Why are few stocks rising despite record highs? | US Stock Market Outlook for the Week (October 12-16)
Hello, this is ‘US Stock Challenge!’.
Click here for last week’s review:
Why did only semiconductors fall during a week of record highs? | US Stock Market Weekly Review (October 5-9)
While writing yesterday’s review, one figure caught my attention.
In a week where the S&P 500 and Nasdaq hit all-time highs, the Philadelphia Semiconductor Index ended lower. The advance-decline ratio also remains low.
The number of stocks rising is not increasing. Even though the indices are at record highs, not many stocks are going up.
Why is this happening?
And this week, we will get some of the answers.
Starting Tuesday, October 13, earnings announcements for the July-September quarter will begin. Major financial firms will lead the way, followed by major semiconductor companies on Wednesday and Thursday. The September CPI (Consumer Price Index) will also be released the same week.
In other words, this week is a time when two premises will be tested simultaneously.
Stock price premise: Are companies generating the expected profits? → Earnings
Interest rate premise: Is inflation settling down? → CPI
If the state where only a few stocks are rising is supported by expectations, the market will move significantly once the answers are revealed.
In yesterday’s review, I wrote that the market, which was bought on Monday due to lower oil prices, was bought on Friday due to earnings expectations. The reason for buying shifted mid-week.
We will get the answer to that shifted reason this week.
Let’s get started!
First, let’s cover the key points.
● July-September earnings begin on the 13th. Major financial firms lead the way
● September CPI on the 14th, September PPI and retail sales on the 15th. Six indicators are concentrated on Thursday
● Discussion with Governor Warsh on the 16th. Blackout period before the FOMC begins on the 17th
● Monday is Columbus Day. The stock market is open as usual, but the bond market is closed
● Even if indices are at record highs, not many stocks are rising. Selection will be tested this week
1 | The composition of this week
—Despite record highs, few stocks are rising
The S&P 500 has reached a record high. This is because expectations for additional interest rate hikes have receded due to cautious remarks from Fed officials and a downward surprise in the September employment report.
However, this rise is skewed.
The advance-decline ratio remains low.
The advance-decline ratio is an indicator that compares the number of stocks that have risen with the number of stocks that have fallen. A low ratio means that the number of stocks rising is small.
The index is hitting record highs, yet few stocks are rising.
In other words, a small number of stocks are pushing the index up. In reality, the gains are limited to a select few, such as AI-related and energy stocks.
The same thing was reflected in the numbers during yesterday’s review. In a week where the S&P 500 and Nasdaq hit record highs, the Philadelphia Semiconductor Index ended lower. The index and its components were pointing in different directions.
And on the real economy side, things are starting to diverge as well.
This is where the term “K-shaped” comes in.
Economic recovery and growth patterns are sometimes described using letters of the alphabet, such as V-shaped recovery or L-shaped stagnation.
A K-shaped pattern refers to a situation where one line goes up while another goes down simultaneously. Even though there is growth overall, it is splitting into winners and losers within that.
Data showing this is currently on the rise.
● Consumer sentiment is declining due to high gasoline prices and rising interest rates
● Corporate procurement costs are rising
● Unemployment rates are high among the youth and in the information industry
The overall economic figures are not bad. However, the burden is unevenly distributed within.
The intensifying selective buying in the stock market may be reflecting this structure. Stocks that are bought and stocks that are not are clearly diverging.
It is not that everything is good, but only the chosen ones are. This week’s earnings reports will be
the first opportunity to confirm whether that selection was correct.
2 | Focus on Economic Indicators
Monday: The bond market is closed.
October 12 is Columbus Day. The stock market will be open as usual, but the bond market will be closed. This means that interest rate movements will pause on this day.
Since the market is currently moving based on interest rates, we will be without that clue for a day. On a day when only stocks are moving, the reasons for price movements might become harder to read.
Wednesday: September CPI and the Beige Book
October 14 is the first peak of the week.
CPI (Consumer Price Index) is an indicator that shows how much the prices of goods that consumers actually pay have risen. It is a representative figure for inflation and also serves as a premise for the Fed’s monetary policy.
Currently, crude oil and gasoline prices remain high. In the ISM manufacturing index, the index for corporate purchase prices is also rising.
Costs are rising. We will be able to confirm with this CPI how much of that is being passed on to the prices consumers pay.
The Beige Book will also be released on the same day.
The Beige Book is the common name for the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is a compilation of information heard by the 12 regional Federal Reserve Banks from businesses and households in their respective regions. It contains voices from the field rather than just numbers.
Loan burdens are increasing due to rising interest rates, and consumer sentiment is sluggish due to high prices. We may be able to see parts that do not appear in statistics, such as how the aforementioned K-shaped divergence is being discussed in the actual regional economy.
Thursday: Six indicators overlap
October 15 is the busiest day of the week.
● Initial jobless claims (for the week of October 10) ● October New York Fed Manufacturing Index ● October Philadelphia Fed Manufacturing Index ● September Retail Sales ● September PPI (Producer Price Index) ● August Business Inventories
The PPI (Producer Price Index) is the price at the stage where companies purchase goods. If the CPI is the “price consumers pay,” the PPI is the “price companies pay.”
By looking at these two side-by-side, we can tell whether companies are absorbing the rise in costs themselves or if they are able to pass them on through price hikes.
If the PPI is rising and the CPI is not, it means companies are cutting into their profits to endure it. This will affect profit margins in earnings reports.
And on the same day, retail sales will also be released. This is the figure for how much consumers actually spent.
Whether the decline in sentiment is appearing in actual spending—I believe this figure is the most direct indicator of what is happening with the lower line of the K-shape among this week’s indicators.
Furthermore, on the same day, Taiwan Semiconductor will also release its earnings. Thursday will be the day with the most information.
Friday: The Chair’s discussion. And silence begins the following day.
On October 16, Chair Warsh will have a discussion with IMF Managing Director Georgieva. This is in conjunction with the IMF-World Bank Annual Meetings being held in Thailand.
And from October 17, we enter the blackout period before the FOMC.
The blackout period is the time before the FOMC (Federal Open Market Committee) meeting during which Fed officials do not speak publicly about monetary policy. It is a practice intended to avoid exerting unnecessary influence on the market and begins approximately two weeks before the meeting.
The next FOMC meeting is from October 27 to 28. In other words, Friday’s discussion will be the final opportunity to hear the Chair’s thoughts before the FOMC.
With the September employment statistics coming in lower than expected and cautious remarks emerging from high-ranking Fed officials, expectations for an additional rate hike at the October meeting have receded. However, that view could change with this week’s CPI.
If it changes, what will the Chair say? Or will they say nothing? Friday’s market looks like it will be the final factor for this week.
3 | Focus of Earnings
Tuesday: Major financial institutions lead the way.
On October 13, Citigroup, Wells Fargo, JPMorgan Chase, and Goldman Sachs are lined up. UnitedHealth Group and Johnson & Johnson are also on the same day.
When looking at bank earnings, there are two items to watch rather than the profit amount.
One is lending trends. With interest rates remaining high in the 5% range, how much are companies and individuals borrowing? If borrowing is decreasing, it suggests that capital investment and consumption are beginning to stall.
The other is credit costs.
Credit costs refer to the amount set aside in advance as an expense, anticipating that loaned money will not be repaid. This is also called the provision for loan losses.
If this increases, it means the banks themselves foresee that “more people will be unable to repay their loans in the future.”
Amidst the strengthening trend of consumer frugality, how will credit costs for credit cards and personal loans move? This is the figure that represents the lower line of the K-shaped recovery as seen from the corporate side.
Bank earnings are released at the beginning of the earnings season. Therefore, these figures can sometimes determine the market sentiment for the following several weeks.
Wednesday and Thursday: ASML and Taiwan Semiconductor
ASML Holding reports on October 14, and Taiwan Semiconductor on October 15.
Neither is a US company. ASML is Dutch, and Taiwan Semiconductor is Taiwanese. Even so, the earnings of these two companies move US semiconductor stocks.
ASML manufactures the equipment used to make semiconductors. Their order figures reflect capital investment plans for more than a year ahead.
Taiwan Semiconductor is a contract manufacturer of semiconductors. This is the company that actually produces the chips designed by Nvidia and Apple.
In other words, these two companies are in a position to show us the content of demand before US semiconductor companies release their own earnings.
What we should look at is not just sales growth.
It is the gross margin.
The stock prices of semiconductor companies can move more based on whether they can maintain profit margins than on whether their sales are growing. If demand is strong, they can sell without discounting, which increases profit margins. When demand weakens, profit margins fall first, even if sales remain flat.
Is demand for AI data centers continuing? Or has a change on the demand side begun, as suggested by the reports on OpenAI’s revenue outlook mentioned in yesterday’s review?
The profit margins of these two companies will be the first clue.
Also, in the same week, the semiconductor trade show “SEMICON West” will be held in San Francisco from October 13 to 15. Since earnings and the trade show overlap, it will be a week where information regarding semiconductors will be concentrated.
Other: AI is coming to PCs
On October 16, Microsoft will release the “Surface Laptop Ultra,” a notebook computer equipped with Nvidia-made AI semiconductors.
Until now, AI semiconductors were things placed in data centers. Now, they are coming into the computers in our hands.
While this is not something that will immediately lead to large sales, it is an event that indicates the direction in which the use of AI semiconductors is expanding.
4 | This week’s schedule
October 12 (Mon)
Columbus Day (Stock market open as usual, bond market closed)
IMF/World Bank Group Annual Meetings (until the 18th, Thailand)
25th WPC Energy Conference (until the 15th, Saudi Arabia)
Earnings: None scheduled
October 13 (Tue)
September Existing Home Sales
September Monthly Treasury Statement
IMF “World Economic Outlook (WEO)” release
Semiconductor trade show “SEMICON West” (until the 15th, San Francisco)
Earnings Citigroup, Wells Fargo, JPMorgan Chase, Goldman Sachs, UnitedHealth Group, Johnson & Johnson
October 14 (Wed)
September CPI (Consumer Price Index)
Beige Book (Federal Reserve Economic Report)
Institute of International Finance (IIF) Annual Membership Meeting (until the 16th, Thailand and online)
Chicago International Film Festival (until the 25th)
Earnings BlackRock, Bank of America, ASML Holding
Thursday, October 15
Initial Jobless Claims (for the week of October 10)
October New York Empire State Manufacturing Index
October Philadelphia Fed Manufacturing Index
September Retail Sales
September PPI (Producer Price Index)
August Business Inventories
G20 Finance Ministers and Central Bank Governors Meeting (Thailand)
EU Summit (until the 16th)
Earnings Charles Schwab, Taiwan Semiconductor
Friday, October 16
September Import/Export Price Index
September Industrial Production
September Capacity Utilization
August Treasury International Capital (TIC) Data
Chair Warsh in conversation with IMF Managing Director Georgieva (Thailand)
Microsoft “Surface Laptop Ultra” release
Earnings ICICI Bank, HDFC Bank (both scheduled for the 17th)
(Blackout period before the FOMC begins on October 17)
Schedules are subject to change. Please check the IR pages of each company or the official announcement sources when using this information for investment decisions.
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Frequently Asked Questions, Q&A
Q1. Which is more important, CPI or PPI?
A1.
They have different roles.
CPI is the price consumers pay, while PPI is the price businesses pay. While CPI is used for monetary policy decisions, PPI is more relevant when considering corporate profit margins.
This week, CPI will be released on Wednesday and PPI on Thursday, so you can compare them side-by-side.
Q2. Is the Beige Book meaningful even though it doesn’t contain numerical data?
A2.Yes, it is. This is because it contains information before it appears in statistics.
CPI and employment statistics are figures that aggregate what has already happened. The Beige Book is a collection of interviews about what businesses and households are “feeling right now.” Therefore, it can sometimes show changes earlier than statistics.
However, since it is not numerical, interpretations can vary depending on the reader.
Q3. What changes when the blackout period begins?
A3.Fed officials stop making statements regarding monetary policy.
Normally, statements from high-ranking officials move the market, but that source of information disappears. Therefore, it becomes a period where decisions are based solely on indicators and earnings.
This time, it runs from October 17 until the FOMC meeting on October 27-28.
Q4. How does it affect stocks when the bond market is closed?
A4.Since interest rate movements stop, it becomes harder to read what the stock market is watching to determine its direction.
However, since the market is only closed for one day, it is unlikely to have an impact that would change the overall trend. It is enough to simply consider it a day where the reasons for price movements are difficult to discern.
Q5. Is a low advance-decline ratio a bad sign?
A5.It is not necessarily bad. However, it indicates that the gains are concentrated in a small number of stocks.
When a small number of stocks are pushing up the index, the index will also collapse if those stocks fall. This means the foundation is narrower than in a market where a wide range of stocks are rising.
This week’s earnings will provide answers to the expectations supporting those few stocks.
Q6. Why do the earnings of Taiwanese and Dutch companies affect US stocks?
A6.
Because they are the ones actually manufacturing the products for US companies.
Chips designed by Nvidia are manufactured by Taiwan Semiconductor. ASML is the company that makes the manufacturing equipment for them.
Therefore, the demand from US semiconductor companies is reflected in the figures of these two companies first. In terms of the earnings schedule, they are in a position to report earlier.
Three things to check this week
1. Are companies absorbing costs or passing them on?
We will look at Wednesday’s CPI and Thursday’s PPI side by side. If the PPI is rising but the CPI is not, it means companies are cutting into their profits to endure the costs. That will show up in the profit margins in their earnings reports.
2. Is the credit cost for banks increasing?
This refers to the earnings of major financial institutions on Tuesday. If loan loss provisions have increased, it means the banks themselves see that ‘the number of people who will be unable to pay back loans in the future is increasing.’ It is an indicator that views consumer-side figures from a corporate perspective.
3. Can semiconductor profit margins be maintained?
This refers to ASML on Wednesday and Taiwan Semiconductor on Thursday. We will look at gross profit margins rather than sales growth. This is because when demand weakens, profit margins fall before sales do.
This week is when expectations will be met with answers.
The index is at a record high, but not many stocks are rising. If expectations are what is supporting that small number, there is a possibility that there will be significant movement once the answers are revealed.
Which of this week’s indicators and earnings are you most concerned about?
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