An intra-Big Tech rotation or a summer consolidation?

The environment is favorable for stocks: rising corporate profits, disinflation and the process of rate cuts by central banks.

The Fed is expected to begin its first reduction in Fed Funds in September, while some have already started the process. According to Factset, profits of S&P 500 companies are expected to increase by 11.3% in 2024 and 14.4% in 2025. Many analysts are revising their S&P 500 targets for 2024 upwards towards 5,600- 5,700.

The S&P 500 has not seen a daily decline of more than 2.05% in 377 days, the longest streak since the Great Financial Crisis of 2008-2009. In May, the VIX hit its lowest level since November 2018.

More favorable US inflation for stocks, a Fed expected to act in September and confirmation of a recovery in profits for the Russell 2000 in 2Q24 could allow small and medium-sized companies to outperform the Russell 1000 in the coming weeks. Returning to the Russell 2000 is a short/medium term tactical decision, because in our opinion the structural trend remains the play on mega-caps with AI, electrification and the reindustrialization of the United States.

A very overbought Magnificent Seven, a low VIX and a Fear investor sentiment indicator should result in a consolidation of stocks in the near term before heading towards our 2024 target of 5,750 for the S&P 500. While June is a favorable month in terms of seasonality, July is one of the best months of the year and the period from August to mid-October is often more difficult. Will we see an intra-technology rotation and thus avoid a correction or will we be treated to our summer correction?

We have a valuation of $150 on Nvidia, but technically the stock is very overbought. In March, in such a situation, the stock price corrected by 20% over a month and a half. We could return to $100, an important support, before going towards $150. Nvidia, Microsoft and Apple offer high P/E 24, 47x, 38x and 32x, compared to the average annual progression over the next 3 years, 23%, 16% and 8%. AI is a hot topic that could push investors to stay in the theme, taking profits on the three stocks mentioned and buying alternatives such as AMD, Intel, Micron, Amazon or Meta. An intra-technology rotation would reduce the risk of a strong correction.

The defense sector has suffered profit-taking, but the technical setup is becoming interesting with oversold MACDs. Defense has been penalized by the peace summit for Ukraine in Switzerland and the political chaos in France with the dissolution of the National Assembly that could precipitate the arrival of the extremes, RN or LFI, in government, two pro-Russian movements. Despite everything, European defense companies are receiving large orders that ensure annual revenue growth rates between 25% and 30% by 2030. Germany’s Rheinmetall received an order for munitions worth €8.5 billion from the German army, its largest order ever. Military spending will accelerate in a dangerous world with the latest developments of an all-out war between Israel and Hezbollah, increased Chinese incursions into Taiwanese air and sea space, frequent maritime skirmishes between China and the Philippines, and a military agreement between Russia and North Korea, the latter putting pressure on the border between the two Koreas with repeated land incursions.

Gold prices declined in the final hours of last week after the release of stronger-than-expected US economic data (PMI Manufacturing and Services), with the market questioning the timing of a rate cut by the Fed. The release of inflation figures on Thursday and Friday, including PCE – personal consumption expenditures – the Fed’s preferred measure of inflation, could give new momentum to gold and stocks. In April and May, we observed a decline in the US Headline and Core CPI, from 3.5% to 3.3% for the former and from 3.8% to 3.4% for the latter.

A good PCE on Friday should be favorable for stocks and gold. July could then confirm its reputation as one of the best months of the year. Tactical purchase of the iShares Russell 2000 (IWM US/US46428776555). Intra-technology rotation is possible. In the short term, we take some profits on Nvidia to buy AMD. We are strengthening European defense (oversold) and gold towards $2,300.