TOPLEY’S TOP 10 May 28 2024 | View From The Top

1 – 2. Q1 Earnings Recap

Nasdaq Dorsey Wright
AI-focused “Fab Five” lift large caps to best earnings growth in almost 2 years.
We wanted to hold off until we got Nvidia’s earnings before doing our Q1 earnings recap… and they did not disappoint (+468% YoY earnings growth for Nvidia)!
Now, Q1 earnings season is all but done for the S&P 500 (96% reported), and it turned out pretty well for large caps (and especially mega caps).
S&P 500 earnings grew +6% YoY in Q1 (chart below, orange bar) – the strongest growth in nearly two years.

But, as we showed a month ago, earnings were top heavy. Earnings for the AI-related “Fab Five” (Amazon, Google, Meta, Microsoft, and Nvidia) grew +85% YoY, while earnings actually fell 2% YoY for the rest of the S&P 500.
3 buckets of sector earnings: AI-related, ongoing earnings recessions, and everyone else
At the sector level, the divide wasn’t quite so stark. Instead, they fell into three buckets: AI-related sectors, those still in earnings recessions, and everyone else (chart below).

AI-related sectors saw 25%+ YoY earnings growth: Information Technology, Communication Services, Consumer Discretionary, and Utilities (dark green bars).
Continued earnings recessions for Health Care, Energy, and Materials (red bars) for the same reasons (drop in Covid-related spending, 25% YoY drop in natural gas prices, and earlier manufacturing recession, respectively).
Everyone else saw +4% to +10% YoY earnings growth. These sectors (Financials, Industrials, Consumer Staples, and Real Estate) aren’t AI hubs, but they’re still benefitting from a strong economy (light green bars).

3. S&P 5 Straight Weeks of Gains…..Positive 23 of Past 30 Weeks

Jim Reid Deutsche Bank
After another run of 5 consecutive weekly gains, the S&P 500 is in rarefied historical territory again. For example, the index is now up for 23 of the last 30 weeks, which is a joint record since 1989. And if this week ahead is positive again, it would mark 24/31 weekly advances, which would be a joint record back to 1963.

Unsurprisingly, some of these relentless advances happen as the economy is recovering from a recession. So, in 1958 for example, the index set an all-time record of 26 positive weeks out of 30. Equities went on a serious rally as output began to rebound after the 1957-58 recession, whilst unemployment came down. It’s a similar story in 1954 and 1980, and some have made that recession argument about today’s moves since a US recession in 2023 had been the overwhelming consensus at one point. But as optimism about a soft landing has grown, equities have rallied very strongly.

Another theme is that the rallies have often occurred around periods of tax cuts. There was a very strong rally in 1964, which came around the time that President Kennedy’s proposed tax cuts came into force, having been signed by President Johnson in 1964. Another happened in 1986, ahead of the passage of the Reagan tax cuts in his second term, which substantially reduced the top rate again. A similar theme happened in 2017-18, around the passage of the Trump tax cuts. Given markets are forward-looking, it’s plausible that this anticipation is working beforehand as well as afterwards.

A more concerning theme is that a few of these happen shortly before recessions – a last hurrah for equities if you will. In fact, by March 1929, the S&P 500 had gone on a run of 23/30 gains, just like today, yet the Wall Street Crash happened six months later. Likewise in December 1989, it had been on a run of 23/30 gains, but the economy was in recession within the year. It’s the same in March 1945, where the 23/30 weekly rally ended just as a recession was beginning.

So, are markets rallying on the lack of a recession, or is this the last gasp before the next recession? Either way, the chart shows that we’re nudging up against what would be the most relentless run of gains in history.

4. Percentage of Stocks with Dividend Yields Above Treasury Yields.

Ned Davis Research

5. It’s Not Anything Close to 1999…Check P/E’s Below

Charlie Bilello

Unsustainable Values: Interesting to reflect on this piece of historical art — while the internet would a decade or so later become ubiquitous and a source of tremendous wealth and innovation, at the height of the dot com bubble it was pure hype at that stage… certainly relative to the valuations prevailing at that time.

Source: @kakashiii111 @NewLowObserver

6. China World Leader in Battery-Electric Vehicle Sales

Barrons By Al Root

https://www.barrons.com/articles/china-ev-tesla-ford-gm-trade-tarrifs-63cd62cc?mod=past_editions

7. Record Travel Memorial Day

CRUZ ETF still below all-time highs.

8. First Drop in Home Remodeling 10 Years…9% Home Credit Lines

WSJ By Ryan Dezember
A widely cited barometer of the remodeling market is pointing to the first annual decline in home-improvement spending since the housing bust of the late 2000s. That would follow a run up to last year’s record $481 billion, threatening a reliable source of economic growth and stock-market gains.