Jul 215 min read

US Economic Outlook: Aura Solution Company Limited

The Underdogs Are Catching Up

In recent news, the assassination attempt on former President Donald Trump has dominated the headlines, capturing the attention of political observers and the public alike. While this dramatic event has sparked discussions about the potential implications for Trump's election chances, financial markets have remained relatively unmoved. Instead, the spotlight has shifted to a different underdog story unfolding within the US equity markets, where this year’s laggards are beginning to catch up.

US Equity Markets: A Reversal of Fortunes

The US stock market has experienced significant volatility this year, with certain sectors and companies underperforming while others have surged ahead. However, recent trends indicate a shift as the previously lagging stocks are starting to close the gap. This phenomenon is particularly evident as the US earnings season approaches its peak, providing a clearer picture of the underlying economic conditions and corporate performance.

Several factors contribute to this catch-up effect in the equity markets. Firstly, the Federal Reserve's monetary policy has played a crucial role in stabilizing the market. With interest rates remaining relatively low and a cautious approach to tightening monetary policy, investors have found renewed confidence in previously undervalued stocks.

Secondly, the resilience of the US consumer has been a driving force behind the recovery. Despite economic uncertainties, consumer spending has remained robust, supported by strong job growth and wage increases. This has benefited sectors such as retail, consumer discretionary, and technology, which had faced challenges earlier in the year.

Earnings Season: A Critical Juncture

As the US earnings season enters its hot phase, investors and analysts are closely watching corporate performance to gauge the health of the economy. Earnings reports from major companies will provide insights into how businesses have navigated supply chain disruptions, inflationary pressures, and changing consumer behavior.

In particular, attention is focused on industries that were heavily impacted by the pandemic and are now showing signs of recovery. For instance, the travel and hospitality sectors, which faced significant setbacks, are witnessing a rebound as vaccination rates increase and restrictions ease. Similarly, manufacturing and industrial companies are benefiting from increased demand and improved supply chain conditions.

Economic Indicators: A Mixed Picture

While the resurgence of underperforming stocks is a positive sign, the broader economic outlook remains mixed. Inflation continues to be a concern, with rising prices affecting both consumers and businesses. The Federal Reserve's stance on inflation and interest rates will be critical in shaping market sentiment and economic stability in the coming months.

Additionally, geopolitical factors, such as trade tensions and global economic uncertainties, could influence the US economy's trajectory. Investors will be closely monitoring developments in these areas as they assess the potential risks and opportunities in the market.

A Dynamic Landscape

The US economic outlook is characterized by a dynamic landscape, with underdog stocks catching up and the earnings season providing crucial insights into corporate performance. While political events like the assassination attempt on Donald Trump capture headlines, financial markets remain focused on fundamental economic factors.

Aura Solution Company Limited continues to monitor these developments closely, providing our clients with expert insights and strategies to navigate the evolving market conditions. As the US economy adapts to new challenges and opportunities, we remain committed to helping our clients achieve their financial goals and succeed in a rapidly changing environment.

As the US earnings season approaches its hot phase, we take a closer look at the US economy. This week, 100 companies from the S&P 500 will report on their business situation and outlook, followed by 290 next week. We see some catch-up potential in companies that have not been in the spotlight in recent weeks and months.

Equity Markets: Time for the Laggards to Catch Up

While US ‘big tech’ companies continue to benefit from a strong long-term fundamental outlook, there are several reasons for some of this year’s lagging equities to catch up in the coming weeks.

Following the release of the US consumer price index, US equities experienced a sharp momentum sell-off during Thursday’s trading session. This year’s leaders, particularly the US information technology (IT) behemoths, saw declines, while rate-sensitive cyclical sectors such as US regional banks and small caps rallied strongly. The lower inflation outlook, alongside lower bond yields, should help alleviate the pressure of higher funding costs in these segments.

While we continue to recommend holding exposure to the US megacap IT companies given their strong long-term fundamentals, we see catch-up potential for some of the market’s laggards for several reasons:

Stretched Sentiment and Positioning: After the phenomenal outperformance of the Magnificent 7 (M7), sentiment and positioning indicators appear stretched for this cohort.
Narrowing Earnings Growth Advantage: The earnings growth advantage of the M7 versus the rest of the broad market is expected to narrow over the coming quarters, historically leading to a broadening out of equity market leadership.
Political Tailwinds: The recent increase in the odds of former president Trump winning the US presidential election in November should provide an additional tailwind for cyclical sectors with high exposure to the domestic economy. A new Trump administration is expected to take a harsher stance against some of the bigger IT names.

US Inflation: Easing Prices Boost Confidence in Rate Cuts

The weaker US inflation data for June strengthens the case for a rate cut at the September Federal Open Market Committee meeting. The decline in inflation was broad-based, affecting all major categories of the consumer price index. Together with softer economic data, including a cooling labor market, this has increased confidence that inflation will trend lower in the coming months. We have lowered our forecast for US inflation to 3% in 2024 and 2.2% in 2025. We still expect the Federal Reserve to cut rates in September and December.

US headline inflation slowed to 3.0% year-on-year in June, with lower energy and goods prices contributing to the decline. Shelter inflation, which has been a significant contributor to elevated inflation, slowed markedly in June, and other services prices also exerted less upward pressure on inflation. This long-awaited slowdown in shelter costs has been particularly helpful in boosting market confidence that the decline in inflation is real and sustainable.

Core inflation slowed only marginally to 3.3% in May. Both data points were slightly weaker than expected, reinforcing the view that inflation is continuing to fall, albeit in a still volatile and unpredictable manner.

What Does This Mean for Investors?

For now, we recommend keeping exposure to the US IT behemoths but allocating fresh capital to cyclical stocks such as small and mid-caps and industrials. However, given the risks of higher bond yields, a focus on quality is warranted at this stage.

Otherwise, it is like every summer: many investors are in the mountains or by the sea rather than at their desks, leading to the usual summer lull in the market. Whether the earnings season threatens to turn this into a summer storm remains to be seen. Therefore, it is not the time for major portfolio adjustments, although individual opportunities always arise.

Aura Solution Company Limited continues to monitor these developments closely, providing our clients with expert insights and strategies to navigate the evolving market conditions. As the US economy adapts to new challenges and opportunities, we remain committed to helping our clients achieve their financial goals and succeed in a rapidly changing environment.