To The Moon

• Both the S&P 500 and Nasdaq 100 suffered a sell-off last week, ending with weekly losses of -1.95% and -3.98%, respectively.

• Major market movers last week included UnitedHealth (+10.52%), Berkshire Hathaway (+2.36%), Exxon Mobil (+2.47%), Nvidia (-8.75%), Microsoft (-3.62%), Amazon (-5.84%), Eli Lilly (-9.59%), AMD (-16.54%), and CrowdStrike (-17.87%).

Important events this week include:

• Tuesday: Earnings reports from Tesla, Visa, and Alphabet

• Wednesday: PMI and ServiceNow’s earnings

• Thursday: GDP and unemployment claims

• Friday: PCE

Things to Know Before Starting Your Week:

1) Rotation Will Continue but Likely Slow Down:

• Unlike the second week of July, which witnessed a broad-based rally, limited sectors benefited from sector rotations. Only "old economy sectors" such as Energy (+2.04%), Real Estate (+1.32%), Financial (+1.19%), Consumer Staples (+0.95%), and Industrial (+0.57%) closed the week higher. This is reminiscent of the market reaction one month after Trump was elected in 2016.

• The semiconductor sector, represented by the SMH ETF, suffered a significant weekly loss of 9.59% due to U.S. President Donald Trump stating that Taiwan should fund its own defense and reports of the U.S. contemplating stricter regulations on chip trade with China.

• While sector rotation is likely to continue due to increasing hopes of rate cuts, the speed of rotation may slow down as market participants start to price in the possibility of Kamala Harris winning the US presidential election. The sell-off in the tech and semiconductor sectors, if any, will likely be milder this week compared to last week. Caution is advised with rotation plays as laggard sectors or old economy sectors may not show earnings surprises this season. Overall, I still favor the "Magnificent Seven" and semiconductor stocks/ETFs such as SMH ETF $VanEck Semiconductor ETF(SMH)$ , Nvidia $NVIDIA Corp(NVDA)$ , Broadcom $Broadcom(AVGO)$ , TSMC $Taiwan Semiconductor Manufacturing(TSM)$ , ARM $ARM Holdings Ltd(ARM)$ , ASML, and AMD. Once laggard sectors have had some catch up in performance, investors may realize that AI is a significant secular theme that could drive faster earnings growth and eventually favor tech-related stocks again.

• Biden announced he will drop out of the 2024 US presidential election, endorsing Kamala Harris as the Democratic nominee. According to US bookie site Predictit, Kamala Harris has a 40% chance of winning the election compared to Trump’s 61%.

2) Further Weakness in AI Stocks is Likely Limited:

• Some AI stocks have nearly dropped 20% relative to their June/July highs. A market is generally considered a bear market when prices have declined more than 20%. Thus, traders may want to accumulate stocks or support stock prices when they drop near 20%, as a fall beyond this point sends bearish signals to bulls, who may then give up holding the stock.

Source: Bloomberg, Tiger Brokers, 20 Jul 2024

• The market is trading on the assumption that the China-US tech war will escalate if Trump is elected. However, the US presidential election result will only be known on November 5. Market may have overpriced-in the pessimism at the moment.

• However, US equities will likely drop further if Trump continues to comment on new trade wars with China.

3) AI Stocks Are Priced for Perfection for Good Reason:

• Both ASML and TSMC reported earnings that beat street expectations, yet both stocks fell last week mainly due to potential new US-China trade tensions.

• Alphabet and Tesla will release earnings results on Tuesday after market close, while Meta Platforms, Microsoft, Amazon, and Apple are expected to release earnings next week.

• AI stocks are priced for perfection, yet earnings might still beat expectations due to AI growth. AI-related stocks might still be at the start of a long-term secular growth cycle. AI-related stocks might still be at the start of a long-term secular growth cycle, so investors should wait for good opportunities to accumulate rather than "sell first and buy back later."