U.S. tech stocks are nearing the tail end of a crucial midyear run, which has defined the market's bullish narrative for much of the past decade.
Jeffery Hirsh of the Stock Trader's Almanac notes that the Nasdaq Composite typically enjoys a 12-day rally that begins in late June and runs until mid-July. This year's vintage will likely expire on July 14, just as JPMorgan Chase kicks-off the bulk of the bank and financial earnings reporting for the second quarter. Tech updates will follow later in the month.
"Since 1985, the Nasdaq has averaged 2.5% over this 12-trading-day window, with a median advance of 2.9%," he said in a recent blog post. "The rally has produced gains in 32 of the last 41 years, a 78% hit rate. It has held up across bull markets, bear markets, recessions, and recoveries."
"The rally has failed nine times since 1985 -- market conditions and unexpected events can overwhelm any seasonal pattern," he added. "But a 78% hit rate and a 2.5% average gain over 12 trading days is a setup worth trading."
Indications so far as solid, with the Nasdaq up around 3.4% since the close on June 25, and the S&P 500 rising 2.5%. July gains, however, have been muted, with the Nasdaq sipping 0.03% and the S&P 500 rising just 0.6% since the end of June.
Chip stocks are a big part of that underperformance, with the PHLX Semiconductor Index down 9% for the month and down 11% from the all-time high it reached on June 22.
That likely puts the next few trading days, and indeed the start of the second-quarter earnings season, in sharp focus.
S&P 500 profits are forecast to rise 24.4% from last year over the second quarter, with a top-line tally of just under $700 billion. Tech-heavy sectors are likely to deliver around half of that total, with financials chipping in around 16.7%.
Market reaction of late, however, has been antithetical: Outside of energy, which is up 5.3% over the past month and likely to see explosive earnings growth on the back of the crude price surge linked to the war with Iran, other sector leaders like healthcare, utilities, and consumer staples will only see a muted contribution to the overall profit tally.
That could suggest a high bar to clear for a market sitting on year-to-date gains of more than 13% for the Nasdaq and 10% for the S&P 500.
"We believe the earnings season begins from an unusually strong fundamental base, with an equally unusual set of high expectations sitting atop it," said Anthony Saglimbene, chief market strategist at Ameriprise. "Broadening beyond tech could be one of the more important tests of the season."
For that to extend into the back half of the year, however, markets will need to see a sustained pullback in Treasury bond yields, softening jobs and inflation data, and a retreat from the hawkish tenor on interest rates that has characterized the Federal Reserve's communications under new Chairman Kevin Warsh.
The early suggestions are good: investors haven't given up on peace talk progress between Washington and Tehran, and have kept crude oil gains in check this week. That's putting at least some downward pressure on Treasury yields and capping gains for the U.S. dollar.
But the picture can change quickly.
"The U.S. is reportedly striking Iranian bridges for the first time since April, and Iran is threatening a new full Hormuz blockade," said ING's FX strategist Francesco Pesole. "Yet investors are probably clinging on to the fact that technical talks between the two parties are continuing."
"The risks here are obvious," he added. "Investors may be underestimating the chance of a new Strait of Hormuz closure and non-linear oil spikes."
All said, stocks are in a good place heading into the final days of the midyear rally, but a host of factors that surround the market are keeping investors on edge. And it's no exaggeration to say the next three weeks will prove crucial for the market's second-half fate.
(END) Dow Jones Newswires
