Daily market snapshot

• Equities mixed but showed some footing after tech-led weakness – Stocks put in a mixed performance on Thursday, though markets displayed what we would characterize as a bit of stabilization, following the declines in recent days stemming from underwhelming earnings reports from some of the bellwether technology names, along with an overall rotation away from growth stocks that have prompted equities to retreat from the recent record highs. The TSX was little changed on the day. After spending the majority of the day in positive territory, the S&P 500 was unable to hold on to the gains and closed moderately lower, while the Dow added 81 points, and small-caps continued their outperformance with a gain of more than 1%. Meanwhile, tech stocks continued to lag, with the Nasdaq finishing nearly 1% lower. Bonds moved higher, pushing 10-year Government of Canada bond rates below 3.4%, while gold was lower and oil prices gained 1%. A slew of earnings reports added to the mix, with better-than-expected results from companies like IBM and Chipotle, while disappointments from Ford and American Airlines are weighing on those shares. U.S. economic data provided some help, as second-quarter GDP came in ahead of expectations.*
• U.S. GDP report shows a still-solid economy – The latest GDP report showed that the U.S. economy grew by a healthy 2.8% in the second quarter, ahead of consensus estimates calling for 1.9%. This was a notable pick up from the previous quarter's 1.4% pace of growth, powered by an acceleration in household consumption as well as a notable jump in investment spending (particularly equipment investment).* There are a few key takeaways from this result:
  • The resilience in personal consumption is a bright spot, highlighting that consumers are not going into hibernation. Softness in the labour market is starting to emerge, which, along with slower wage growth and depleted accumulated savings, leads us to believe we'll see slower spending growth ahead. That said, we're not yet seeing evidence that consumer spending will turn down in a manner that would drive a broader decline in GDP. With labour-market conditions still in solid shape, we think the consumer will continue to support slower-but-positive economic growth over the balance of the year.
  • This pace of growth should give the Fed confidence that the economy is not in immediate need of monetary support. Therefore, we think this will support the central bank holding rates steady next week. At the same time, we don't think this poses any major changes to the expectation of a September rate cut. Friday will bring the latest read on the PCE (personal consumption expenditures) index, the Fed's preferred measure of inflation. A lot is riding on that report, but to the extent it does not show a surprise uptick in consumer price pressures, we think the combination of moderating inflation and still-solid GDP growth supports the "soft landing" outlook that has largely underpinned the rally in equities this year. In contrast, the Bank of Canada has already shifted into an easing cycle, implementing its second rate cut on Wednesday, as it seeks to support domestic growth.
• Some perspective on the recent market volatility – The pullback in the stock market in recent days has driven headlines and some anxiousness in overall market sentiment. It's not unreasonable to expect that some weakness could linger as investors evaluate election uncertainties, incoming quarterly earnings announcements, and the prospects of upcoming Fed moves dictated by the balance of high but falling inflation and positive but moderating economic growth. Nevertheless, we think some perspective is warranted around recent market moves. The S&P 500 is off about 4% since early last week, but we'd point out two important elements of that pullback: 1) This decline is from an all-time high. The TSX is down less than 2% and is still up 5% over the last month. Moreover, the U.S. stock market is up more than 13% so far this year and 20% over the last 12 months.* 2) This dip is largely coming from weakness in big tech, the very stocks that have been sizable outperformers this year. This is underscored by the fact that the Nasdaq is down 7% from its highs, while the Dow and Russell 2000 index (small-caps) are off only modestly from recent highs. This suggests that the dip is not, at this stage, a more marketwide decline and, in our view, is more reflective of some froth coming off of the top of the largest gainers, versus being driven by new risks or concerns about the underlying fundamentals.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks drop on underwhelming earnings - Major equity indexes posted broad declines on Wednesday, with the S&P 500 logging its worst daily decline since December of 2022 and the tech-heavy Nasdaq declining more than 3%. Earnings from two of the Magnificent 7 stocks underwhelmed, weighing on the growth sectors of the market that have driven most of the market gains this year. Shares of Tesla fell 11% after a fourth straight quarter of disappointing earnings, while shares of Alphabet also pulled back, as the race in artificial intelligence (AI) is driving higher spending than analysts expected*. On the other side of the Atlantic, corporate profit disappointments were front and centre as well, with shares of luxury goods company LVMH dropping to a six-month low on signs that China growth is weighing on luxury spending*. Shares of Deutsche Bank were also under pressure after the company reported its first quarterly loss in four years and paused share repurchases*. Despite the risk-off sentiment, the TSX outperformed the S&P 500, as the Bank of Canada cut interest rates again this morning. The rate-cut announcement weighed on the loonie, which touched a three-month low relative to the U.S. dollar*.
• Bar of expectations is high for mega-cap tech - Between today and the end of next week, over 50% of the S&P 500 companies will have reported earnings, shifting some of the attention from U.S. politics and macroeconomic data to the health of corporate America. The outlook for earnings remains positive, as S&P 500 earnings growth is expected to accelerate from 6% in the first quarter to about 10% in the second*. However, unlike the past couple of quarters, the bar of expectations is higher for the broader market, and more so for the Magnificent 7 group of stocks that are responsible for the bulk of this year's gains. Analysts project profits at these companies to rise 30%, outpacing the rest of the market, as they have done for the past five quarters*. But given the elevated valuations, investors are sensitive to any blemishes in the results and in forward guidance. To this point, results for Alphabet were strong, but the stock finished down 5% due to higher spending*. We think that AI is poised for rapid growth over the next five to 10 years and can continue to drive earnings for the companies that are spending heavily today to enable its development. However, as comparisons from a year ago for mega-cap tech become harder and earnings growth from the rest of market starts to pick up, we expect to see a broadening in market leadership ahead, providing further fuel for the sector rotation that appears to be underway the last couple of weeks.
• Bank of Canada eases further - On the economic front, the Bank of Canada's interest-rate decision was today's highlight. The bank lowered its policy rate to 4.5% from 4.75%, as was expected, with Governor Macklem reiterating that it is reasonable to expect further interest-rate cuts given the progression in growth and inflation. With the 2% inflation target in sight, policymakers are now more sensitive to downside risks to consumer spending, especially given the upcoming mortgage renewals for those homebuyers that signed on at record-low rates five years ago. We think that another rate cut in September is likely if current trends persist.
• Broader backdrop remains supportive - South of the border, business activity indexes (S&P Global PMIs) released this morning suggest that growth held mostly steady in July, but the current level of activity is consistent with an average pace of expansion. Tomorrow's advanced estimate of second-quarter GDP is likely to convey a similar message, as the U.S. economy is expected to grow 2%*. That would be an acceleration from the prior quarter but also a notable downshift compared with the second half of the last year, which we would describe as normalization after a period of very strong demand. There are plenty of signs that the labour market and economic growth are downshifting. But inflation is cooling as well, which should allow the Fed to start cutting rates and the BoC to continue its easing cycle, potentially just in time to achieve a soft landing. Given the magnitude and speed of the rally in the first half of the year, markets could enter a choppier phase in the near term. But as long as the economy stays out of recession, inflation continues to moderate, and central banks gradually let off the brakes, we would view any pullbacks in both equities and bonds opportunistically relative to cash and bonds.

Angelo Kourkafas, CFA
Investment Strategist

^{Source: *FactSet}

• Stocks finish mostly lower Wednesday amid tech weakness: Equity markets were mostly lower on Wednesday, with weakness in U.S. technology shares weighing on markets. The weakness in tech was driven by reports that the U.S. is considering tightening trade restrictions on companies that export semiconductor equipment to China. In response, the S&P 500 declined by over 1.3% for the day, while the technology-heavy Nasdaq declined by 2.8%.* The TSX finished lower on the day as well, declining by 0.7%.* Outside of technology and growth sectors, U.S. markets fared better, with the Dow posting a 0.6% gain for the day and the Russell 1000 Value Index gaining about 0.2%.* Overseas, Asian markets were mixed overnight, while European markets were mostly lower following U.K. inflation data that was slightly above expectations.* Bond yields were little changed on the day, with the 10-year GoC yield closing around 3.34%, while the 10-year U.S. Treasury yield finished around 4.15%.* In the commodity space, oil prices finished higher by more than 2.5%, while gold prices were lower by 0.2%.*
• U.S. small- and mid-cap rally takes a breather: Despite closing lower on Wednesday, U.S. small- and mid-cap stocks have had an impressive run over the past week. After posting a modest 1% gain in the first half of the year, U.S. small-cap stocks have ripped higher the past several days and are now up by roughly 11% year-to-date.** Prior to today, small-caps had seen a daily gain of greater than 1% in each of the past five trading days, the longest such streak since April 2020.* U.S. mid-cap stocks have seen strong returns as well, gaining roughly 5% since last Wednesday, and are now higher by roughly 9% year-to-date.* The move higher in U.S. small- and mid-cap stocks was ignited last Thursday following softer-than-expected inflation data that showed U.S. core consumer price index (CPI) inflation rose by 3.3% in June, the lowest rate since April 2021. The encouraging inflation data has led markets to now price in two to three Fed rate cuts in 2024, compared with just one in late May.*** Small-caps rallied in response to the Thursday CPI reading, gaining over 3.5% for the day and finishing up by 6% last week.* Mid-caps followed suit, gaining 1.6% on Thursday and finishing last week higher by 3.4%. On average, small- and mid-cap stocks carry more debt in their capital structure than large-cap stocks. Therefore, Fed rate cuts that send interest rates lower could have a positive impact on profitability of small- and mid-cap stocks through the form of lower interest expense. To the extent that inflation can continue to trend lower, allowing the Fed to cut interest rates while economic growth remains positive, small- and mid-cap stocks could continue to benefit in the months ahead.
• U.S. housing-market activity shows signs of improvement in June: U.S. housing starts for June were at a seasonally adjusted annual rate of 1.35 million, better than the prior reading of 1.31 million and ahead of expectations for 1.3 million.* U.S. building permits, which serve as a leading indicator for future construction activity, were at a seasonally adjusted annual rate of 1.45 million, above the May reading of 1.4 million and better than consensus expectations for 1.39 million.* Despite the improvement from May to June, both housing starts and building permits were lower on a year-over-year basis, as higher interest rates have weighed on housing-market activity. Yesterday provided a read on domestic residential-construction activity, with housing starts for June coming in at a seasonally adjusted annual rate of 242,000, below expectations for 255,000 and below the May reading of 265,000.* Our view is that Fed and Bank of Canada rate cuts in the months ahead should lead to lower interest rates, which could prompt a pickup in residential construction activity in the U.S. and Canada.

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet 
**FactSet, small-caps represented by Russell 2000 Price Index, mid-caps represented by Russell Mid Cap Price Index
***Bloomberg} 

Monday, 7/22/2024 p.m.

• Washington remains in focus as Biden drops re-election bid: On Sunday afternoon, President Joe Biden announced he will not seek reelection in November as the Democratic nominee, and he endorsed Vice President Kamala Harris to be the Democratic nominee, though others may enter the race. This latest twist in the political landscape potentially brings more uncertainty about the final outcome of the U.S. election. However, stocks took the news in stride, with the S&P 500 gaining over 1% while the TSX posted a 0.8% gain.* We'd view the positive response as a sign that markets likely don't expect any wholesale changes in policy from the upcoming Democratic nominee. On the other side of the aisle, Donald Trump remains the favourite to win the election according to PredictIt, but his odds are lower after the news. Over the past two weeks, part of the sizable outperformance of U.S. small-cap stocks has been credited to hopes of deregulation and more confidence around the start of the Fed rate-cutting cycle. The small-cap rally continued today, with the Russell 2000 Index gaining over 1.5%.* In our view, here are the key takeaways from the weekend developments:
  • The change in the Democratic nominee won't dramatically change the policy backdrop. From a market standpoint, the key issues at stake will likely remain taxes and tariffs. The Trump administration proposals point to lower taxes, deregulation and higher tariffs. While markets have welcomed the pro-growth stance, these policies could also pose inflationary risks down the road. On the Democratic side, we don't expect a meaningful deviation from current views on trade and taxes
  • The procedure around the selection of the new nominee and headlines heading into the democratic convention can inject more short-term volatility. Historically, volatility tends to rise about two months before the election but subsides after the election.
  • The investment backdrop remains positive for markets, supported by rising corporate profits, continued economic expansion, and the potential for lower yields as the Fed potentially pivots to interest-rate cuts in the months ahead. We'd recommend investors use short-term pullbacks as an opportunity to add to quality investments in line with their long-term goals.
• Fundamentals, not politics, remain in the driver's seat for markets: While political uncertainty can and does drive short-term bouts of market volatility, we'd remind investors that playing politics with your portfolio can be a risky strategy. For example, looking at the previous two administrations, Donald Trump has talked tough on relations with China and imposed tariffs on billions of dollars' worth of imported goods in 2018. While the Biden administration has kept many of the Trump administration tariffs in place, rhetoric has been softer toward China, and there has been a greater willingness to be collaborative with China as a trade partner. Based purely on rhetoric and headlines, it would be easy to assume Chinese stocks underperformed under the Trump administration and outperformed under Biden. However, the opposite is true. Under the Trump administration the MSCI China Index gained 114% while under the Biden administration the MSCI China Index has declined by roughly 48%.* Over the long run, we believe fundamental forces, such as economic growth, interest-rates and corporate earnings, are more powerful drivers of market performance. To that end, we believe conditions will remain favourable for U.S. equity markets in the months ahead, driven by ongoing economic growth, a Fed that is approaching interest-rate cuts, and healthy corporate profit growth.
• Bank of Canada meeting and corporate earnings take the spotlight: Monetary policy will be centre-stage for markets, with the Bank of Canada (BoC) set to meet on Wednesday. June's inflation reading was lower than expected, which, combined with a soft retail-sales report last Friday, has likely paved the way for another BoC rate cut at Wednesday's meeting. On the earnings front, roughly 30% of the S&P 500 is set to report this week. Expectations are for the S&P 500 to grow earnings by roughly 10% year-over-year in the second quarter, backed by strong profit growth in the communication services, information technology, financials and health care sectors.* Looking ahead to the full year, expectations are for the S&P 500 to grow earnings by just shy of 12% in 2024, which, if achieved, would be the strongest growth rate since 2021.* Unlike 2023, where only a handful of sectors saw strong profit growth, 2024 is expected to see positive earnings growth across every sector except energy and materials.* Healthy profit growth across multiple sectors could lead to a broadening of leadership in the months ahead and help to extend the current bull market.

Source:Bloomberg, Edward Jones.

Image Description: This chart shows the average level of the VIX Volatility Index 6-months before and after election day since 1992. Historically, volatility spikes as election day approaches but subsides in the weeks after. Past performance does not guarantee future results.

Investment Strategy

^{Source: *FactSet}