U.S. Equity Market Radar (June 9, 2014)
The S&P 500 Index experienced a broad based rally again this week with financial shares leading the way. The market made new highs this week as global monetary policy remains accommodative and risky assets are responding.
Strengths
- The financial sector was the best performer, rising 2.3 percent. The sector had been a laggard year to date with a flattening yield curve and government and regulatory pressures weighing on sentiment of the group. With this weekās ārisk onā mentality, many of the large index heavyweights that have trailed for much of the year outperformed, such as Bank of America, JP Morgan and Citigroup.
- The industrials sector was also strong this week as Joy Global rose 12 percent after reporting earnings that beat market expectations. Even with very weak coal prices and lackluster demand for their products in the mining sector, the company positively surprised the market, leading some to speculate that the stock has bottomed. Caterpillar also responded positively to this news and rallied almost 6 percent for the week.
- Broadcom was the best performer in the S&P 500, rising 19 percent this week. The company announced on Monday that it is seeking strategic alternatives to its cellular baseband business, including a possible sale or wind down. By exiting the baseband business, the company expects to save $700 million that can be redeployed elsewhere.
Weaknesses
- The telecommunication services sector was the worst performer this week as AT&T and Verizon were both down more than 1 percent on concerns of intensifying competition.
- The casino and gaming stocks were hit hard this week, as Macau gaming revenue for May disappointed. Wynn Resorts fell by 4.6 percent.
- PVH Corp. was the worst performer in the S&P 500, falling 9 percent. The reported earnings came in below expectations and also guided second quarter earnings per share below consensus, citing a challenging North American retail landscape.
Opportunities
- The European Central Bank (ECB) cut interest rates and took additional monetary easing steps, which bodes well for the global growth outlook and supports equity valuations going forward.
- The bounce in cyclicals the past three weeks has been very encouraging and likely indicates confidence regarding not only the U.S. economic recovery but also the global trajectory. This bodes well for quality growth stocks with reasonable valuations.
- The S&P 500 closed at a new high again this week, and while there are still some concerns in the market, the path of least resistance is higher.
Threats
- Sell in May has not worked so far this year, but with a dearth of earnings or market moving economic data, a June swoon canāt be ruled out.
- At almost 18 times trailing earnings, the S&P 500 is not ācheap.ā Valuation may be a headwind for future market gains.
- Housing data remains disappointing overall. If growth does not accelerate, this threatens the robustness of the broader economic recovery.
