12 February 2024 Equities | US

Equities and the MacroSphere: Big Caps Rip, Smaller Caps Mark Time

By John Tierney

Summary

What matters more – that the major indices keep breaking records or that smaller caps are going nowhere fast? On balance, we remain marketweight equities.
Earnings reveal American luxury goods sales are booming in China – but less so industrial goods.
Media companies reported a slowdown in advertising and travel companies saw softening bookings during Q4 2023, suggesting people were getting cautious – but recent economic data suggests that mindset may be fading.
Consumer discretionary and consumer staples companies are this week’s focus as Airbnb, Coca-Cola, and DoorDash report earnings. Crypto players will be watching Coinbase, and Zillow should provide colour on home sales going into the spring selling season.

Market Implications

We remain marketweight in equities; but valuations are high, raising risk of volatility on any major disappointment.

What We Learned Last Week

A Record a Day? Or Market on Hold?

We seem to see a new record in the S&P 500 (SPX) and NASDAQ 100 (NDX) almost daily. SPX and NDX are up 5.3% and 6.8%, respectively, year-to-date. That is roughly in line with the average annual return since 2000, and maybe half of what one might hope for in a good year.

Meanwhile, we have been cautiously marketweight, largely because SPX and NDX are trading at the highest forward P/E ratios since the early 2000s (apart from pandemic distortions). Either projected earnings must rise sharply or indices must hit some ceiling and narrow trading range for a while to grow into these valuations.

Further, market technicians note the lack of breadth in the rally – it is largely a handful of mega-caps. The equally weighted SPX and Russell 2000 are up only 0.6% and 0.8%, respectively, year-to-date. Both are still below late 2021 highs – the equally weighted SPX 3.3% and RTY 17% (Chart 1).

We maintain our marketweight call. Trade-oriented investors should focus on companies riding the AI boom.

Earnings Insights Are a Mixed Bag

Earnings reports in recent days provide interesting nuggets:

Companies making luxury consumer goods (fashionable clothing, handbags, etc.) reported solid beats, largely because of rising demand from Chinese consumers. Demand from US and EU consumers remains about flat.
Industrial companies report mostly beats, but mixed outlooks. Soft Chinese demand is a common concern.
Consumer discretionary companies producing services and entertainment mostly report solid beats and outlooks. These include Boyd Gaming (BYD) and Wynn Resorts (WYNN). Goods companies like Newell Brands (NWL) and Leggett and Platt (LEG) report soft outlooks.
Online travel company Expedia (EXPE) reports a slowdown in bookings, with weakness more pronounced the second half.
Several companies dependant on advertising report lower-than-expected advertising revenue, including The New York Times (NYT), Pininterest (PINS). Alphabet (GOOG) also missed on advertising revenue. On the other hand, News Corp (NWS) reports solid advertising gains. It also gained on reports that it is planning to license its content to generative AI companies.

Putting it together:

The consumer shift from goods to services continues. Will this week’s retail sales reflect this shift in earnings?
The dichotomy between China’s demand for industrial versus luxury goods illustrates the country’s complexities.
The apparent lull in Q4 2023 advertising probably reflects concerns about modest growth into 2024. Given the strong tailwind coming out of the holiday shopping season, this barometer of business confidence could reverse in Q1 2024.
We see other indications of less certain bookings in H2, notably cruise vendor Carnival Corp. (CCL). This is something to watch.

The Week Ahead

It is another heavy week with 165 companies in our Russell 1000 (RIY) universe reporting. 66% of SPX companies and 55% of RIY companies have reported so far with plenty more to go.

Companies across the sector spectrum are reporting, but consumer discretionary and consumer staples are the ones to watch, especially with retail sales coming tomorrow.

Airbnb (ABNB) and TripAdvisor (TRIP) are of particular interest given the EXPE outlook. The travel side includes Marriot International (MAR), Hyatt Hotels (H), and MGM Resorts (MGM).

We also hear from Coca-Cola (KO), DoorDash (DASH), and Kellogg Co. (KLG). Crypto aficionados will watch Coinbase Global (COIN) on Thursday.

Zillow (Z) will provide colour on the housing sales outlook, and will farm equipment manufacturer Deere & Co (DE) match Caterpiller’s robust outlook?

Among key earnings reports: