What happened last week
- Price Action: MAG-7 leads U.S. equity indices to fresh all-time highs as small-caps and large-cap value decline.
- Softening Economic Data: Unemployment rate ticked higher to 4.1%, up from 3.7% at the start of this year.
- French Elections: A coalition of the left placed first, upsetting the frontrunner far right; uncertainty regarding French fiscal policy remains high.
What we’re watching this week
- U.S. Inflation: Main event this week with potential for a downside surprise to pull forward Federal Reserve’s first rate cut.
- 2Q Earnings: Large banks kick off earnings season in earnest on Friday.
- Politics: Closely monitoring any potential changes to Democratic Party ticket, fallout from French Far Left upset victory, and changes in policy from other countries with new governments (UK, Iran, etc).
Horizon’s Investment Management Views
Last week, U.S. stocks registered fresh all-time highs, led by the mega-caps. The Magnificent 7 (MAG-7) gained ~8%, outperforming the average S&P 500 stock by the widest margin since last May. Although we expected long-term trends to reassert themselves at the beginning of the quarter, the extent of last week’s mega-cap dominance caught us by surprise. The narrow nature of last week’s rally is highlighted by the fact that domestic value and small-cap stocks ended the week lower despite the fall in interest rates; moves lower in rates have recently correlated with small-cap outperformance versus large-caps.
Adding to our expectation of volatility ahead are two factors: weakness in the economic data and political uncertainty. Last week’s data releases pointed to continued softening in both the services sector and the labor market, with the unemployment rate rising for the third straight month. Political uncertainty is an increasingly important driver of investor sentiment. A surprisingly strong showing by a coalition of the French left removed the tail scenario of a far right majority, however, it does little to increase certainty regarding the policy trajectory out of Paris. In the U.S., Biden’s future remains uncertain with Democrats, now including some lawmakers, splintering on their support of the President.
An update to U.S. inflation data is the primary market catalyst this week. A soft CPI print could embolden the doves on the FOMC to push for a September cut. Turning to corporate fundamentals, Friday is the unofficial start of 2Q earnings season with many of the largest household banking names kicking things off on Friday. Zooming out, the bar for this earnings season looks like it is moving ever higher, especially for some of the MAG-7 names. We expect a volatile few weeks ahead as the potential for earnings surprises and lingering political questions keep uncertainty high.
FOMC = Federal Open Market Committee The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The commentary in this report is not a complete analysis of every material fact in respect to any company, industry or security. 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. The “Magnificent 7” Amazon, Apple, Google, Meta, Microsoft, Nvidia, and Tesla. Equities are represented by the S&P 500 Index which is a market-capitalization- weighted index of the 500 largest U.S. publicly traded companies. Small and Large Caps are represented here by broad-based small and large cap indices. Domestic Value stocks are represented by a broad-based domestic value stock index; contact us for more information. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. 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.
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