What Happened Last Week
- Sputtering Rally: Last week, investors reversed the recent strength in tech shares, turning against the stocks that had been leading gains.
- Divided Fed: Fed speakers revealed a split within the board and apprehension about the lack of data.
- Earnings Strength: Earnings season is winding down, with about 80% of S&P 500 companies having beaten estimates thus far.
What We’re Watching This Week
- A Deal in the Senate: Sunday evening, lawmakers struck a deal to reopen the government; the House is expected to vote on it later this week.
- Earnings: A number of European companies and a handful of more speculative names from the AI theme are up next to report.
- Treasury Issuance: The U.S. Treasury will auction 3, 10, and 30-year notes this week in a test of demand for Treasuries as the reopening process gets underway.
Investment Management Team’s Views
Markets reversed recent trends last week as investors questioned the future of AI CapEx spending and popular retail stocks came under pressure after their earnings reports. The tech sector and the tech-heavy NASDAQ 100 were the best performers the prior week but the worst last week, dragging the top-heavy S&P 500 down with them. However, market breadth improved last week, with certain corners of the market, such as dividends, small caps, and the beleaguered healthcare sector, posting gains. The average S&P 500 stock declined only 15 basis points last week, and 284 names were green on the week despite the cap-weighted index falling 1.6%. Last week’s price action was a bit of a reset after a furious rally in tech shares and may represent a good entry point for investors anticipating a year-end rally.
Recent price action in funding and credit markets, along with souring investor and consumer sentiment, indicates that the government shutdown has begun to weigh on equity markets. Sunday evening’s breakthrough in the Senate has been well received by equity investors and may help to restart upside momentum in the more speculative parts of the AI theme that lagged substantially last week. Outside the very front end of the yield curve, bonds have been mostly unaffected by dysfunction in Washington. Federal Reserve officials sounded divided last week on the path for monetary policy, and a lack of government data has made it difficult for the Fed and investors to discern the trajectory of the economy. Optimism is building that the government will reopen this week, but compiling and releasing economic data will take time, increasing the risk that the Fed holds rates steady at its December meeting.
Corporate earnings have continued to come in very strong this quarter, with about 80% of S&P 500 names beating bottom-line estimates. Last week, a host of retail favorites reported healthy earnings, but their stocks sold off, suggesting sentiment had run ahead of fundamentals. In early trading this week, several of those names are making back those losses as shutdown concerns abate. Looking ahead, a few additional higher-beta AI names are set to give updates, and the reception to those prints will be helpful in assessing the strength of this nascent rally and overall risk sentiment into the end of the year.