What happened last week
- Risk-on week as data continued to push back calls of “imminent recession”
- Miss on key inflation and wage data in addition to resurgent US consumer sentiment added fuel to the market rally
- International equities outperformed on dollar weakness, and China stimulus hopes; financials earnings kicked off earnings season
What we’re watching this week
- Earnings season continues with about 11% of the S&P 500 by market cap reporting; 40% report next week
- Nasdaq 100 will rebalance on Friday and will cut the top weights in the index and potentially drive short-term volatility due to large flow impacts
- Weekly data highlights are US retail sales and CPIs from Canada, Japan, and the UK; 2Q GDP from China missed overnight
Horizon’s Investment Management Views
- Both stocks and bonds rallied last week as the data reinforced notions of a soft landing. Easing inflation and continued consumer resilience were reflected by a miss on headline Consumer Price Index (CPI), slowing wage inflation, and a surge higher in consumer sentiment. In defiance of year-to-date trends, international equities1 led last week on tailwinds from a weaker dollar and hopes for stronger stimulus measures out of China (see the weak 2Q GDP print over the weekend). We think that the recent rally in internationals and cyclicals is likely short-lived and may have been exacerbated by short covering. In some of our more tactical portfolios, we sold into last week’s strength in internationals and expressed our increased conviction in domestic growth and Artificial Intelligence (AI)-related stocks.
- Despite solid inflation developments, the market stayed ~90% certain of another hike during next week’s Federal Open Market Committee (FOMC) meeting. Market drivers will likely continue to shift from policy expectations to economic performance as the Fed nears the end of its hiking cycle. As markets price increasingly optimistic economic scenarios, investor sensitivity to downside surprises in economic data may increase, even if we avoid an outright recession.
- Earnings season kicked off last week with some solid reports from the megabanks. Financials lagged on the week, however, with concerns about the shape of the yield curve impacting future profitability. Despite the historic labor market strength unexpectedly extending this market cycle, we don’t think the time is right to embrace the early-cycle cyclical trades in value and small caps; we prefer domestic large caps with a quality and growth bias, as well as higher exposure to the nascent AI-theme.
1 MSCI ACWI Index, which comprises the stocks of nearly 3,000 companies from 23 developed countries and 25 emerging markets. This report is not a complete analysis of every material fact in respect to any company, industry or security. This information should not be considered to be a recommendation to buy or sell a security or to adopt a particular investment strategy. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. The investments recommended by Horizon Investments are not guaranteed. There can be economic times where all investments are unfavorable and depreciate in value. Clients may lose money. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device. Before investing, an investor should consider his or her investment goals and risk comfort levels and consult with his or her investment adviser and tax professional. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. The Nasdaq 100 is a stock market index made up of 100 equity securities issued by the largest non-financial companies listed on the Nasdaq stock exchange. The S&P 500 Index represents the largest US companies. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC.
