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Weekly Market Update

Our Asset Allocation team comments on what’s moving markets and how the PIMCO GIS Dynamic Multi-Asset Fund (DMAF) is positioned.

FOREWORD

  • Access these views via the Dynamic Multi-Asset Fund, a dynamic fund designed to deliver across market environments and help investors navigate the toughest market situations.

From the desk of Our Asset Allocation team, Friday 19th July 2024.

Make Value Great Again

The rotation sparked by last Thursday’s soft U.S. CPI report continued this week as Trump victory odds rose, macro data held up, and the technology sector was battered by headline after headline. Despite strong numbers from TSMC and acceptable ones from ASML, the Artificial Intelligence trade was jolted by Trump’s comments questioning the need to defend Taiwan. It was also pummeled by news that the Biden administration is considering even more severe restrictions on allied chip exports to China. Global IT outages caused by a CrowdStrike glitch only twisted the knife. But the unwind was not limited to tech; consensus longs like Eli Lilly (-9.6% week-over-week) and Eaton (-5.6%) also suffered.

Much has been written on the record nature of these moves, and on technical reasons to believe they may soon run out of steam. To be sure, the combination of “Trumpmentum”, disinflation, and soft landing expectations could extend the rotation further than initially anticipated. And for the most part, softer inflation has translated more into dovish policy pricing than lower growth projections embedded into equities. On the other hand, the environment remains one of broadly slowing growth, earnings should focus attention on fundamental strength, and multiples have pared much of their recent expansion.

Equity gains in the first five months of the year were largely driven by earnings while, until the recent correction, the rally since June had been mainly attributable to multiple expansion. The run up and back was led by the usual suspects. In the near term, the resolution to this limbo will be found one way or another in megacap tech earnings. The pressure is on for them to be “magnificent”.

Figure 1: The rise and fall of U.S. equity forward price/earnings multiples, June-July 2024

Figure 1: The rise and fall of U.S. equity forward price/earnings multiples, June-July 2024

For illustrative purposes only
Source: Bloomberg, as of 22 July 2024.

During the week, the S&P500 index fell 2%, the Nasdaq 100 index fell 4%, and the Russell 2000 index rose by 1.7%. Of note is that the Russell 2000 began declining midweek, just not by as much as the others. As uncertainty rises, seasonality becomes more challenging, and tech ceases to be the only game in town, we’re standing by for new opportunities in the second half of the year.

Clearly in focus is the Trump trade. Despite our economists’ work showing that Trump’s policies as stated could be stagflationary, at least in the initial years, equity markets have been taken by the lure of higher growth. This comes down to: tax cuts being extended (much of which would’ve happened anyway under a Democratic president); greater stimulus (which is as yet uncertain, but would be less significant than the 2017 Tax Cuts and Jobs Act, and could come at the cost of higher rates); and deregulation.

In fairness, corporate taxes are especially salient for equities, and a Democratic White House with a split Congress would bring with it the risk of a hike, whereas Trump wants to bring the rate down to 15%. But we don’t know that the most pro-growth policies will be implemented. What we do know will happen in a second Trump term is higher tariffs – and markets are pricing in the upside more than the downside. Accordingly, beneficiaries such as regional banks have soared while Goldman Sachs’ U.S. tariff risk basket actually rallied after the 28 June presidential debate and has been reasonably flat since March.

What’s not controversial is that Europe will be a loser in all this. Goldman Sachs estimates that Trump’s agenda would lower Euro area GDP by 1%, with a hit to earnings per share (EPS) of 6-7%. Moreover, exposure to China is already dragging down earnings, with brands like Burberry, Swatch, Hugo Boss, and Richemont all hurt by slumping demand. Mainstay industrials like ABB and Atlas Copco also disappointed this week.

In the U.S., earnings are going well in aggregate, just as Citi’s U.S. economic surprise index has ticked up. Of the 70 S&P500 companies that have reported, 81% are beating on EPS with an aggregate surprise of 5.6%. Early snapshots of Amazon Prime Day sales also came in-line with expectations. However, this has been accompanied by a dribble of softer consumer-related reports. Pepsico, Conagra, Delta, United, Spirit, Five Below, Domino’s, Pool, Leslie’s, and JB Hunt all disappointed on key metrics. And ISI’s Retail Sales Survey reading fell to 41.7 from 45.8 last week and 48.3 before that, with 45 being a recessionary level. These are preliminary indicators and we are still early in the season, but consumer strength will be an area to monitor, as always.

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Data as of 19th July 2024 unless otherwise stated.

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