Charts Say Don’t Buy the Dip in Stocks Just Yet

Jeff Buchbinder (00:00):

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Adam Turnquist. Adam, you had some unfortunate developments this weekend, traveling. Tell the listeners who all want to hear about this, what happened?

Adam Turnquist (00:20):

So, we were flying back from the panhandle, Destin, Florida, with my family, my wife and two kids, a three month or a 3-year-old, and about a 10-month old. And unfortunately to get there, we had a few connections, and we were emailing over the weekend about getting the Market Signals podcast. And I said, I might be a little tired, probably have a few more gray hairs after the flight home because we connected in Charlotte, O'Hare, then a two hour drive after landing in Milwaukee. We had one child puking all over himself and my wife, the other screaming and crying throughout the flight. I was walking him up and down the aisle. I was getting some high fives and thumbs up from the, at least the people on the plane that were not too upset with our children misbehaving. But it was all, I'm happy to be back to work today, <laugh>.

Jeff Buchbinder (01:09):

Oh, man.

Adam Turnquist (01:09):

Big times, but tough traveling with little kids.

Jeff Buchbinder (01:12):

That is unfortunate. We can, you know, those of us with kids can relate. Although I think my travel with my kids never got quite that bad. But hopefully people around you understood that you know, you were doing everything you could do. Glad to be home. You're probably not going to travel too much here in the very short term.

Adam Turnquist (01:32):

Taking a break.

Jeff Buchbinder (01:33):

With the family <laugh>. So anyway thanks everybody for joining. We'll here's our agenda for today. We'll try to keep it a little cleaner than that story. Although this market is a little sloppy right now. We'll get to recap the market action last week. I just title this, Cracks Emerge in the Economy and Tech. It's, maybe that's too dramatic, but certainly you know, that's part of the story is some incremental weakness there. Next we'll do chart check. Of course, that's Adam's thing. And the idea here is to try to figure out how much more downside we might have. We're, you know, it's not down huge here yet, but you know, stocks are down and you know, our view, house view is that we'll probably get a little more downside. Next Q4 earnings recap.

Jeff Buchbinder (02:23):

That's the Weekly Market Commentary this week, which is available on lpl.com. And boy, there was strong growth and a lot of upside, but, you know, stocks trade on what happens in the future. And there certainly the outlook is a little more cloudy. Then of course, we'll wrap up as we always do with preview of the week ahead. There's a lot going on this week, and I mean, there's been a lot going on really all year but this week is an especially busy one, so let's get into it. Cracks emerge in the economy and tech. So, Adam, we sold off last week. The S&P was down 1%. Could have been a lot worse if it wasn't for that big rally on Friday on what I guess most people said was just an automatic rebalancing buy of equities. But we did see quite a bit of weakness in tech. You see the tech sector down four. Some of your thoughts on that or any other intra-market observations.

Adam Turnquist (03:24):

I think the price action is just choppy. And when you think about the headlines we're navigating around with tariff uncertainty, some economic uncertainty, we had a little bit of a growth scare, which of course showed up last week. It's just been a choppy several days of price action. In terms of overall breadth, a little bit negative last week, I was looking at that and of course big tech, I think all of the Magnificent Seven names were lower that dragged the NASDAQ composite down three and a half percent as we show there. And interestingly, on Friday intraday, we had basically a retest of the 200-day moving average almost right down to the penny there. Buyers came in bid the NASDAQ off that support level. So a good sign for the, call it the big tech trade at least holding some support. Can't really say the same thing about small caps.

Adam Turnquist (04:14):

You can see the Russell 2000 lagging last week, or at least against large caps, down just over 1% that actually broke below its 200-day moving average in this shorter term range that it's been stuck in. And that's been a surprise because buyers have come back in right around the 200-day moving average the last four or five times. They did not show up last week. So some concerning signs, maybe on the small cap space. And then when you look at leadership trends as well, we're trying to assess this defensive rotation. Is it sustainable? You have areas like healthcare up 8% on the year, you have of course utilities and real estate doing quite well, but you can caveat that a little bit when you look at financials. They actually closed at a fresh record high on Friday. So I don't think you can call it a full blown defensive shift right now. I think that's another good sign for this, just really being more choppy price action than anything else.

Jeff Buchbinder (05:09):

Yeah, financials a very economically sensitive sector, certainly. So yeah, you have to view that as maybe pushing in the other direction as people try to assess the relationship between cyclicals and defensives. I think, you know, turning to international, I guess you could say we've been in the right place preferring international to EM because EAFE, you know, developed internationals had such a strong year, particularly Europe, particularly European defense stocks. I think it's pretty obvious why European defense stocks have been doing so well. You know, but emerging markets has done even better than the S&P 500, so certainly that's getting a lot of attention. The dollar is collapsing today, but it's, well, maybe that's putting it too strongly. It was down like 1% last I looked. That is a huge one day move for currency. Maybe not a collapse, but a huge one day move.

Jeff Buchbinder (06:03):

And so that you know, has well, you'll see it on the next the next page. You're getting some support for international today, but you didn't get as much dollar support for international last week. So here you go. There you see the five day change in the dollar flat, but if I had run this Friday at the close, it would've shown you about a half a percent rise in the dollar. And so last week that put a little pressure on commodities, but I think more importantly than that, last week was a huge week for bonds, right? The, it wasn't just the inflation report on Friday, the core PCE deflator was in line with economists’ expectations. The 10-year yield dropped 22 basis points last week. That is a huge move for a short period of time. And so you see here the Bloomberg Aggregate Bond Index up 1.3% now up almost 3% for the year, which I saw an interview with Treasury Secretary Scott Bessent over the weekend talking about how the 10-year yield has moved down this year. And he has targeted the 10-year yield to try to keep that down. He thinks it's going to go lower than where it is now, and certainly not threatening the 5% that we are worried about a little while ago. So we'll keep watching that very closely. But good week for bonds. Anything else here you want to highlight, Adam? Maybe gold.

Adam Turnquist (07:29):

Just to quickly add onto the bond commentary. Really two things. This is really the first risk off rotation we've seen into the bond market at least over the last several months. We've had some dips in the market, but no real safe haven demand. It stood out a little bit this time with this big drop in yields. Compare that to January, for example, the January lows. Yields are moving in the opposite direction, that was more of a catalyst for stocks to sell off. Now we're seeing this rotation into safe havens. I think that maybe marks the character change of this bull market, a little too early to make that call. But second point is just on the high-yield space, we haven't had credit spreads blow out. I was looking at triple Cs, those are the junkiest in the high-yield space. They marginally moved higher last week and we're still historically tight.

Adam Turnquist (08:16):

So no major signs or cracks showing up in the credit markets. I think that's at least telling, maybe there's a growth scare, but it's just that at this point, a scare, not reality. At least that's what the fixed income market's telling us. And then gold, you can see close to 2,900 continuing to trend higher, dollar coming in a little bit, as you mentioned today right around 106 and a half and 106, 107 is a really important or support level for the dollar index, that marked the top of this consolidation range. So if we start breaking below 106, that would likely introduce more of a range bound dollar, probably a welcome sign for equity markets, and of course, gold as well to take some of that dollar upside risk off the table, but still very much in an uptrend. Can't say the same about crude oil.

Adam Turnquist (09:05):

You can see sub 70 now on crude, there's good support around 65 to $67. I think the market is now expecting OPEC+ to basically delay their production quota increased. I think it's about a month from now when they meet, that seems to be the case. They're actually, in terms of their production quotas right now, they're exceeding them. They just hit one-year high outputs for among the OPEC+ members. And I think the lack of control among some of the members is probably just going to lead to another delay, especially with where crude oil prices are, you know, sub 70 type levels.

Jeff Buchbinder (09:43):

Yeah, we were just talking this morning about how, you know, tariffs might have a little bit of a positive impact on certain commodities in the very short term, but then, you know, if they slow trade, you're talking about a demand shock. So, you know, less growth, less demand and that you know, would be you would think bearish for commodity prices. So a lot of cross currents there. Certainly the dollar is another cross current, right, which affects commodity prices. So we'll watch that too. But the, I guess you got a little bit of a, you know, at least a plateau in gold and maybe a little bit of a downdraft in some of these other commodities which could be signaling maybe a little bit less inflation. We'll have to see. So continuing on. So thanks for that, Adam. Let's do chart check and you know, I think the, you know, the main question here is just how much further down are we going to go? And then a lot of people are talking about the rotation out of the Mag Seven certainly. So I know you'll hit those and a few other topics. So first, the S&P, and I've already heard some shops talk about buy the dip.

Adam Turnquist (10:54):

Not sure if we're there yet.

Jeff Buchbinder (10:55):

It's not much of a dip but some folks are buying it already <laugh>

Adam Turnquist (10:57):

Quite yet because we haven't really had the signals from at least the internals of the market. We've gone from a breakout to kind of this break down on the S&P in a matter of weeks. You can see we briefly exceeded kind of this 6,100 area of resistance only to be met by a pretty sharp downturn breaking below the 20-day moving average, the 50-day moving average. And you can see the lower end of that range marked by that green horizontal line. The low end of the range is about 5,773, and that's going to be a key level to watch. Of course, it's just above the 200-day moving average. So I would not be surprised to get down to that level, even the 200-day moving average if we briefly dip below it. So that's kind of the near term downside risk, at least right now.

Adam Turnquist (11:45):

And then when we look at the internals and try to assess, is the market oversold here? Is it due for a bit of a bounce? Are we going to, or you know, should we be buying this dip? We never really flushed out the internals. And the middle panel looks at the new four-week highs versus new four-week lows, respectively, in green and red. And we never really reached oversold levels on this current drawdown. You can see about 14% of the S&P hitting new four-week lows. But when you flash back to other lows that were registered throughout whether it was a dip or a pullback, you typically exceed levels of negative 14% as we highlight there, you know, you're talking 50, 60% readings back in the December timeframe. Even if you go back to the August dip, you were in the 40, 30, 40% range.

Adam Turnquist (12:36):

So we haven't had that oversold level reached yet on not just this indicator, but even on the bottom panel, you can see the relative strength index or RSI, not really oversold, and it's also diverging from price action. So this threw a lot of technicians off a little bit because here's the market making new highs. We didn't have confirming breadth and we didn't have confirming momentum. We had lower highs actually on RSI. So that negative divergence suggests the sustainability of the breakout is maybe suspect. And that, of course did play out at for right now. So we'll be watching for more of an oversold type reading in the market with, again, downside risk maybe to around the 200-day moving average or the 5,773 level.

Jeff Buchbinder (13:20):

So in the spirit of the phrase, a broken clock is right twice a day. I have been calling for the 200-day test probably since last July <laugh>, so maybe I'll finally get it here. We're getting closer. I, you know, at some point, we'll test the <laugh> the 200-day.

Adam Turnquist (13:40):

It's a rising 200-day moving average. And I should, this is a good point. We talk a lot about the short term, but keep in mind we're really just range bound right now in the market. It might sound a little bearish when we talk about these divergences and weak breadth, but longer term we're still above a rising 200-day moving average, long-term trend is still up. So eventually there will be the buy the dip moment we just think might be a little bit lower than current levels.

Jeff Buchbinder (14:06):

Yeah, and when you have, I mentioned, you know, upfront, it is kind of a sloppy market, when you have the tech leadership break. You know, the rest of the market is still a big chunk, right? The Mag Seven is around 32% of the market, something like that and falling. The rest of the market can certainly keep the broad index afloat even if tech isn't working. So next is seasonality. So good riddance to February. We were down about what percent and a half on the S&P, seasonals look better in March,

Adam Turnquist (14:41):

Much better. February, not a great month for the market. You can see there basically flat over the last 75 years with a pretty low percentage of positive returns. So certainly welcoming here with March and April, you can see the average gain for the S&P up 1.1% and higher 65% of the time. That momentum tends to continue into April as well. You can see up about 1.5% with even a better positivity rate. So we'll see how the rest of the month plays out. Typically intra month, it's up and to the right for March. We'll, of course not making that call, but that's the seasonal progression for the month. And then at the sector level, real estate utilities and consumer discretionary have been the best sectors in March. Gains around 1.7% to 2% across those sectors, healthcare an underperformer, but still positive up 0.1 or 0.5% going back to 1990, just to give you some context on sector performance for March, but a welcoming sign here from a seasonal perspective.

Jeff Buchbinder (15:47):

Yeah, so this is the first trading day of March. It's March 3, 2025 as we're recording this early afternoon and the S&P's down another 1% today. So we, I mean, I think, you know, tariffs that are supposed to come in tomorrow, probably the biggest reason for the weakness today. But they're not in yet <laugh>, so we'll have to wait and see. Certainly you know, they could go in and just get pulled back several days later. They might not go in at all. They might be, you know, kind of shrunk down or narrowed. We'll just have to wait and see. The situation is very fluid. So getting back to the tech, excuse me, technicals, the small cap 600 actually looks a bit worse than the S&P 500. So we, you know, Research continues to favor large over small. Is that the right move here?

Adam Turnquist (16:44):

That is, and it's been a pretty consistent trend overall. I've had a ton of questions at the start of the year about this rotation into small caps. Is it sustainable? Why not? And when we look at the S&P 600 here, we had this pretty impressive breakout through the 2021 highs, but it was a failed breakout, unfortunately, never liked that one as a technician. But we've had subsequent lower highs here and we had a big test last week at the 200-day moving average. You can see that dark blue line with the green arrows, the last several retests, that's where bulls showed up and started to buy small caps. They got oversold, came in right around that 200-day moving average and bid the S&P 600 higher. It did not show up last week, and we actually broke below the 200-day moving average.

Adam Turnquist (17:28):

So a little bit of a concern there. As technicians like to point out, surprises tend to happen to the downside when you're below the 200-day moving average. Still some additional support here around 1,300 to 1,350 before you start making a call for a top being made in the small caps. But definitely on an absolute basis here, it looks like some further downside risk. And then of course, on a relative basis, when we compare the S&P 600 to the large cap S&P 500 consistently lower, and you can see that in the bottom panel in that ratio chart below the 200-day moving average, which is also declining. An interesting spot here, right off the 2024 lows. That's an important support level. Would not be surprised. Maybe you get a little bit of a bounce in relative performance here, but I think you have to respect the longer term trend here in large cap leadership still intact.

Jeff Buchbinder (18:25):

Yeah, so when we talk about rotation, if you're moving out of the Mag Seven, there's still a lot of the S&P you can move to, right? Or you could just buy an equal weight S&P 500 exposure or we like the industrial sector, that is not a Mag Seven sector, right? That's another place you could potentially go. But I mean, you're not calling for this rotation to really sustain itself yet, right, Adam? We have a little more, we need more technical evidence to call for a sustained move away from tech and growth, right?

Adam Turnquist (19:03):

Absolutely. And that's, we've seen this playbook before where kind of the big tech trade gets a little bit overbought, extended and it backs off a little bit and you see a rotation on a short term basis, but those longer term trends have not been reversed. And I think we have to be respectful of that. As exciting as some of these performance numbers are, whether it's year to date or the last few months, the longer term trend has not changed for a lot of those style shifts.

Jeff Buchbinder (19:30):

Yeah. And we have neutrals on a lot of those things that are working. I mentioned international, I mentioned, and we talked about healthcare briefly, financials, right? Comfortable with at least market weight in those areas. Those are big winners so far, year to date. So next up is retail. And this is, or retail's favorite names. And I don't think you've shown this before, a really interesting kind of way to capture what's getting hit the hardest here lately, I would say.

Adam Turnquist (20:01):

Right. And that's been a big theme. When you go back to the January lows, we'll call it mid-January, a lot of the flow data showed just a major imbalance of retail buying. It looked like basically retail was kind of the loan segment of the market buying the dip. And they had major imbalances in terms of the actual buy volume versus declining volume and order flow. Goldman Sachs puts a basket of actual the favorite retail names based on that retail flow data. And that's what this index is. It's an equal weight index, in an interesting spot as well for that theme. Not only to play out on the downside, but also, or excuse me on the upside, but at the downside, as well, you have this major resistance level in this index right around the 2021 highs. And that's basically where retail flows started to dry up over the last couple weeks.

Adam Turnquist (20:54):

So if they were the big buyer of the dip in January and continue to support the market, the retail flows data started to back off and we had this index rollover along with the broader market of course. So another big test here, I think something I'm watching just to see how this index handles this area of support. You have the 200-day moving average and uptrend some prior highs. So a logical spot where you'd see a little bit of a bounce in the retail space. Of course, we're not seeing that today. If this starts rolling over, I think that's maybe a sign for some further downside risk, not just for this index, but maybe just overall on how that weighs into sentiment and just the broader market maybe adds to the evidence here where we could hit the lower end of that range for the S&P 500.

Jeff Buchbinder (21:40):

So when we talk about retail, we're talking about individual investors, right? Not institutions. And so retail, you know, you probably have some folks playing a lot of the Mag Seven names in here but it's not just the Mag Seven you know, just names that are popular with individual investors. So that is an interesting chart to watch.

Adam Turnquist (22:01):

Yeah. And for sector weights, I think tech is about 37% and then financials are about 12%. Those are the top two sectors, and then it's pretty mixed from there.

Jeff Buchbinder (22:11):

Yeah, you probably have a little bit of cryptocurrency exposure in there too, I would guess maybe a little meme stock exposure.

Adam Turnquist (22:19):

There's definitely some meme names in that

Jeff Buchbinder (22:21):

<Laugh>, right? Check your chat boards. So next up sentiment. We did a blog on this recently really great work by Kent and George on our team. You can find that on lpl.com under the Research page. The you know, the a AAII sentiment, I guess it's the gap between bulls and bears is really turned bearish lately.

Adam Turnquist (22:46):

Surprisingly. Yeah, we look at this several different ways. The top panel is just the percentage of bearish, or excuse me, bullish readings, plummeting bearish readings in the middle, skyrocket. And of course, we like to think sentiment follows price, but I would call these moves a little bit asymmetric between what price is actually doing and the reaction we're getting in these sentiment gauges. Of course, tariffs and other things play into that as well when you ask investors, what's your outlook for stocks over the next six months? But even though we're not that far from record highs, really on the S&P 500, these sentiment gauges are flashing readings we haven't seen, for example, since September of 2022. That's the bearish reading. And the difference between the bulls and the bearish is that bottom panel, negative 41%. that gap is over a two standard deviation move below the average of about 6% readings.

Adam Turnquist (23:42):

And we actually back tested that. I think the data's on the next slide. Of course, when you think about extremes and sentiment, you often think contrarian, right? And when you, especially on the bearish side, I usually give the bearish sentiment a little bit more weighting than bullish sentiment. And you can see when you're at levels that exceed negative 31 on the very far left, that's that bull bear spread. How does the market perform under those scenarios when you look ahead over the next three months, six months and year. And on average a year later, the S&P up 10 point a half percent, that's a little bit better than the longer term average going back to the late 80s. So typically this means you buy the dip. And the other extreme I thought was interesting as well, when you're overly or excessively bullish second to the far right there, not exactly great. You can use that as another contrarian signal. In the middle, it's of course a little bit more mixed, but it's always the tails of these contrarian indicators that typically are at least foreshadow kind of the forward performance a little bit better. And we're definitely at the extreme side on the bearish sentiment.

Jeff Buchbinder (24:50):

Yeah. So if we do get the S&P 500 down to the 200-day, you get, you know, you maintain this bearish investor sentiment. This is individual investors in this survey and you get maybe better news on tariffs or at least clarity on what we're facing. That could be a point where we would be more interested in buying the dip. But like I said, there are some people here you know, some firms are stepping in and you know, taking advantage of that bearish sentiment as you said, Adam, as a potential contrarian signal. So let's turn to the 10-year yield here. This is, I mean, really important not just to bonds, but also stocks. So what are you seeing on this chart? It's I mean we're like 4.18 now on the 10-year.

Adam Turnquist (25:38):

Right? A huge move in yields over the last couple weeks. And we went from another kind of failed breakout. We had a 10-year, not long ago, and really in December, January timeframe, breaking out through the spring highs around 4.80 and it's completely backed off then. And the driver now, of course is a little bit of a growth scare. We've violated this shorter term uptrend. We broke down from what we call a head and shoulders top pattern. I'm not going to get too technical here, but we're now below the 200-day moving average, which by the way, is now declining. So this means surprises tend to happen to the downside. And next support you can see there is around kind of this 4.09 level, 4.04 or some key levels, but we we're talking about a 10-year that might break 4% here. If we start getting through that 4.04, 4.09 type levels.

Adam Turnquist (26:28):

And in terms of that growth scare, how do we measure that? One way is just to look at the U.S. Economic Surprise Index, that's in bright blue on that bottom panel, and it's now getting deeper into negative territory. And why does it get there? It's because economic data coming in worse than expected, while break even inflation rates at least measured by the two-year breakevens are moving higher. That combination in that spread, not exactly a great combo as you can see in that bottom panel. Much different scenario than when we looked at rates, call it September through November, December, we had economic data coming in better than expected, and inflation moving higher as well. But the deviation in that spread started to unfold. And I think that's been weighing on equity markets as well, pricing in potentially higher inflation, less growth, <laugh>, not exactly a great combination. I'm not going to say the s word here in terms of stagflation, but you just said it certainly <laugh>. I think I better clarify if I'm going to drop the S word.

Jeff Buchbinder (27:33):

That's exactly what I was going to say. There are folks starting to worry about that.

Adam Turnquist (27:39):

More and more headlines with that.

Jeff Buchbinder (27:40):

Our economist Jeff Roach this morning on our internal call about that. And yeah, there's no doubt that risk of that is rising with the increase in the inflation expectations surveys. By the way, today we got another piece of evidence that inflation's a problem with the prices paid index in the ISM report. So, you know, inflation's sticky it's stubborn, right? Even though, you know, Scott Bessent certainly, and the White House are confident they're going to be able to get it down there back to the 2% target. It's going to take well, and the Fed is confident too, but it's going to take a little bit of time. And even with some help from slower growth, you know, you might have to wait until second half of the year before you get any Fed rate cuts. We'll just have to see how pronounced this slowdown is. So 10-year yield important to watch which is certainly why the Trump administration is targeting it. We still are comfortable enough with bonds, you know, decent yields and, you know, obviously you could get some capital appreciation if yields fall, love the income, and then you potentially get a little bit of a buffer against equity market volatility. So today is an example, right, the S&P 500 is down about 1% and the 10-year yield is, let's see where it is.

Adam Turnquist (29:05):

We're at 4.17 right now.

Jeff Buchbinder (29:06):

Down five basis points. So you're getting bond diversification today. I mean, doesn't happen every day, but certainly helpful today for diversified portfolios. So thanks for that, Adam. Let's go to earnings and the Weekly Market Commentary, again available on lpl.com. I'll just give the real quick highlights here. And then Adam, you can comment. So I mean, 18% growth based on FactSet numbers for Q4, that is a really big number. Haven't seen that in a few years. Of course, coming out of the pandemic where you had that negative earnings shock, it wasn't hard to grow fast out of that once the economy reopened. So, but in normal times, that is a very abnormally high number. So I think that should be recognized here. Big surprises. We had a six percentage point upside surprise. Financials and the Mag Seven did a lot of the heavy lifting.

Jeff Buchbinder (30:12):

In fact, 14 out of the 18 points were Mag Seven and financials. So didn't get a lot of help from the rest of the market, but you got a little. The other point I'll make here is even though estimates came down, as they almost always do, the outlooks from corporate America was still good enough to preserve the double digit earnings growth expectation. So, you know, even though it's not double digits for each quarter, it is double digits for the whole year. We think that might be a little aggressive, but that's where consensus is. So next, this is the relationship, speaking of the ISM, the relationship between the ISM manufacturing index and the S&P 500 earnings. And you see here, the relationship is very, very close because earnings are more manufacturing driven, the economy is more consumer driven.

Jeff Buchbinder (31:08):

So when you compare an earnings metric to a manufacturing metric, you're going to have a closer correlation. It's not so much the case when you compare, let's say GDP to earnings. So you can see how tight these two lines move really closely together over time. This is a very long-term chart, but they move very closely over time. So you, we got the ISM today, you know, we don't want to see prices paid jump and we don't want to see new orders collapse, but that's basically what happened. So January was kind of the opposite, right? So we had a good, this report is just through the January number. So the point I want to make here is maybe it makes sense to look at a two month number, right? And on a two month look, manufacturing actually is starting to pick up. A little bit of this is probably racing ahead of tariffs, but we're up about, you know, four points off the recent low and new orders was up like seven, eight points off of the recent low.

Jeff Buchbinder (32:14):

So there is a little bit of an uptrend here, which signals may be continued good earnings. The lead time is like three to six months. So next three to six months probably going to get good earnings as consensus believes. This next chart shows you the forward four quarters estimates, which now are 2025. The, you know, obviously the estimates have been cut, but that's pretty much always the case. The way I set up this chart, it looks like it's cut more than it more than it has been, but you know, it's about three 4% over the last several months. Not dramatic, but you know, it's a cut. 269 is consensus. Now our estimate's 260. Tariffs aren't really in this estimate. Oh, and by the way, we think that economists’ expectations or strategist expectations for economic growth are a little bit too optimistic.

Jeff Buchbinder (33:15):

So you put in a little more of a growth slowdown, throw in a little bit of tariffs, which who knows how much <laugh>, but throw a little bit of tariffs. And that's how we get to our 260 number. So, you know, we still think there's some more downside. That's not a massive amount of downside. The average cut to estimates in a given calendar year is about 6%. We're not even looking for 6% downside, we're looking for more like 3% downside. So still pretty good, still high single digit earnings growth, but probably consensus estimates are probably too high. And then the last chart and I'll go to you Adam, for any thoughts you have on earnings. South Korean exports, just like the ISM. South Korea exports because of the tech components really tie closely to S&P 500 earnings.

Jeff Buchbinder (34:07):

Now what's interesting, this is actually kind of like the ISM story. They're related. We had this big dip. So the dark blue line is year over year change in South Korean exports and they were down about 10% in January. But just over the weekend we got another reading for February and it was actually flat, barely positive. So this chart maybe makes it look a little more dramatic than it is, but the point is we still have, you know, kind of lackluster export growth. You see the same thing if you look at Taiwan. And of course there is not just tariff risk, not just general trade war risk, but we have export controls on you know, chips to China. And that's a risk here because these components move around. In fact, I saw a story today you know, about potentially NVIDIA chips that shouldn't go to China moving around across other Asian nations and then getting there anyway, <laugh>.

Jeff Buchbinder (35:09):

So certainly tough to control. All I'm saying here is this global supply chain with this as a, you know, kind of a barometer could put pressure you know, on S&P 500 profits, if we have trade tensions, more export controls, more tariffs because that's going to influence this, the movement of electronics across borders. So key takeaway here, earnings probably going to slow and you know, it's just going to be really hard to do something like 10, 12%, which is where most of the strategists are. Adam, your thoughts,

Adam Turnquist (35:54):

I think for what the market's been had really to absorb and navigate around, it's holding up relatively well, not just, I mean I think earnings are obviously the foundation of that, even though they may be subject to slowing down a little bit, the overall earnings outlook still, I think, good enough to support equity markets here. And I think you're seeing that in price action. And the other thing with some of the survey data, I think a lot of that's just going to be volatile until we have some certainty on trade. If you think about the, how those surveys are conducted, they poll, whether it's a manufacturer or small business about their outlook, whether it's on CapEx employment orders, and it's tough to really talk about CapEx or order flow when you really don't know how much it's going to cost. What are tariffs, where you're going to source things, do you have to change your CapEx plan? So I think there's just going to be a lot of noise in that data and I think that really supports more of kind of a range bound, higher volatile market. And that's really what we're seeing right now.

Jeff Buchbinder (36:59):

Yeah. And that's our expectation for generally speaking for the year, right? High single digit returns, high single digit gains in earnings with a little more bumpiness along the way that's consistent with the year three bull market. That's consistent typically coming off of a big year or a big two years, the late nineties, with maybe a little bit of an exception because you had what, basically five big years. So yeah, this, all these things are kind of pointing to the same place, which is choppy and maybe modestly rising stock market. You know, if you, it might be hard to justify a 21 PE or even higher PE when you're just getting average earnings growth, but the potential for this AI investment to pay off and there's going to be north of 300 billion this year just from the big tech names, the potential for that to pay off is worth a little bit of a premium. I think that's what you're seeing. And we still have inflation to unwind. If you get lower inflation and lower rates, that's worth a higher PE as well.

Jeff Buchbinder (38:12):

So let's now move on to the week ahead, Adam. So what do we got? Lots of key data. We already got the ISM, I mentioned before. Didn't put the updated number here, but you got a, you know, a really big 64 on prices paid. That's the main headline. The overall index was pretty close to where it was last week. We're barely over, I mean, last month, we're barely over 50. You know, you're going to get trade noise. So any other data here? Well, the jobs report is the big one of the week. So I'm interested in your comments there, but also the stuff that is not here, like ECB meeting, China, you know, the NPC, the National Congress meetings this week where we're likely to get stimulus and maybe a new growth target, right? That's a big one. And then State of the Union, do you have any thoughts on, you know, who's going to be there and where they're going to be sitting?

Adam Turnquist (39:12):

I don't have any charts for that one or what China's really going to be interesting because we know that they're going to roll out stimulus. What is it going to take to surprise the market? China's had a pretty big rally here, depending on what exact index you're looking at. China Tech doing quite well. What's it going to take to keep that momentum going and what's that growth target going to be? I think baseline, expecting 5% growth for next year, they're going to need to really inject a lot of money into their system to support more domestic consumption, especially in light of tariffs because their export activity expected to maybe slow down a little bit just given the challenging political uncertainty or trade uncertainty there. And then of course, just the jobs data. It's going to be all about jobs. It's kind of interesting to watch how we kind of volley back and forth between inflation being on trial to the labor market being on trial.

Adam Turnquist (40:03):

And I think even though we had that hot CPI print, there's a little more concern on the labor market side with some of the data we've witnessed. So that should be an interesting one on Friday. Especially, you know, with the non-farm, of course ADP employment's going to be importance, but the labor market report on Friday's going to trump them all. So it'll be a busy week. And I think Costco has earnings. I always like to look at that just to see what they're reporting on the retail side, that's been a big topic, is the retail downshifting on their spending, what's the Costco membership look like? People flocking there, but we've spent a lot of time at Costco and usually the line is over the last year it hasn't changed. It's all the way to the back of the store <laugh>. So I don’t know, anecdotes from there seems to be doing quite well.

Jeff Buchbinder (40:52):

I try to go to Costco, you know, right before close during the week, <laugh>. Yeah, it's as you typically don't have. Unbelievable. Yeah, don't have the lines at that. Yeah, it's busy place. It'll be, a lot of people will be talking about the upper income consumer versus the lower income consumer, right? And so, you know, Walmart may be doing a little better than the dollar stores and Costco may be doing a little bit better than Walmart and all of that. Target in there somewhere. Generally speaking, the holiday and not the holiday, the first quarter retail environment was pretty good. You know, you had pretty decent numbers from Home Depot and Lowe's in the home improvement area. I guess you have low expectations there given where rates are and mortgage rates in particular. But yeah, overall the, you know, we didn't get a lot of evidence.

Jeff Buchbinder (41:40):

I mean, Walmart's guidance was a little conservative, but we didn't get a lot of evidence that the consumer is really under stress or incrementally more stress. It is still however, the high income consumer that's carrying the water and you know, you'll probably hear about that from the analysts after Costco's results. So good call out there. There's a couple tech names and a couple retail names beyond Costco. It's really slim. There's only like, you know, a dozen or so companies left. So we're going to call Q4 earnings season over and you know, start to gather some information about Q1 because you know, the earnings seasons almost blend together. <Laugh>, you're going to start preannouncement season is just a, you know, a few weeks away. So yeah, I think that we'll go ahead and end there.

Jeff Buchbinder (42:31):

I mean, there's just so much going on. We could literally do a five hour podcast with how many things are going on.

Adam Turnquist (42:37):

I got enough charts, we can do it.

Jeff Buchbinder (42:39):

You have enough charts, nobody would listen. <Laugh>, we might have like two people playing it in the background after hour two <laugh>, right? But yeah, we're not going to do that. So, we'll go ahead and wrap up there. But thanks Adam for joining this week. Really, really great stuff. You know, just to kind of pull out a few takeaways, probably a little bit more downside to this market. We're not really declaring a sustained rotation out of the Mag Seven. We still think there's, you know, enough of an uptrend there that you know, still have a slight preference for growth over value and for large over small.

Jeff Buchbinder (43:18):

And certainly we're paying a lot of attention to international markets here. You know, been cautious on EM, remain so, but we'll certainly be watching the NPC meeting out of China this week. Europe's really been doing well. Certainly that's caught our attention. Neutral, undeveloped international right now. That's probably where we're going to stay for a while. But you know, certainly with your help, Adam, we'll be watching the charts. So with that we'll wrap. Thanks everybody for listening as always to another edition of LPL Market Signals. We'll be back with you next week. Take care everybody. <Silence>.