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A.I. Trade Rolls Over to Energy; Consumer Discretionary in Focus

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Monday, June 24th, 2024

Market indices begin a new trading week where they left off last week. A rollback in tech stocks over the past three sessions has joined a positive streak of now five sessions on the blue-chip Dow index.

Coming off last week’s Juneteenth holiday, where trading had been relatively in-line across indices, we’ve seen the Dow and small-cap Russell 2000 break out to the upside and the Nasdaq and S&P 500 to the downside. For today, the Dow gained +260 points, +0.67%, while the Nasdaq lost -192 points, -1.09%. The S&P was down -0.31% and the Russell +0.62%.

Keep in mind this is the final trading week of calendar Q2 and the first half of 2024 (1H24). We already know the Nasdaq was off to the races this quarter, thanks to NVIDIA’s (NVDA - Free Report) historic rise in valuation — +145% year to date — helping the index grow +20% from the initial trading day of 2024. But a leveling off has taken the reins in the past few sessions, helping bring a semblance of some parity in the indices where before there was none. NVIDIA itself is down more than -15% from its recent all-time highs, and -6.6% today.

The Dow is still down quarter-to-date (as is the Russell). But its five-day winning streak is making up some ground, led by the Energy space. Among these companies, oilfield services led the way, with companies like Baker Hughes (BKR - Free Report) and SLB (SLB - Free Report) up +4.5% and +4.1% on the session, respectively. Drillers like Devon (DVN - Free Report) and Occidental (OXY - Free Report) were both up +4% on the day, while super-major Exxon Mobil (XOM - Free Report) was up +3%.

We don’t see these developments as a knock on the A.I. trade, or Tech in general. But this leveling-off of share allotments doesn’t seem the dumbest idea the market has ever come up with, especially with plenty of things up in the air, both for this week and looking ahead to 2H24. Nor do we see Energy posing a true challenge to the A.I. trade at any time in the near future. What we’re really looking at is whether to drive indices higher, more evenly parse our portfolios evenly or consider cutting positions based on what’s to come.

Specifically, this points toward Friday’s Personal Consumption Expenditures (PCE) results. We appear headed toward mid-2% levels for May, barring any surprise to the upside. These would further align with the soft landing the Fed has been orchestrating since it began ratcheting down rate hikes beginning in late 2022. Also, because PCE data largely comes from other economic reports already released, big shocks in either direction are less likely than in other metrics. And what’s been fed into PCE data has a decidedly downward bias these days.

Here’s something else with a downward bias. Pool Corp. (POOL - Free Report) , a poster-child for the Consumer Discretionary space, has been coming down notably from its March highs — and has fallen another -13% on quarterly guidance this afternoon. New pool construction is now estimated to be down -15-20% in 2024, and full-year earnings are now expected in a range of $11.04-11.44 per share — a deep cut from the Zacks consensus $13.30 per share. We expect the company’s Zacks Rank #3 (Hold) to come down from here.

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