The next catalyst looking to expand the market could be corporate earnings. Second-quarter earnings season is approaching in the coming week, and it’s a strange time for markets. The S&P 500 and Nasdaq Composite tumbled on Thursday as weak inflation data spurred investors to take profits in large technology stocks despite a sharp improvement in internal breadth. Market darling Nvidia shares fell on one of its worst days of the year, while interest-rate-sensitive sectors such as small- and mid-cap stocks outperformed. In fact, the top 10 stocks in the S&P 500 fell 2.2% on Thursday, while the balance of the market rose 1.3%, marking the fourth rotation from large to small stocks in the past 20 years. Patrick Palfrey said. IWM 5D mountain iShares Russell 2000 ETF earnings results next week will help investors understand whether the rotation trade is sustainable. Investors are considering whether they can continue to rely on artificial intelligence trading to drive the S&P 500 to a record high, or whether they should expand their investment horizons from here. “(Thursday) was definitely a rotation day, with the leaders being pulled out and the laggards finally making a bid this year,” said Art Hogan, chief market strategist at B. Riley Financial. “I think earnings season may be the next step for these types of moves. A catalyst.” At least on Friday, the rotation appeared to be intact. The Dow Jones Industrial Average, which has a higher real-economy weight than the S&P 500 and Nasdaq, hit a new intraday record above 40,000 points. Rotating Trades Many investors expect big tech companies to underperform given their high valuations and higher expectations heading into earnings season. According to FactSet’s consensus forecast, S&P 500 companies’ second-quarter consolidated earnings will grow 9.2%. Keith Buchanan, senior portfolio manager at Globalt Investments, said he is cautious on large-cap stocks, noting that he is taking a neutral stance on the group. While he is optimistic about the long-term growth prospects of artificial intelligence, he expects these companies to face some challenges in the near term. “We may get to a situation where, you know, 70% of companies can exceed earnings, which is a very high number from a historical perspective, but 10 or even three or four top companies can achieve that numbers, but not more than earnings. “So I think the dislocation between the top 10 companies in the S&P 500 and the other 490 companies really distorts what you can gain at an aggregate level,” he added. B. Riley Securities’ Hogan said he still expects the S&P 500 to end the year higher than his original forecast of 5,600, as he expects strong earnings and lower interest rates. “It’s not inconceivable that we exit this year at 5,800 on the S&P,” he said. But he also expects investors to cut exposure to large-cap stocks and allocate them to other underperforming areas of the market. UBS said that historically at least, the trend toward small-cap stocks and away from large-cap tech stocks is likely to continue for some time. Strategist Palfrey noted that after a “significant” one-day rotation, the trend could continue for four weeks, meaning now is the time for investors to actively pick stocks. “Given the tendency of large-cap managers to underweight their largest stocks, (Thursday) proved to be one of the best days for mutual fund alpha generation in the past two decades. This comes on the heels of a difficult second quarter, when 75% of the broad market Core managers are lagging the S&P 500,” Palfrey wrote. “Further underperformance by large-cap stocks should be supportive of alpha generation.” Read Through On the calendar, investors will get further read-throughs on consumers, such as U.S. retail sales data for June, which is expected to be weaker than last month, according to the FactSet consensus estimate moon. Wall Street will use the data to understand the state of the economy. David Sekera, chief U.S. market strategist at Morningstar, said the weaker-than-expected data could indicate “a deeper economic slowdown than we currently model in our base case.” Quincy Krosby, chief global strategist at LPL Financial, said the retail sales data may indicate whether the recent outperformance of small-cap stocks is “justified” as the group is more sensitive to changes in the economy. Elsewhere, there were profit results for the remaining major banks. Goldman Sachs and BlackRock will report results on Monday, while Morgan Stanley and Bank of America will report results on Tuesday. AI leaders ASML and TSMC will also report results on Wednesday and Thursday respectively. One Week Ahead Calendar All Times Monday, July 15, 8:30 a.m. ET Empire Index (July) Earnings: Goldman Sachs, BlackRock Tuesday, July 16, 8:30 a.m. Export Price Index (June) 8:00 a.m. 30 Import Price Index (June) 8:30 a.m. Retail Sales (June) 10 a.m. Business Inventories (May) 10 a.m. NAHB Housing Market Index (July) Earnings: JB Hunt Transport Services, State Street, Morgan Stanley , Bank of America, PNC Financial Services Group, UnitedHealth Group Wednesday, July 17, 8:30 a.m. Building permits (preliminary) 8:30 a.m. Housing starts 9:15 a.m. Industrial production 9:15 a.m. Manufacturing production 2 p.m. Fed Beige Book Earnings: United Airlines, Discovery Financial Services, U.S. Bancorp, Johnson & Johnson, Citizens Financial Group, ASML Thursday, July 18, 8:30 AM Continuing Unemployment Claims (07/06) 8:30 AM Initial Unemployment Claims Relief Headlines (07/13) 8:30 AM Philadelphia Fed Index (July) 10 AM Leading Indicators (June) Gains: Netflix, M&T Bank, KeyCorp, Domino’s Pizza, DR Horton, Blackstone, TSMC Friday, July 19 Profits: SLB, American Express, Halliburton, Fifth Third Bancorp, Regions Financial, Huntington Bancshares
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