Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Goldman Sachs senior U.S. portfolio strategist ben Snider asks Is the big tech trade over?
“Ben Snider, senior U.S. portfolio strategist in Goldman Sachs Research, identifies two particular causes of the weakness. First, there is growing concern that the massive investment in AI may not soon translate into higher productivity or revenue. Second, while higher rates have long led to valuation premiums for the strongest companies, anticipated rate cuts are now putting the size of those premiums into question. ‘What’s driven these stocks for most of their outperformance has been strong business models, above average revenue growth, and very high profit margins — and we’ve learned nothing in the last two weeks that suggests any of that is changing,’ Snider says on The Markets podcast. ‘I think it’s really more about very elevated positioning, very elevated valuations. In physics terms, you can think of that as high potential energy. And then we’ve gotten some of those catalysts I mentioned, and that has led to a very sharp positioning shift, and a very sharp shift in share prices as well.’ ‘I think you can make a good argument for diversifying a little bit, perhaps investing in an equal-weight S&P 500 if you are concerned about the degree of concentration or AI investment,’ Snider says.”
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BMO senior economist Sal Guatieri believes that mortgage arrears are nowhere near a problem,
“For the first time since the financial crisis, home loan defaults in Canada are mounting and look to move higher on rising joblessness, resetting mortgages, and soft home prices. But how much higher? In April, 0.18% of home loan payments to banks were overdue by three or more months, up modestly from recent record lows. However, the arrears rate is still lower than in 2019 and the current U.S. rate (1.0%), about half the four-decade average, and miles below 1983′s apex when both mortgage and unemployment rates were in double digits. For the 36% of households with a mortgage, the vast majority continue to make payments … While the current arrears rate isn’t worrisome, it likely hasn’t peaked. The unemployment rate has risen by 1.6 percentage points since 2022 and could approach 7% later this year, more than a percentage point higher than pre-pandemic norms … Though rising, there’s reason to believe the arrears rate won’t breach long-run norms. More job seekers, rather than big layoffs, explain the spike in the jobless rate. The number of persons receiving employment insurance benefits remains low, meaning most families haven’t suffered a loss of income.”
“Valid Fears of Mortgage Arrears?” – BMO Economics
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In ‘R’ is for Rotation, Jefferies strategist Steven DeSanctis argues that U.S. small caps have further to run,
“Small has beaten the Russell 1000 and the NASDAQ 100 by nearly 14 and 20 percentage points since the close on July 9, and the MTD gap between these indexes puts this in second and third places, respectively, in their history books. We guess we were wrong by saying that small does not need rate cuts to beat large, as with the weaker inflation report and slowing of the economy, it is nearly a 100% probability that the Fed will cut during their September meeting … the gap in earnings growth will close as we move through the 2nd half of the year with the forecast now looking at small beating large in the Q4 reporting season. We feel good about this taking place, as revisions have held up down cap of late and the cut to ‘24s estimated growth has been less severe. Given nearly $9B has come into small-cap ETFs in July and as the cover chart suggests (thanks to our friends at Vanda Research), CTAs have allocated more of their dollars to the size segment, the smallest of the small is leading the pack, as one would expect. We would also expect, and have seen, active managers just simply can’t keep pace with their indexes and are having one of their toughest months in quite some time”
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Diversion: “No, NASA hasn’t found life on Mars yet, but the latest discovery is intriguing” – Ars Technica