Equities Q3 Fundamental Outlook: Bullish Momentum to Slow

Strong Momentum Likely to Wane successful Q3 arsenic the Fed Awaits Incoming Data

US equity indices are connected way to adjacent retired Q2 successful affirmative territory acknowledgment to outperformance from Nvidia, which temporarily saw it assertion the rubric of the largest banal successful the US erstwhile measured by marketplace cap. Tech-heavy indices similar the Nasdaq and S&P 500 person risen implicit the 4th but the comparatively heavy pullback astatine the commencement of the play has hampered the wide emergence during the three-month period.

Mega Cap Tech Stocks Q2 Performance (01/04/2024 – 21/06/2024)

Source: Rifinitiv, Prepared by Richard Snow

The question connected everyone’s caput revolves astir whether a fistful of important companies volition beryllium capable to propulsion US indices higher successful the coming 4th considering the existent rally is looking little inclusive with less stocks trading supra their idiosyncratic 200-day elemental moving averages (SMAs). Other considerations see Q2 net results which volition filter successful from July, delayed complaint cuts signaled by the Fed, and the tally up to the US statesmanlike election.

A Less Inclusive Rally is not Necessarily Bearish but tin Slow Momentum

There has been a batch of treatment astir the sustainability of the bullish inclination successful tech-heavy indices arsenic determination has been a driblet disconnected successful the fig of stocks trading supra their semipermanent averages. The measurement has dropped from supra 80% to little than 68%.

As tin beryllium seen from the illustration below, whenever the percent of S&P 500 stocks trading supra their 200 SMAs driblet from 80%, determination is much apt than not a further deterioration successful stock prices for the bulk of index. In 2018, 2020 and 2022 the percent of stocks supra their 200 SMAs stalled and reversed, coinciding with a little speechmaking for SPX astatine the extremity of each year.

However, arsenic we’ve seen successful 2023, banal markets tin inactive rally contempt less stocks taking portion and this is simply a improvement that has go much evident precocious with the emergence of Nvidia – taking the full marketplace headdress of the apical 5 stocks successful the scale to implicit 25%. As agelong arsenic the heavyweight stocks execute well, the scale is capable to clasp up adjacent if the bulk of stocks stagnate oregon acquisition shallow pullbacks.

Measure of Market Breadth for the S&P 500 (% of SPX stocks trading supra their 200 SMAs)

Source: Barchart, prepared by Richard Snow

After acquiring a thorough knowing of the fundamentals impacting US equities successful Q3, wherefore not spot what the method setup suggests by downloading the afloat US equities forecast for the 3rd quarter?

Q2 Equity Earnings and The Fed Delays Rate Cuts owed to Inflation Concerns

US net play for the 2nd 4th kicks disconnected successful the archetypal week of July and appears apt to reflector the mostly affirmative results witnessed implicit Q1. In fact, analysts person somewhat raised their afloat twelvemonth forecast for net growth from 11.2% to 11.3% successful 2024 successful stark opposition to the meagre 1% fig that materialised successful 2023.

S&P 500 Projected Earnings Growth 2024 by Sector

Source: FactSet, prepared by Richard Snow

The longer-term outlook appears positive, with treble digit net maturation expected to widen into 2025, expanding the likelihood of a brushed landing erstwhile the Fed yet acquires capable assurance to little the involvement rate.

Thus acold equity markets person proven robust, printing all-time highs contempt complaint cuts perpetually being pushed backmost owed to stubborn inflation. The Fed raised its ostentation expectations erstwhile the updated forecasts were released astatine the June FOMC gathering and indicated that it plans to little the Fed funds complaint conscionable erstwhile this year, down from 3 projected successful March but the determination betwixt 1 oregon 2 cuts was a precise adjacent one. Markets precocious underwent a hawkish repricing (as seen successful the illustration below), which could support equity gains capped successful Q3 earlier the representation changes successful Q4 erstwhile that archetypal Fed chopped is anticipated. Inflation prints for June and July volition beryllium important successful the appraisal of a imaginable chopped successful September, but for now, markets afloat terms successful a chopped by November.

If this remains the case, Q3 whitethorn spot constricted gains connected the equity beforehand with indices rising towards the extremity of the 4th unless the September FOMC gathering becomes much favourable. Such a script is apt to buoy equities sooner. Keep successful caput the autarkic Fed typically avoids argumentation adjustments successful an predetermination period to region itself from immoderate accusations of governmental interference. That leaves September and December arsenic the lone viable months if we are to get 2 complaint cuts this year.

Implied Yield for CBoT 30-Day Fed Funds Futures Curves

Source: Rifinitiv, Prepared by Richard Snow

What Does Seasonality successful an Election Year Reveal for the S&P 500?

Generally speaking, predetermination years are large for the banal market. Data going arsenic acold backmost arsenic 1949 sees a emblematic predetermination twelvemonth adding astir 7% connected average, portion years involving a sitting president moving for reelection person climbed astir 13% connected average. We’re lone halfway done 2024 and already seeing gains of 15% towards the extremity of June. July and August thin to consolidate oregon grounds a flimsy emergence earlier September sees a broader continuation of the yearly bull trend. If incoming ostentation information shows important progress, the seasonal uptick successful the S&P 500 successful September whitethorn coincide with an accrued anticipation of a afloat 25 ground constituent chopped from the Fed.

Seasonal Trajectories for the S&P 500 nether Different Scenarios During an Election Year

Source: Hirsch Holdings Inc, X via @AlmanacTrader

Fundamental Summary for Equities successful Q3:

The outlook for US indices is inactive bullish, but headwinds similar stubborn ostentation data, ostentation expectations, a little inclusive rally, and a seasonal consolidation bounds the grade that indices are apt to emergence successful Q3. One past happening to enactment according to the latest Bank of America Global Fund Manager Survey is that capitalist sentiment is overwhelmingly positive, with 64% of respondents predicting a ‘soft landing’ and 26% indicating a ‘no landing’ scenario.