Investor Sentiment (AAII)
Bullish sentiment, that is, expectations that stock prices will rise over the next six months, is at 39% and remains above its historical average of 37.5%.
Bearish sentiment, that is, expectations that stock prices will fall in the next six months, is at 32%, slightly above its historical average of 31%.
What the market will do after interest rate cuts
Europe has taken the first step in terms of lowering interest rates. It is not usual to see the European Central Bank anticipate the Federal Reserve, but on this occasion it has done so.
Last week the ECB decided to lower rates by 25 points, as expected, from 4.50% to 4.25%. This was the first reduction since 2016, driven by a slowdown in inflation to less than half last year’s levels. However, the entity revised upward its inflation projection for 2024 and 2025 by two tenths, to 2.5% and 2.2%, respectively, and does not expect to meet the objective until 2026, which makes further rate cuts difficult. As things stand, a new rate cut in July would be ruled out and there may be doubts as to whether it will also be in September. What’s more, there are already some voices that are not clear about whether interest rates will be lowered again in the remainder of the year.
Meanwhile, the Federal Reserve is in an election year for the White House (November), but historically it has acted in a similar way regardless of whether there are elections or not. At its September meeting it would not be easy for it to justify an interest rate cut if inflation remains stagnant. At your November meeting you will not want to make any moves because there will possibly be greater volatility in the markets on those days, since the elections will be right before. That is why if you want to lower interest rates this year, the best option would be at the December meeting.
But is a reduction in interest rates positive for the markets? Yes for the following reasons:
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Companies can afford to take on more debt at a better price to obtain money for projects and investments.
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Reduces the financial costs of debt on companies’ balance sheets.
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Monetary easing stimulates the economy and business income.
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Savings products, especially those aimed at the most conservative, offer lower returns, making them no longer attractive to many investors and leading to a flow of money towards variable income assets.
Pay attention because if we look at what European markets do throughout history when interest rates are lowered, we have to increase an average of 2% in the following month, 6% in the following six months and 10% in the following twelve months. later. Most favored sectors? Electrical, renewable, defense and media.
More catalysts in favor of the markets
The euphoria over artificial intelligence has led to a rise in multiples over the last year, with the P/E ratio of the S&P 500 increasing by 19%, from 20.5 to 24.3, which is its valuation highest since just 3 years ago.
I leave you 4 catalysts that work in favor of the market:
1) The summer months (June, July and August) are not exactly the best months of the year for the market. But in election years in the United States, such as the current one, things change quite a bit, in fact they are the best months of the year.
2) The S&P 500 obtained almost 5% profitability in May. When this happens, if we look at history, in the following month, in June, it rose 80% of the time with an average return of 1% and the rest of the year 10%.
3) The S&P 500 rises practically 10% so far in 2024. When this happens and reaches double digits from the beginning of a year to the end of May, the rest of the year is usually interesting, with a rise average of 8.8% (there have even been 19 occasions when it rose twice as much).
4) 75% of S&P 500 companies are expected to generate gross margin expansion over the next year.
How to take advantage of the bullish semiconductor rally
Chip stocks constitute the largest weighting within the S&P 500 for the first time, surpassing the software sector.
This change in scenario is due to optimism about the semiconductor sector’s ability to financially capitalize on artificial intelligence.
Proof of this is that the PHLX Semiconductor index has risen 23% so far in 2024 and 48% in the last 12 months.
The chip sector’s 11% weight in the S&P 500 marks a new high and a substantial increase from the 2% weight in early 2014.
Meanwhile, the five sectors with the greatest weight in the index reach 27%, their highest level in 44 years.
Here we can see the Philadelphia semiconductor index, which is made up of 30 companies in the sector whose activity is related to the creation, distribution and sale of semiconductors and microchips. It was created in 1993. The companies that comprise it must have a market capitalization of no less than 100 million dollars and have had a minimum trading volume of 1.5 million shares in each of the previous six calendar months.
How can you take advantage of the bullish rally in the semiconductor sector?
One way is to buy shares of companies, such as Applied Materials (NASDAQ:), KLA, Nvidia (NASDAQ:), Intel, Micron (NASDAQ:), AMD (NASDAQ:), ASML (AS:), Qualcomm (NASDAQ: ), TSM, Analog Devices (NASDAQ:), ON Semiconductor (NASDAQ:), Infineon (ETR:).
Another simpler, faster and cheaper way is through sector ETFs, such as Invesco PHLX Semiconductor (SOXQ), VanEck Vectors Semiconductor ETF (SMH), iShares Semiconductors UCITS USD.
Look at the comparison of the performance of the S&P 500 (in red) and Philadelphia semiconductor (in blue) indices.
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