Broad stock market indexes pulled back from their all-time highs during yesterday’s U.S. trading session. The S&P 500 declined by 0.25%, while the Nasdaq 100 dropped by 0.8%, primarily due to a selloff in AI stocks. The financials, energy, and materials sectors outperformed, whereas the real estate, consumer discretionary, and communication services sectors lagged behind. Below, we provide our tactical outlook for stock market performance over the coming weeks and, in particular, our view on July 2024.

Market Analysis – brief summary

Broad stock market indexes retreated from their all-time highs yesterday. The S&P 500 dipped by 0.25%, while the Nasdaq 100 fell by 0.8%, driven by a selloff in AI stocks.

Some important economic data was released yesterday in the USA. We highlight our analysis of these data below:

Housing startscame in at an annualized rate of 1.28 million, significantly below the estimated 1.38 million and 5% lower than last month. This unexpected decline suggests that higher interest rates may be impacting the residential real estate market.

Additionally,housing inventoryhas reached recent highs. Active listings in the U.S. now total 787,000, the highest number since September 2020, although still below long-term averages.

Initial joblessclaims exceeded estimates, reaching 238,000. Although this figure is 5,000 lower than the previous reading, it surpasses the forecast of 235,000 and is thesecond highest reading since August 2023.

Yesterday, two central banks announced their interest rate policies. TheBank of Englanddecided to maintain its base rate at5.25%, aligning with expectations. The policy committee’s vote of 7-2 in favor of maintaining the current rate suggests a gradual shift towards easing as economic data continues to improve.

Meanwhile, theSwiss National Bank(SNB)lowered its key policy rate by 25 basis points to1.25%, in line with market forecasts. This marks the second time the SNB has eased monetary conditions since central banks worldwide broadly raised interest rates.

It is also worth to highlight that the U.S. stock indexes hit new all-time highs before experiencing substantial selling and closing the day in the red yesterday. The selloff was led by prominent AI stocks such as Nvidia, ARM, Broadcom, and Vertiv.

Despite these sharp declines, particularly in ARM Holding (ARM), Broadcom (AVGO), and Nvidia, it appears to be largely profit-taking. Nevertheless, we foresee that the AI megatrend will remain robust, and investors should continue to prioritize this theme, also in the coming weeks.

Our Tactical View on the market

Let’s dive into history

Over the past 20 years, July has proven to be a strong month for stock market performance. During this period, the S&P 500 has risen in 15 out of 20 years, reflecting a 75% success rate. On average, the S&P 500 has gained 2.3% in July. This trend is evident whether trading the SPDR S&P 500 Trust (NASDAQ:SPY) or a similar ETF, and it generally applies to stock market behavior in July.

In the last decade, the S&P 500’s performance in July has been even more impressive. The index has increased in nine of the past 10 years, equating to a 90% success rate, with an average gain of 3.5%.

S&P 500 Index annual performance

S&P 500 Index – P/E ratio – trend

Looking at other indices for further validation, the NYSE Composite has also shown consistent upward movement in July. Over the past 20 years, it has risen in 15 out of 20 years, or 75% of the time, with an average gain of 1.7%. In the most recent decade, the NYSE Composite has increased in nine out of ten years, averaging a 2.3% return in July.

Similarly, the Nasdaq 100 index has shown upward movement in 17 of the last 20 years, reflecting an 85% success rate. On average, this index has gained 3.6% in July. Over the past decade, the Nasdaq 100’s performance has been even more remarkable, with an average return of 5.1% and a perfect record of rising in each of those ten years (100%). This trend is relevant when trading the Invesco QQQ Trust Series.

Over the years, various macroeconomic events have had significant impacts on stock market performance in the month of July. Here’s a historical overview from 2015 to 2023:

Analysis of historical stock market performance in July – key drivers

Below is a summary of our analysis on the key macroeconomic factors influencing stock market performance each July from 2015 to 2023:

2015: The market was influenced by several factors including eroding commodity prices, particularly oil, and concerns over China’s economic slowdown, which contributed to global market volatility. The S&P 500 Index had a slight decline of approximately -0.73% in July.

2016: Key events included the aftermath of the Brexit vote, which led to significant market fluctuations. Additionally, the Federal Reserve’s cautious approach to interest rate hikes played a role in stabilizing investor sentiment. S&P 500 Index increased by about +9.54% during July.

2017: Positive corporate earnings and strong economic data in the U.S. buoyed markets. Optimism about corporate earnings and a generally positive outlook on economic growth were key drivers. S&P 500 Index: +19.42% in July.

2018: The market faced headwinds from trade tensions, particularly tariffs between the U.S. and China, and concerns over rising interest rates. Despite these challenges, strong corporate earnings provided support. S&P 500 Index: -6.24% in July.

2019: Expectations of an interest rate cut by the Federal Reserve and better-than-expected corporate earnings were primary drivers of the market’s performance in July. S&P 500 Index: +28.9%.

2020: The COVID-19 pandemic caused unprecedented volatility. However, aggressive fiscal and monetary policies, including stimulus measures and liquidity injections by central banks, helped stabilize financial markets. S&P 500 Index: +16.26% in July.

2021: The economic and earnings rebound that started in 2020 continued, lifting equity markets to record highs. However, concerns over inflation and the Delta variant of COVID-19 led to some market volatility. S&P 500 Index: +26.89%.

2022: Despite a strong rebound in July, driven by good corporate earnings and a temporary relief from inflation fears, the overall market sentiment remained cautious due to rising interest rates and ongoing geopolitical tensions. S&P 500 Index: -19.44% in July.

2023: The market experienced considerable volatility with alternating periods of strength and weakness. By July, positive earnings reports and easing inflation concerns helped drive the market higher. S&P 500 Index: +24.23% in July.

These events illustrate the complex interplay of macroeconomic factors that influence stock market performance each July. From 2015 to 2023, the broad stock market’s performance in July was negative in only three out of nine years.

Tactical view on July 2024

Let’s take a look at the current market consensus for the S&P 500 Index performance in July 2024:

Oppenheimer Asset Management: They have lifted their year-end target to5,500from 5,200, indicating almost 0% upside potential from yesterday’s closing level of5,473.16.

Société Générale: They also raised their year-end target to5,500from 4,750. As we highlighted above – we see almost no upside for the S&P 500 Index from the yesterday’s closing level.

Bank of America: Their year-end target is5,400for the S&P 500 Index.

Goldman Sachs: They expect the S&P 500 index to rise to4,700by the end of 2024, representing a price gain of about 5% and a total return of around 6% including dividends.

Based on the S&P 500 Index performance forecasts for 2024 from leading market experts, we do not anticipate any upside from current levels. This could indicate a potential negative stock market performance in July 2024, a consolidation phase, or a market correction.

In our view, majority of the positive stock market triggers, e.g. fewer interest rates hikes (in September, December 2024); earnings growth, offsetting rising costs, are already priced-in by the market. So, the odds that July 2024 may see a consolidation or even correction are currently higher than the odds of stock market appreciation, unless we see much more positive macro-economic and geopolitical events.

Our arguments that support neutral-to-bearish view on July

The stock market is facing potential headwinds that could lead to a correction in July 2024. Below we summarized the key reasons:

Interest Rates and Inflation:

• Inflation has been declining but remains above the Federal Reserve’s 2% target.
• Central bankers project only one rate cut by year-end, indicating a cautious approach.

Valuations:

• Stock valuations are elevated. TheS&P 500 is priced at a 32% premiumcompared to its 20-year average price-to-earnings ratio.
• Tech stocks, which have been driving the market, trade at a 68% premium.
• These lofty valuations may not be sustainable without upward revisions to earnings estimates.

Tech Sector Vulnerability:

• Mega-cap tech stocks have outperformed the market, but their valuations are stretched.

Our conclusion

We would like to caution investors about the limited potential for further gains in the market, especially as tech stocks continue to rise. Our comprehensive analysis and research indicate that the stock market is currently at its highest valuation since 1929, excluding extraordinary events such as COVID-19. This overvaluation could lead to a significant market correction or, at best, a period of consolidation.

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