US stock charts are broken. The economy isn’t.

5/4/24 8:00AM

Even after the robust 1.3% gain to end the week, the US stock market is still largely a boulevard of broken charts.

If you’re looking for a segment of the market that has:

A price above its 21-day moving average (21 dma), and
A 21 dma > 50 dma > 200 dma that have all moved higher over the past month

There’s not much there.

This holds for the US stock market as a whole…

That’s in stark contrast to where we stood a month ago, when the S&P 500 had closed at least 2% above its 50-day moving average for 96 consecutive sessions – the longest such stretch since 1971.

It’s a very clear and abrupt loss of momentum that’s been partially recovered, with US stocks sitting just 2.4% off record highs. The trends are far from your enemy right now, but they’re more of an acquaintance than a friend.

The good news? There’s not much evidence to suggest the pullback in US stocks had much to do with the economy or the outlook for corporate profits. So blame valuations. Or geopolitics. Or inflation. Or whatever excuse needed for profit-taking after such a historically strong run of form. (But you can’t blame the eclipse.)

Consider: Initial jobless claims remain near historic lows. Nearly 81% of people between the ages of 25 and 54 have a job as of April. There have only been 49 months (just over four years) in which a higher proportion of so-called “prime age” people were employed in US history, going back to the late 1940s.

The lion’s share of first-quarter earnings season is over, and the results have been stellar: companies are exceeding profit estimates by 8.6% so far, on average. If sustained, that would be the biggest upside surprise since Q3 2021. And 12-month forward earnings per share estimates continued to trend higher, even when the stock market wasn’t.

And there’s even one critical part of the stock market where trends stayed intact through the recent volatility: the banks.

It’s rare to have a 5% decline in US stocks where banks do better than the index at large. Over the past 10 years, banks have had a beta of about 1.25 to the S&P 500 Index (meaning their moves, in absolute terms, tend to be 25% larger than those of US stocks as a whole).

“While global economic performance was surprisingly desynchronized last year, the overall story has been consistent of late, one of economic resiliency supported by tight labor markets and the consumer,” said CEO Jane Fraser during Citi’s earnings call in April.

Simply: banks are a particularly cyclical part of the stock market, and if they’re holding up relatively well, it suggests there isn’t a host of consumer or business credit problems about to rear their heads.

Nia Warfield, Luke Kawa

Megacap tech and the AI trade power US stocks to fresh records

The S&P 500 rose 0.5%, the Nasdaq 100 was up 0.8%, and the Russell 2000 advanced 0.3% on Monday.

Matt Phillips

Analysts on hard drives: “Supply remains tight”

Bank of America analysts bumped up price targets for hard disk drive (HDD) industry leaders — and S&P 500 top stocks — Seagate Technology Holdings and Western Digital as surging AI data center demand for these low-cost, long-term data storage devices continues to ramp up. They wrote:

“We raise our calendar year hard disk drive exabyte shipment forecast to 1,602 exabytes (+28% y/y) from 1,575 exabytes (+26% y/y) and see room for further upside as demand continues to outpace supply. Despite double digit percentage increases in total capacity... from STX & WDC so far during C25, HDD industry supply remains tight.”

BofA boosted its price target for Seagate from $170 a share to $215, slightly above where the stock is trading on Monday. The analysts also increased their stock price target on Western Digital from $100 to $123, implying a roughly 20% premium to where its share were trading Monday afternoon shortly before 2 p.m. ET.

Besides being an influential market driver this year, demand for hard disk data storage also reflects the vast amounts of data that the boom in AI is expected to generate. (A single exabyte is the equivalent of 1 billion gigabytes.)

As a result, hard drive makers like Seagate and Western are focusing on the next generation of high-capacity data storage gizmos that pack more data bits. These devices are also more profitable than traditional disk drives, which has helped to boost the profitability of the industry, BofA analysts said.

“As HDD demand continues to outpace supply, STX & WDC have seen profitability metrics hit all-time highs,” they wrote.

Those profitability metrics could help explain why the stocks have suddenly caught the fancy of traders.

“We estimate that STX & WDC can get above 42-43% corp gross margin levels exiting [calendar year 2028],” they wrote. “But if pricing is stronger than expected or if manufacturing efficiencies lower COGS, we believe margins could go even higher. Key risks include pause in hyperscaler capex (low probability) and tariffs.”

Max Knoblauch

Alaska Air declines as it warns its profit will be dinged by fuel costs, weather, and air traffic control problems

Seattle-based Alaska Air is trading lower Monday afternoon after the airline warned investors that its third-quarter profits will likely come in on the low end of its prior outlook.

When Alaska Air reported its second-quarter results in July, the airline said it expected third-quarter earnings to land between $1 and $1.40 per share. As of early Monday, analysts polled by FactSet estimated $1.35.

A host of issues are behind the company’s expectations of a dent to earnings. ALK said it’s projecting fuel costs to climb to between $2.50 and $2.55 per gallon, up from its previous estimate of $2.45, due to West Coast refinery disruptions. Weather and air traffic control issues “led to increased costs from overtime, premium pay and passenger compensation,” Alaska said.

With Monday afternoon’s move, ALK shares are down about 8% year to date.

Matt Phillips

Intel cuts expense forecast, sees best gain in weeks

Intel shares jumped after the partially nationalized US chip giant snipped its forecast for operating expenses this year to $16.8 billion from $17 billion after finalizing the divestiture of 51% of its stake in its Altera programmable chip unit to private equity firm Silver Lake.

Shortly after 12 p.m. ET the stock was up 4%, Intel’s best gain since August 22, when the Trump administration announced the extraordinary step of having the federal government take a 10% ownership stake in the private chip company.

Intel trims full-year expense outlook following Altera stake sale

OpenAI doesn’t have the cash to pay Oracle $300 billion — raising it will test the very limits of private markets

The ChatGPT maker plans to burn though $115 billion by 2029. No company in history has ever lit that much money on fire intentionally, let alone tried funding such a splurge through private markets alone.

David Crowther9h