For those of you who would prefer to listen:
Summer slowdown? No chance. Like that Hurricane that whipped through the Caribbean and the Yucatán Peninsula before landing in Texas, there have been swirling winds and rapid cross currents in Washington, on Wall Street and beyond.
This was another pivotal week on Planet Earth. There were significant developments, economically, politically and geopolitically, that will greatly influence the course ahead. The Market is paying attention. Here is an update on what happened and why it matters in another not-so rapid rundown.
The political winds keep blowing as the election looms in the distance. Party conventions are around the corner and the majority of Americans are increasingly less enthusiastic about the candidates. Will both be on the ballot in November? It’s a legitimate question. This race to the White House for 2025 is anything but normal.
The Market doesn’t seem phased about the political situation. It definitely likes the prospects of looser regulations and lower taxes. When it comes down to it though, it’s earnings that primarily drive stock prices. Earnings are still growing. This, combined with inflation slowing. That’s taken the S&P to all-time highs.
Economic winds are changing. It was reflected in the June Job Report. 206K jobs were created last month. That was ahead of the 190K estimate. But the big news was the 111K downward revisions to May and April. 4 of the past 5 reports have seen the initial number revised down. Government statistics have missed the mark. The result is this 3-month average job growth is the lowest since January of 2021. The unemployment rate also ticked up to 4.1%.
Government and healthcare jobs accounted for most of the growth. They’re generally not tied to the Economy. Retail, professional services, and restaurants all contracted. That’s been the hottest area for job growth since Covid. It’s another sign that consumer spending is slipping.
Inflation has definitely slowed. Keep in mind, that merely means prices have stopped going up fast. In other words, they’re still going up, just at a slower speed. The June CPI (Consumer Price Index) declined 0.1% from May. It’s still up 3% from a year ago. That was the same pace for core inflation, which excludes food & energy. It was the slowest core inflation growth since April 2021. It continues to head towards the Fed stated target of 2%.
Prices have slowed or, in some cases, gone down in multiple areas. Rent saw the lowest monthly increase since August 2021. Used cars and airline fares saw outright declines. In fact, airline fares dropped 5% in June. That, on top of the 3.6% decline in May. Gasoline prices fell 3.8% too. The problem is, Oil prices have gone higher in July. Gas prices will follow. That’s inflationary. The Market won’t like that.
Interest rates dropped like a rock this week. The Market is now assigning nearly 100% probability of a cut in September. But an important contributor to this slowing inflation is America’s weakening Economy.
The Fed is definitely inching closer to cutting rates due to the “considerable progress” that has been made in taming inflation. This from Fed Chair Powell. Speaking to Congress this week, he was careful not to offer a timeline for interest-rate cuts, which investors are now betting will begin in September. But he emphasized the significance of the cooling job market.
Powell also told Congress that commercial real estate may remain stressed for years. Demand for office space plummeted during Covid and is showing little signs of recovering. Property values have sunk while debt remained. In many cases, property owners owe more than the buildings are now worth. That’s a time-bomb that’s been ticking for a while now.
Consumers keep spending. But they are increasingly selective in where and how. Experiences have been a theme since the re-opening of America. This is a theme we track closely, as consumer spending accounts for roughly 70% of America’s economic output.
Something else Americans have been doing: Borrowing. There’s now over $1.3 Trillion in credit card debt. That’s an all time high. And the interest rate on it is just under 23%. Younger generations have been accumulating debt of late, often paying just the minimum balance. That has led to a 40% increase in delinquencies. Credit card debt can bury you. It’s so easy to misuse and so hard to get out from when you do. Credit card is the worst kind of debt.
There was record TSA traffic over the 4th of July weekend. 3+ Million flew the friendly skies Sunday, the most ever. TSA has recorded 8 of its 10 busiest days ever in 2024. American Airlines said it had 775K passengers across 6,500 flights. That’s an all time high for the airline that’s been around for nearly a century.
Delta reported earnings this week. Record traffic is clearly good for the airlines. But too much of a good thing can present challenges. Now there is a glut of airline seats, especially at the lower end of the market. In many cases, supply has outstripped demand. Airlines are now discounting domestic fares to fill them. Southwest is certainly facing this issue. Delta highlighted the strong Summer activity but anticipates a slowdown into Fall. That’s another crack in the consumer story.
Pepsi is a proxy for consumer spending. The company also reported earnings this week. Revenue grew just 1%. That’s low. What’s worse, it was all on the back of higher prices. People keep paying more for less. They’re finally taking a stand.
Consumers have pushed back on price. PepsiCo’s beverage volume declined 3.5%. That’s Pepsi, Gatorade and Tropicana juices among others. The company’s snacks business was down 4%. That’s Fritos, Doritos and Lays. Inflation in the U.S. is moderating but consumers are suffering the cumulative impact of years of steep price hikes. Prices are 26% higher today than 2019, before Covid.
Costco is also a good barometer for consumer appetites. It has 52 Million loyal members, and growing. Costco increased its membership by 7.4% from last year. It also raised its annual dues for the first time in 7 years. While high inflation has forced consumers to cut back on spending, Costco’s low prices continue to attract shoppers. Even younger Americans are joining. Same store sales rose 7% in June. Lucky 7 has been Costco’s number.
Earnings Season has now officially begun. The Big Banks traditionally start things off. Friday’s reports from Citibank, JP Morgan and Wells Fargo underwhelmed. Profitability keeps getting squeezed by the inverted yield curve. Loan growth has slowed. Big item purchases seem to be tabled for now. Follow the money; It tells a story. Money flow is slowing.
The Street expects Q2 S&P earnings to grow 8.8%. That would be the strongest since the 9.4% print for Q1 of 2022. Bottom-up Earnings Per Share (EPS) estimate declined by just 0.5% over the course of the quarter from $59.22 to $58.94. The Street is modeling $243 for the year. That has the Stock Market trading at 23x this year’s earnings. That is a lofty level compared to history.
Eight of the eleven S&P 500 sectors are expected to report earnings growth for Q2. That could trigger a broadening of stock participation. That said, Big Tech is still the dominant theme. Goldman Sachs pointed out the top 6 stocks in the index are expected to grow EPS by 30% compared to last year. That’s Amazon, Apple, Google, Meta, Microsoft and Nvidia. The other 494 are expected to grow a combined 5%. It’s clear where the growth is. Their stock prices reflect it.
The North Atlantic Treaty Organization (NATO) celebrated its 75th anniversary of existence this week. Members congregated in Washington, claiming its strongest allegiance since the years following the Second World War. Today, the alliance is rallying around the increasing threat of a unified China and Russia. Hot wars and cold wars are growing.
The U.S. and NATO allies have pledged to boost Ukraine’s air-defense capabilities including sending equipment for five Patriot systems, which are manufactured by Raytheon and Lockheed Martin. The U.S. and other countries, including Canada and the U.K., also plan to provide dozens of tactical air defense systems in the coming months. Defense budgets are on the rise and we don’t see it stopping anytime soon.
Back to the Market:
We’ve covered the narrow leadership of the Stock Market in 2024. Basically 6 stocks have driven the strong S&P 500 performance. The other 494 have been flat or down on the year.
Heading into the week, the 3-month correlation between S&P 500 returns and the number of S&P 500 stocks advancing dropped to the lowest on record. It means that the number of stocks driving gains is the smallest ever. Ever. That’s a long time. Notably, 40% of S&P 500 stocks are down year-to-date. The previous low was reached in 2000. You no doubt remember what happened back then.
This trend reversed hard this week. Thursday brought something that had not happened in 2 decades. Small Caps, which were negative on the year, jumped 3% on the session. The Tech-heavy NAS fell 2%. That 5% differential was the widest one day move in 24 years. How about this: The S&P 500 was down Thursday but 400 of its stocks went up. That says it all. The Tech Titans got hit hard. The price action was the complete opposite of the defined trend in 2024.
Buy the dip has worked since 2022. It will keep working… until it doesn’t. That was evident Friday, which saw a return to Tech, though all major indices closed decisively in the green. We don’t think Thursday was a one-off situation. Friday’s close looked a little suspect too.
The Wall Street crowd has been leaning euphoric and the positioning reflects it. At a minimum, a reversion to the mean was necessary. Investor complacency can lead to trouble. I’m reminded of the great philosopher Mike Tyson who said: “Everyone has a plan, until they get punched in the mouth.”
The Market has been way overdue for a correction after the vertical move higher led by the few. You may recall, there was a 5% decliner in April. That served as a reality check and cleared the decks a bit for this Summer move higher.
We see another correction coming, heading into Fall. It’s only a matter of when. These cross currents are picking up the pace. What isn’t clear is whether it’s a sector rotation or full-blown correction. Will the rest of the Market try to play catch up with Tech or will a Tech sell-off give way to what the rest of the Market has been signaling all year? Whichever it is, we’re ready. We know what it’s like to get punched in the mouth. And we know how to respond too.
If you’d like to hear more on this subject, Quint and I cover it in our podcast this week. Our weekly recording seems to be getting some serious traction. Take a listen and let us know what you think.

Have a nice weekend. We’ll be back, dark and early on Monday.
Mike