To The Moon

• The S&P 500 and Nasdaq-100 returned 4.06% and 5.96%, respectively, last week.

• Major market movers included JP Morgan (-3.83%), Berkshire Hathaway (-2.57%), Adobe (-4.71%), Wells Fargo (-2.26%), Exxon Mobil (-1.32%), Amazon (+8.81%), Broadcom (+22.41%), Tesla (+9.28%), Meta (+4.87%), Alphabet (+4.47%), Oracle (+14.26%), and AMD (+13.37%).

• Important economic events this week include Retail Sales on Tuesday, and the FOMC meeting and Unemployment Claims on Thursday.

• The Bank of Japan (BOJ) is scheduled to hold its policy meeting on Friday, but no changes are expected.

Things You Should Know Before Starting Your Week:

1) Election Uncertainties May Continue to Weigh on Stocks in the Coming Weeks

• Clean energy stocks rose last week, indicating that Wall Street may be betting on Kamala Harris leading the US presidential race.

• According to the US online betting site PredictIt, Harris’s odds of winning the presidential election increased to 56 cents, up from 53 cents before the presidential debate.

• However, I believe it remains a close race. Investors may stay on the sidelines as more uncertainties lie ahead.

• Harris is proposing a smaller increase in the capital gains tax compared to Biden. She proposes a combined 33% capital gains rate for top earners, lower than Biden’s proposed 44.6%.

• Harris also wants to raise the corporate tax rate from 21% to 28%, which could hurt corporate earnings.

• In contrast, Trump plans to cut the corporate tax rate to 20% from 21%.

• However, Trump’s proposed tariffs, which include a 10%-20% tariff on most imported goods and a 60% tariff on goods imported from China, could negatively impact corporate earnings.

Source: Bloomberg, 16 Sep 2024

2) Traders Are Betting on a 50bp Rate Cut Ahead of the FOMC Meeting

• US stocks have been buoyed by expectations of a larger-than-expected rate cut. Traders now see a 59% chance of a 50bp Fed rate cut, according to CME FedWatch.

• The final piece of economic data that could significantly impact the size of the rate cut is the Retail Sales report due on Tuesday.

• I believe investors have already priced in much of the rate cut expectations, and Jerome Powell may aim to temper expectations of further rate cuts during the FOMC meeting. As a result, US stocks may decline following the first rate cut.

Source: CME Fedwatch, 16 Sep 2024

3) Slower earnings growth in the next few quarters may drag Magnificent Seven stocks lower

• Due to the high base effect, most of the Magnificent Seven stocks are expected to report lower year-on-year growth in their operating income over the next two quarters.

• I am unsure how much of this expected slowdown has already been priced into the stocks.

 4)  Technology-Related Sectors Led the Rebound Last Week, But Rallies May Falter This Week

• All sectors, except for Energy, rallied last week.

• While technology-related stocks continue to be long-term winners, I am not fully convinced that the S&P 500, including the tech sector, can sustain a rally just yet. The VIX curve remains inverted, suggesting that investors still expect high near-term risks.

Source: Bloomberg, Tiger Brokers, 16 Sep 2024

Conclusion:

• I still see potential for a "sell the news" reaction to the first rate cut, and therefore remain skeptical of last week’s rally. Election uncertainties, an inverted VIX curve, poor seasonality in September and October, and further unwinding of yen carry trades following the Fed's rate cut may keep investors on the sidelines.

• US stocks could still challenge their August lows before the US election on November 5th, and may only stage a convincing rebound in November and December.

• I remain long-term constructive on US equities. Investors may capture market returns by investing in S&P 500 ETFs (SPY $SPDR S&P 500 ETF Trust(SPY)$ , IVV $iShares Core S&P 500 ETF(IVV)$ , VOO $Vanguard S&P 500 ETF(VOO)$ ) and the Nasdaq-100 (QQQ $Invesco QQQ(QQQ)$ ) initially, then gradually divest from the ETFs and reallocate proceeds into their preferred individual stocks.