Both the CPI and PPI inflation reports will be released later this week. Headline CPI is expected to increase a hefty 0.6% month/month. Any upside surprise would only add to the upward pressure in interest rates.
The bigger story this week is earnings season starts with the major banks reporting. Bank stocks peaked on August 13th and have since corrected 12% (KBW Bank Index), underperforming the S&P 500 by 10% over that time period. Apparently investors don’t believe the earnings growth story for banks. The good news is that it sets the bar low.
Banks are key because credit keeps the economy going. When banks are lending, the gears of the economy are moving. A slowdown in lending causes the economy to ease.
HAPPY FOURTH BIRTHDAY TO THE BULL MARKET
The current bull market has lasted 1,455 calendar days which ranks as the ninth longest and ninth strongest all time. This week’s fourth birthday was not easy to achieve. One challenge has been going against the three-headed monster. All three heads (interest rates, oil prices and the U.S. Dollar Index) are moving in the wrong direction.
Breadth remains negative as measured by the advance/decline line. The cumulative advance/decline line has a long way to go to confirm the new all-time high in prices. The new high in the S&P 500 last Tuesday seems miraculous given that the equal-weighted version of the S&P 500 is 6% below its high. (This represents how the average stock in the S&P 500 is performing.) Small and mid-caps are also struggling. And just four stocks are responsible for half the S&P 500’s YTD gains: Apple, Nvidia, Micron and Advanced Micro Devices.
Semiconductor stocks, leaders of the digital economy, collapsed early in summer before stabilizing. Bears say the sharp pullback in semis brought back memories of the dot.com bust.
So what is there for a bull to like? Earnings, and lots of them. Corporate profits are expected to grow 26.5% this quarter (year-over-year) for the S&P 500. And 31.8% for the calendar year. The recent slide in the broader market shows investors are wary of these earnings forecasts so this season is crucial. It is important to remember stocks track earnings over time and disregard a lot of noise in the news.
Another positive: Bulls compare the AI bull market (which started in October 2022) as defined by ChatGPT’s release to the introduction of the internet with the release of Netscape in 1994. The performance of the two bull markets fits neatly on top of each other for the first four years as seen on the graph below:
Nasdaq Composite % Change in the 10 Years After Netscape Release vs. ChatGPT Release
Source: Bespoke Investment Group
What comes next is the explosive spike in share prices in 1999 (see the parabolic move higher with the blue line). Can AI make a similar push in 2027? It is not likely we will get anything close to what we saw in 1999, but we could see a leg higher due to strong earnings and more reasonable valuations compared to earlier this year. History doesn’t always repeat, but it often rhymes.