Daily market snapshot

Thursday, 8/29/2024 p.m.

• Stocks close mixed as NVIDIA pulls back – Stock markets were mixed on Thursday, as NVIDIA earnings disappointed somewhat versus investors' high bar of expectations. The Dow Jones was higher, while the S&P and tech-heavy Nasdaq closed modestly lower. NVIDIA reported quarterly revenue growth of an impressive 122% in the quarter, but this was down from 262% in the prior quarter, indicating that the pace of its stellar gains may be slowing somewhat*. Nonetheless, the stock is up over 140% for the year, despite falling about 8.5% this week thus far. More broadly, the S&P 500 remains higher by over 17% in 2024, driven by a solid fundamental backdrop*. Inflation appears to be moderating, the Fed is likely to cut interest rates in the back half of the year, and the economy is on pace for a soft landing. While stocks may not continue at this pace of gains, and we could see volatility reemerge, we believe that the underpinnings of this bull market remain intact.
   
• Second-quarter S&P 500 earnings growth delivers – Second-quarter earnings season is nearly complete, with over 98% of S&P 500 companies having reported earnings. Earnings growth is on pace for about 11.3% year-over-year, above the 8.8% growth that was expected at the end of the first quarter*. About 79% of companies have had positive earnings surprises, well above the 10-year average of 74%*. In addition, the sectors with the largest upside surprises to earnings included utilities, health care, and financials, not the typical growth sectors like technology or communication services. While earnings growth has been revised lower for the third quarter and the fourth quarter, overall earnings growth for the full year remains on track for over 10%, well above last year's 1% earnings growth rate*. In our view, the positive and broadening earnings growth this year is one of the key supportive factors driving solid gains in equity markets. We believe there is a reasonable case to be made for double-digit earnings growth in both 2024 and 2025.
   
• Economic growth for the second quarter is revised higher – In addition to a solid second-quarter earnings season, the revised second-quarter U.S. GDP report released on Thursday also painted a picture of economic growth at or above trend growth rates. Second-quarter GDP growth was revised higher to 3.0% annualized, above the last reading of 2.8%. This was driven by strong consumption growth of 2.9%, well above the prior reading of 2.3%*. In our view, while there are mounting concerns about a cooling labor market and the impact on consumers, the GDP figures point to a U.S. consumer that continues to spend at a reasonable rate, in line with trend levels. Looking forward to the third quarter, the Atlanta Fed GDPNow forecast points to a U.S. GDP growth rate of about 2.0%, also in line with the average of 1.5% - 2.0%*, and certainly not indicating a downturn or recession. We believe as inflation continues to moderate and the Fed begins to lower interest rates, this could perhaps support a reacceleration of consumer and corporate spending in the quarters ahead.

Mona Mahajan
Investment Strategist

^{Source: *FactSet}

• Stocks pull back modestly on tech weakness - There were no major economic releases today, and stocks were little changed early in the day. However, a dip in NVIDIA, which is scheduled to report earnings after the market close, drove a late afternoon decline, with the growth sectors lagging*. Given the sizable rally over the past two weeks, it is not surprising to see markets digesting the move higher ahead of important catalysts. Aside from the last handful of corporate earnings updates, the Fed's preferred measure of inflation will be released on Friday, and the August employment report is coming out the following Friday. Both of these datapoints will help provide an answer to the question about whether the Fed will cut rates by 0.25% or 0.5% at its September 18 meeting. In Canada, the BoC is expected to cut rates by a quarter point when it meets next Wednesday. On the corporate front, RBC and National Bank earnings exceeded estimates, with shares of the latter rising the most in four years*. The financial services sector was the only one to end higher for the day*.
   
• NVIDIA earnings could set the tone - NVIDIA, the company that has been the primary beneficiary of the artificial intelligence (AI) boom and excitement, is scheduled to report earnings after the market close today. Given NVIDIA's significant influence on the S&P 500, now accounting for 7% of the index, and the stock's about 160% gain for the year, any upside or downside surprises relative to consensus estimates could produce an outsized reaction, shaping the market narrative for the remainder of the week*. Analysts expect a fourth straight quarter of triple-digit growth, with sales growing 112% and earnings growing 139%, as other mega-cap tech companies like Microsoft, Alphabet, Meta, Amazon and Tesla all spend heavily on NVIDIA’s processing units to develop AI capabilities*. In our view, while innovation is alive and well and supporting the lofty tech valuations, diversification matters too. We think the recent broadening of market leadership is an encouraging development for the sustainability of the bull market.
   
• August performance: In like a lion, out like a lamb - After a long stretch of market calm, August injected a dose of volatility, which, while uncomfortable, was short-lived. Following a near 10% pullback in the beginning of the month, the first correction this year, stocks have staged an impressive recovery*. Recession fears subsided as quickly as they appeared, while the Federal Reserve has now given the most explicit signal yet that rate cuts are imminent. We wouldn't sound the "all-clear" regarding market volatility, as the next two-month stretch that will lead us to the November U.S. election day has historically been seasonally challenging for stocks, with bigger daily fluctuations and lower returns. However, the fundamental backdrop remains positive, in our view. Economic growth and corporate profits are on the rise, while the Fed is about to embark on a multiyear rate-cutting cycle to adjust its policy from restrictive to neutral. Leadership for the month of August reflects this upcoming shift, with a mix of interest-rate-sensitive and cyclical sectors occupying the U.S. leaderboard's top five (consumer staples, real estate, health care, utilities, and financials)*.

Angelo Kourkafas, CFA
Investment Strategist

^{Source: *FactSet}

• Equities mixed ahead of U.S. tech earnings: Equity markets were mixed on Tuesday, with markets waiting with anticipation for tomorrow's earnings results from technology giants NVIDIA and Salesforce. The S&P 500 and NASDAQ both posted modest gains for the day, while the TSX was lower by roughly 0.3%.* From a leadership standpoint, the technology and financials sectors were the top performers of the S&P 500, while the energy sector lagged in response to a decline in oil prices.* On the macroeconomic front, The Conference Board's U.S. Consumer Confidence Index was better than expected for August, rising to 103.3 versus expectations for a reading of 100.* Additionally, average U.S. consumer inflation expectations over the next 12 months declined to 4.9%, which is the lowest reading since March 2020.* Bond yields were little changed, with the U.S. 10-year yield closing around 3.83%, while the 10-year GoC yield finished the day around 3.06%.* After a sharp move higher yesterday, oil prices closed lower on Tuesday, with crude oil ticking down to under $76 per barrel.* 
   
• Domestic bank and U.S. tech earnings in focus as earnings season winds down: Corporate earnings will remain in the spotlight this week, with five of the Big Six domestic banks and U.S. technology giants NVIDIA and Salesforce scheduled to report. Bank of Montreal (BMO) reported this morning, with earnings coming in below consensus expectations, while Bank of Nova Scotia (BNS) reported earnings that were slightly better than expected.* In response, shares of BMO closed lower by roughly 7% while BNS gained over 2%.* Canadian Imperial, Royal Bank of Canada and National Bank of Canada will all report later this week. Turning to tech earnings, both NVIDIA and Salesforce will report after market close on Wednesday. Consensus expectations are for NVIDIA to post earnings per share of $0.65, which, if achieved, would equate to year-over-year earnings growth of roughly 140%, while Salesforce is expected to grow earnings per share by roughly 11%.* Given the technology sector comprises nearly one-third of the S&P 500, tomorrow's results could set the tone for markets the remainder of the week. At an index level, second-quarter earnings have been strong in both the U.S. and Canada. With over 90% of companies in the S&P/TSX Composite and S&P 500 having reported second-quarter results, TSX earnings are on pace to grow by 8.4% year-over-year in the second quarter, while S&P 500 earnings are on pace to grow by 10.8%.* With valuations rich relative to history in the U.S., healthy corporate profit growth will likely be a necessary ingredient for continued strength in equity markets. 
   
• Markets eye domestic GDP and key U.S. inflation data: Domestic economic growth and U.S. inflation will be front and centre for markets this week with the release of second-quarter GDP and U.S July personal consumption expenditures (PCE) inflation on Friday. Expectations are for real GDP to grow by 1.9% in the second quarter, which, if achieved, would be a modest uptick from the first-quarter reading of 1.7%.* The past eight quarters have seen average quarterly GDP growth of only 1.3% compared with average quarterly growth of roughly 2.5% in the three years leading up to the pandemic, signaling that higher interest rates have weighed on domestic economic growth in recent years.* On the U.S. inflation front, markets expect headline PCE to rise by 2.6% year-over-year and core PCE to rise by 2.7%.* After a string of hotter-than-expected U.S. inflation readings in the first quarter, inflation has trended lower in recent months, with the three-month annualized rate of change in core PCE falling to 2.3% after the June reading.* Lower inflation combined with softening U.S. labour-market conditions has revamped market expectations for Fed rate cuts, with futures markets pricing in the first cut at the September 17-18 meeting and a total of roughly 100 basis points (1%) of Fed rate cuts by year-end.* In our view, the combination of Fed rate cuts with ongoing positive economic growth should be supportive to equity markets, particularly in the U.S., in the months ahead.

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet}

• Equities mixed to start the week – The upward market momentum lost some steam today in the U.S., as growth and technology stocks declined. On the flip side, the TSX, U.S. small-cap stocks, and the Dow rose. Following last week's more than 1% rise that pushed the S&P 500 within breathing distance of its record high, it is not surprising that equities are taking a breather, as investors await NVIDIA's earnings on Wednesday, as well as the Fed's preferred measure of inflation and Canada GDP on Friday*. Overseas markets were also mixed after a strong rally last week, aided by the softening of the U.S. dollar after the Fed confirmed market expectations for rate cuts. Elsewhere, oil prices rose more than 3% on fears of escalation in the Middle East*.
• Upcoming rate cuts help boost sentiment - Investors continue to assess the implications from Fed Chair Powell's speech on Friday, where he offered the most explicit signal yet that rate cuts are imminent. At the annual symposium at Jackson Hole, where in the past major policy changes have been signaled, Powell mentioned that "the time has come for policy to adjust". The recent consumer price index (CPI) readings have provided more confidence that inflation is moving to target, and because of that, policymakers are starting to focus on the cooling of the labour market as they seek to engineer a soft landing. The bond market is now pricing in the start of a new rate-cutting cycle, which is just weeks away (the next FOMC meeting is on September 17-18), with more of the debate now focusing on the size of the first move and the number of subsequent cuts. While rate cuts are not a panacea, the gradual easing in borrowing costs while economic growth remains on solid footing should help support sentiment, valuations and corporate profits.
• All eyes on NVIDIA's earnings this Wednesday - NVIDIA, the clear leader in AI development and the excitement it has generated, now represents 7% of the S&P 500, with a market capitalization of $3.2 trillion, second only to Apple. Given the stock's significant influence on the index and its 161% rally so far this year, its earnings report on Wednesday could set the tone for the markets*. Unlike the first half of the year, a broader range of sectors and stocks are now driving the rally, indicating a shift in market leadership that we've been anticipating. While the S&P 500 has yet to hit a new high after the early August pullback, the equal-weight index -- a better reflection of the "average" stock -- has reached new highs over the past two weeks*. We think the improving earnings trends beyond the Magnificent 7 will lead to more balanced gains in the last two quarters of the year.

Angelo Kourkafas, CFA
Investment Strategist

^{Source: *FactSet}