By James Ooi - uSMART Securities Market Strategist

This report provides an outlook for the week, highlighting the release of earnings reports from major US companies like Microsoft, Alphabet, Meta Platforms, Amazon, Coca-Cola, Visa, McDonald's, Boeing, Intel, Texas Instruments, American Airlines, ExxonMobil, and Chevron. uSMART Securities Market Strategist James provides this US Macro Strategy Weekly Report.

About James Ooi:
- Over 13 years of experience in buy-side and sell-side of capital markets

- Former Fund Manager of renowned asset management firm

- Focus on fundamental analysis and macro-outlook for US & Singapore markets

- SGX Academy Trainer

US Macro Strategy Weekly Report

Outlook for the Week:

This week, companies that account for 42% of the total market value of the S&P 500 index will release their financial reports, including tech giants Microsoft, Alphabet, Meta Platforms, and Amazon. Other important companies reporting their performance include Coca-Cola, Visa, McDonald's, Boeing, Intel, Texas Instruments, American Airlines, ExxonMobil, and Chevron.

Important economic data release this week includes US Q1 GDP on Thursday, and US March Core PCE Price Index and US Employment Cost Index on Friday.

The US stock market continued to trade in a range in April, with the S&P 500 index rising by only 0.75%. The main reason is that economic data and performance did not show significant surprises.

The funds of US Money Market Funds (MMFs) remain close to the historical high of $5.2 trillion (Figure 1), indicating strong global demand for safe-haven assets. Investors have yet to recover from the fear of the banking crisis, and the current high level of the stock market is difficult to sustain.

Figure 1: Total US Money Market Fund, institutional and retail investors' Money Market Fund

Source: Bloomberg, 24 Apr 2023

Hedge funds are currently betting on net short positions for S&P 500 mini futures, with the number of contracts increasing to about 344,000, close to the high in 2011 (Figure 2). Their main view is that the economy and corporate profits are about to decline, leading to a contraction in valuations. Past data shows that when hedge fund net short positions rise to a high level, the S&P 500 index usually falls. Successful examples include 2007, 2011 (a slight decline), and 2015, but the recent 2020 was a failed example (Figure 3).

Figure 2: Hedge funds' bet on S&P 500 mini futures positions

Source: Bloomberg, 24 Apr 2023

Figure 3: Hedge funds' bet on S&P 500 mini futures positions vs S&P 500 index

Source: uSMART, Bloomberg, 24 Apr 2023

Currently, the VIX index continues to decline, with the current level at 16.89. According to historical data (Figure 4), the Fed will only cut interest rates when the VIX index is above 20. In other words, the market is not fearful enough, and economic data is not bad enough. A high interest rate environment is expected to continue this year.

Figure 4: VIX Index vs Fed Interest Rates

Source: uSMART, Bloomberg, 24 Apr 2023

In conclusion:

The investors’ sentiment has been low throughout April. The market is waiting for the Federal Reserve's interest rate decision and the earnings reports of major tech companies this week to decide their investment strategy.

The Federal Open Market Committee (FOMC) of the Federal Reserve will hold a two-day meeting on 2^ndMay to 3^rd The market currently predicts the last 25 basis points of interest rate hike, bringing the terminal rate to 5%-5.25%. Investors are uncertain about how long the terminal rate will continue before a rate cut. In addition, if Powell's statement is too hawkish, it may trigger the "Sell in May and go away" market sentiment.

Analysts are beginning to predict that the year-on-year growth of earnings per share in the first quarter of 2023 will reach the bottom (see Figure 5), which has led to the S&P 500 index being at a high level. Investors need to pay attention to the performance outlook revealed in the earnings report to confirm whether the year-on-year growth has bottomed out from the previous quarter. I still believe there will be one more decline, and the worst case scenario is that the S&P 500 index will fall to around 3600. However, it is expected that the decline will rotate between sectors, so the bottom of individual stocks does not represent the bottom price of the overall market. Currently, some high-quality companies such as Apple, Amazon, Visa, Tesla, Costco, and Microsoft do not appear to be overvalued. Investors should gradually establish long-term holding positions in the next market downturn.

Figure 5: S&P 500 index excluding energy stocks (year-on-year growth of earnings per share)

Source: uSMART, Bloomberg, 24 Apr 2023

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