S&P 500 strength surprises all analysts
Last week, the S&P 500 set yet another record high, topping 5,500 for the first time ever. At that level, the index is trading higher than any of the 20 analysts had projected in a Bloomberg survey in December. Chipmaker NVIDIA rose to briefly become the largest listed company by market cap, ending the week in 3rd place behind Microsoft and Apple. Bond markets nervously watched the gap between the French and German 10-year widen to 80 basis points, the highest level since 2017. In trade and commodity markets, Brent crude oil rose 3% to $85, container prices climbed due to continued Red Sea disruption, and potato prices increased because of another wet harvest season.
The main event in the markets this week is the release of new PCE data (personal consumption expenditures), the Fed’s favourite inflation measure. Crypto markets are excited about the first Ethereum ETF, which could start trading as soon as July 2. On Thursday, President Joe Biden and Donald Trump will face off in a debate hosted by CNN.
Preview of US inflation data for May
Fresh PCE data for May will be released on Friday. Over the past three months, the Core PCE Price Index remained constant at 2.8% year-on-year. The markets want to see progress in the fight against inflation, especially after the hawkish signal from the Fed in June. The Fed itself sees Core PCE at 2.8% at the end of this year, with it coming down to 2.3% only in 2025 and further down to 2.0% in 2026. Analyst consensus for May is at 2.6%, with only a 0.1% increase month-on-month. A positive surprise in inflation could revive hopes for more interest rate cuts, potentially weakening the dollar and causing the EUR/USD to rise. Persistent inflation might be a risk for stock markets.
Seasonal patterns: will the S&P 500 make progress again in July?
The S&P 500 has gained 15% since the beginning of the year. Seasonal patterns suggest that the rally could continue in the coming weeks. Historically, July has been a winning month 75% of the time over the past 20 years, with an average return of 2.3%. Recent weeks have already been particularly strong: the index has risen 4% so far in June (historical average: -0.2%), and 4.8% in May (average: 0.2%). Given this exceptional performance, the seasonal pattern may have already been priced in early. However, the anticipated summer weakness could present new opportunities to strategically position for the rest of the year.
Data center strength
NVIDIA’s rise to the top spot in market cap ranking is solely due to the insatiable demand for data centers performing computations for generative AI models. New announcements come through virtually every week, with Amazon’s $17 billion and Microsoft’s $7 billion expansions in Spain, and Microsoft’s additional $10 billion investment in Germany as recent examples. Elon Musk shared that his AI startup xAI, founded in 2023, has hired Dell Technologies and Super Micro Computer to provide hardware. These two suppliers are part of a shortlist that includes other data center stocks such as chipmakers NVIDIA and Micron, chip designer Arm, chip foundry TSMC, cooling systems provider Vertiv, and nuclear power generator Constellation Energy, all of which have gained over 50% so far this year.
Data centers for generative AI do not replace traditional ones (used for services like Netflix, etc.), but are incremental to them. Beyond commercial and consumer applications, it is becoming increasingly clear that generative AI is crucial for defending any country’s national security interests. Investments are often made with horizons of at least ten years. Earnings releases need to evidence the monetization by the so-called “picks and shovels” providers listed above.
Earnings & events
Transportation company FedEx ($FDX) and cruise line operator Carnival Corporation ($CCL) will release their earnings on Tuesday, June 25. For the past four years, the cruise company has been striving to return to profitability. The logistics company is anticipated to show an 8.1% increase in earnings per share compared to the same quarter last year. Micron ($MU) will open its books on Wednesday, June 26. Expectations are high as the chipmaker has already rallied 69% this year in the slipstream of NVIDIA. Sports gear company Nike ($NKE) is scheduled to report on Thursday, June 27, facing pressure to enhance its market performance and keep pace with competitors.
The current climate doesn’t seem attractive for IPOs. Luxury shoemaker Golden Goose has postponed its listing due to the political turmoil in Europe, and also the long awaited clothing company Shein listing in the US is not likely to happen any time soon.