a potential ticking timebomb.
Consumers Are Spending – Fortunately, the consumer sector is strong. Consumer staples companies report solid results and outlooks on rising prices and volumes. In the discretionary sector, Royal Caribbean (RCL) reported much better-than-expected results and strong bookings through H1. It sold off 3% apparently because investors had even higher expectations.
That serves as a reminder that SPX and NDX are trading at forward P/E multiples of 20.5 and 26 – the high point since the early 2000s (apart from pandemic distortions). And those valuations reflect expectations that SPX and NDX earnings jump 9% and 21%, respectively, after being flat for the past one-and-a-half years.
What could go wrong?
Suffice to say, the major indices are priced for perfection.
It may be the weak spots we noted above will be cured in coming months and 2024 will register strong growth. Or it may be the recovery remains uneven and a drag on growth.
We remain marketweight on equities, although we only expect a modest rally. We see more upside for RTY as rates fall further. However, as we discussed in a recent note, this may be a patient trade.
The Week Ahead
This week sees about 215 companies in our Russell 1000 universe reporting. There will be more consumer discretionary companies reporting on the goods and services side – we expect soft goods-oriented companies and strong services.
A key report for the US and global economy will be heavy equipment manufacturer Caterpillar (CAT) today. Meanwhile, Ford Motor (F) will discuss how its EV program is performing, and The New York Times may provide an update on company propensity to spend on advertising. McDonald’s (MCD), Chipotle Mexican (CMG), and PepsiCo (PEP) will update on what consumers eat these days. And Walt Disney (DIS) faces the challenge of matching Netflix’s strong quarter.
Among key reports:
Monday
- Caterpiller (CAT)
- McDonald’s Corp. (MCD)
- Tyson Foods (TSN)
Tuesday
- Amgen (AMGN)
- Chipotle Mexican (CMG)
- Cummins Inc. (CMI)
- Ford Motor (F)
- Madison Square Garden (MSG)
- Spotify Technology (SPOT)
Wednesday
- CVS Inc. (CVS)
- Emerson Electric (EMR)
- New York Times (NYT)
- News Corp (NWS)
- Uber Technologies (UBER)
- Walt Disney Co. (DIS)
- Wynn Resorts (WYNN)
Thursday
- Boyd Gaming Corp. (BYD)
- Expedia Group (EXPE)
- Harley Davidson (HOT)
- Tapestry Inc. (TPR)
Friday
- Newell Brands (NWL)
- PepsiCo (PEP)
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.