Where Does The Stock Market Head Next?

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Colin Symons, CIO Lloyd Financial Group

There’s been a lot of worry over the last several months, as stocks have largely taken a pause while rate concerns are high on oil concerns and high spending, both from government and AI spending. At this point, its well-trod ground, including on this substack. However, nothing lastingly bad has actually happened. Let’s switch things around and talk about what can go right.

From a macro perspective, growth, inflation, monetary and fiscal policy all look pretty good, and with room to improve particularly if oil fears fade. Liquidity is a little questionable, but again, that can get better if we relax. Same thing with positioning, which is also strong but not at extremes. If we relax, which mostly means oil concerns lessening, we can potentially do very well.

Stocks, specifically, are a big swing factor in terms of returns. Interestingly, valuations have actually been going down, as earnings and guidance have moved up while stocks have stayed roughly flat. If we can just get investors to worry less, we can expect them to accept paying higher valuations, sending stocks up.

I think that’s actually a pretty modest goal. The last earnings season looked pretty good, particularly for the AI growth drivers. Investors willingness to pay for that growth was the stress point, as rate fears keep valuations in check. If earnings can stay strong and hopefully broaden out, that’s a powerful signal, and thus far, growth remains solid.

We’ve also had continuing worries that AI spend is peaking. While there have been modest signs of potential trouble, that fear still seems pretty ephemeral. As long as AI spend remains, that large cohort can revalue higher. We have Oracle (ORCL) earnings coming up this week, which seems likely to show the AI spend and demand is still there.

At heart, the primary concern has been the rate picture, as a combination of inflation and spending fears are keeping rates high. Where’s the ceiling on that? On the short-end, that’s a question of the rate hike picture, which predicts hikes but also keeps pushing them to the future. On the long-end, the Treasury is actively supporting the market, starting this week.

On the inflation side, while it’s been sticky of late, it’s also failed to rise and is well off covid highs. With active work towards calming military action both in Ukraine and Iran, it seems reasonable to consider inflation worries have the potential to actively lessen. Strong downside potential in oil seems somewhat underpriced.

Talking about what can go wrong tends to sound smart and seductive. Most of the time, however, the market climbs that wall of worry. Given a lack of euphoria currently, I think it’s reasonable to consider that things can get better. For our part, we recently added back some risk, in the form of buying Intuitive Surgical (ISRG.) That may not be a very aggressive move, but reflects the idea cash and safety may not be a good long-term place to be while nominal GDP remains so good.

Payrolls were 162K vs. exp. 56K, with Average Hourly Earnings up 0.3% m/m, as expected, and the Participation Rate moving up from 61.6% to 61.4%. The Unemployment Rate stayed at 4.1%. Strong, if not huge, numbers, which got yields up and hit risk assets. That said, several details point to this not being such a strong report, with the jobs mostly being hospitality and local government, while wage growth cools.

NFIB Small Business Optimism dipped to 98.7 vs. est. 99.3 as uncertainty remains high.

Saudi Arabia has several energy facilities halted after attacks, sending oil up 3%.

Diesel fuel hit an all-time high on Friday on a lack of refining supply and a Russian ban on exports.

The yen hit a seven-month high as Japanese rate hike expectations grow as the economy strengthens.

ASML is up 3% as top chipmakers committed to use their latest gear.

Intel (INTC) is up 4% on plans to raise CPU prices on strong demand.

ADP Employment today.

Bottom line: Semis are leading but oil is hurting to start the week

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