Weekly Trader's Outlook

If you read last week's blog, you might recall that I had a "Moderately Bullish" outlook for stocks this week, citing bullish technicals and the potential for some short covering and/or performance chasing by fund managers. The S&P 500 index (both market weight and equal-weight) and the Russell 2000 index all notched fresh all-time highs this week, while the Dow Jones Industrial Average pulled back modestly week-over-week. Despite the potential risks related to the Iran conflict (i.e. higher oi prices/yields), this continues to be a market driven by strong earnings growth, which continues to be fueled by investment in the AI infrastructure buildout. Stocks appear to be in "melt-up" mode, coupled with relatively low volatility (VIX = 14.50) and relatively low summertime volume. Also potentially assisting the recent rise is investor sentiment, which is bullish, but also contains a healthy level of skepticism (i.e. if everyone was bullish I'd be more concerned). Are there potential risks to the bull run? Absolutely. Aside from the Iran conflict, we are in a seasonally bearish time for stocks (August/September), we are in a midterm year (which historically has encountered a market pullback), we have a new Fed Chair who is intentionally opaque, and 30-year Treasury yields have pushed up to fresh cycle highs. Worth mentioning here, yesterday's 30-year Treasury auction went off at a 25-year high of 5.216%, which conveys investor appetite (or lack thereof) for longer-term U.S. debt. Perhaps higher borrowing costs and declining equity risk premium can be overlooked by stock investors as long as the trajectory of U.S. corporate earnings growth continues to trend higher. However, make no mistake that this market/economy is being fueled by the AI infrastructure buildout, and that buildout will need to be supported by strong adoption and sound economics over the next several years in order to validate the massive investments.

Speaking of AI, there were several constructive data points that supported the validity of the AI trade in my view. First, on Monday Nvidia CEO Jensne Huang announced a partnership with six of the largest asset managers to pool $500B in capital that is intended to help fund the AI infrastructure buildout. The intent is to give smaller AI-related companies access to capital to participate in the AI secular growth story. Next, on Tuesday AI server maker Super Micro Computer reported strong earnings and robust guidance (25% above Street estimates), and so did cloud computing renters CoreWeave & Nebius, both sending signals of strong industry demand for compute. Then yesterday, memory storage maker SanDisk held an analyst day and provided the following long-term projections: "Mid to high-teens revenue growth forecast through 2030; 80% non GAAP gross margin, 75% Non-GAAP operating margin for 2028-2030." These data points follow the strong earnings/guidance from hyperscalers just two weeks ago, so the demand for compute and AI trade looks to be intact.

Tracking the Q2 earnings scorecard, the results continue to be very strong, even when removing one-time earnings contributions due to investment gains from Amazon, Alphabet and Microsoft. So far, 455 of the S&P 500 companies have reported results and 69% have beat estimates on the top line while 87% have beat on the bottom line. Perhaps more impressively EPS growth is currently tracking at 50.51% and revenue growth is at 14.65%. When excluding one-time investment gains, the EPS growth rate for the S&P 500 is tracking 26-29% (according to estimates from Goldman Sachs and data compiled by LSEG).

At the time of this writing (2:22 PM ET) stocks are slightly lower across the board (sans the Russell 2000), though off the lows of the session (DJI - 67, SPX - 15, $COMP - 108, RUT + 10). On the bullish side, the technicals are bullish, new highs can still attract short covering and performance chasing, and although the Iran conflict could be an underappreciated wild card, oil prices are relatively contained, at least for now. On the bearish side, seasonality shifts more bearish as we move into the back half of August and into September, longer-term Treasury yields remain buoyant (despite benign inflation data, a soft Nonfarm Payrolls report and weak retail sales), and investors might be a little complacent at this point of the uptrend (VIX hit an 8-month low today and hardly anyone seems to consider the Middle East conflict a potential threat to the global economy). Anything can happen at any time concerning geopolitical headline risk, but as for next week, it doesn't seem to me that there is a lot out there to alter the recent script, which is stocks are in melt-up mode. Although some modest consolidation wouldn't surprise me at some point next week (see "Technical Take" on SPXEW below), the path of least resistance is likely still higher. Therefore, I'll provide a "Slightly Bullish" forecast for next week, which could include some healthy digestion of recent gains. What could challenge my forecast? The most obvious catalyst would be a negative development out of the Middle East.

• Monday (8/17): Empire State Manufacturing, NAHB Housing Market Index, Net Long-Term TIC Flows
• Tuesday (8/18): Building Permits, Capacity Utilization, Export Prices, Housing Starts, Import Prices, Industrial Production, Pending Home Sales
• Wednesday (8/19): EIA Crude Oil Inventories, MBA Mortgage Applications Index
• Thursday (8/20): Continuing Claims, EIA Natural Gas Inventories, Initial Claims, Leading Economic Index, Philadelphia Fed Index
• Friday (8/21): S&P Global U.S. Manufacturing Index, S&P Global U.S. Services PMI

• Monday (8/17): Fabrinet (FN), H World Group Ltd. (HTHT), XP Inc. (XP)
• Tuesday (8/18): Amer Sports Inc. (AS), Baidu Inc. (BIDU), Hesai Group (HSAI), Home Depot Inc. (HD), Jack & Henry Associates Inc. (JKHY), Keysight Technologies Inc. (KEYS), Klarna Group PLC (KLAR), La-Z-Boy Inc. (LZB), Pony AI Inc. (PONY), Toll Brothers Inc. (TOL), VNET Group Inc. (VNET), ZTO Express Inc. (ZTO)
• Wednesday (8/19): Analog Devices Inc. (ADI), BILL Holdings Inc. (BILL), Coty Inc. (COTY), Estee Lauder Companies Inc. (EL), Full Truck Alliance Co. (YMM), Lowe's Companies (LOW), Nordson Corp. (NDSN), Target corp. (TGT), TJX Companies Inc. (TJX), Viking Holdings Ltd. (VIK), ZIM Integrated Shipping (ZIM)
• Thursday (8/20): Advance Auto Parts Inc. (AAP), Alibaba Group Holding Ltd. (BABA), Alour Lifestyle Holdings Ltd. (ATAT), Autohome Inc. (ATHM), Deere & Co. (DE), Futu Holdings Ltd. (FUTU), NetEase Inc. (NTES), OSI systems Inc. (OSIS), Ross Stores Inc. (ROST), Walmart Inc. (WMT)
• Friday (8/21): BJ's Wholesale Club Holdings Inc. (BJ), Buckle Inc. (BKE), Ke Holdings Inc. (BEKE), MINISO Group Holdings Ltd. (MNSO), Ubiquiti Inc. (UI)

There was a solid dose of economic data this week, which was highlighted by the monthly inflation reports and a reading on the pulse of the consumer via the monthly retail sales report. There was something for both the bears and the bulls from these data points. First, both inflation reports were either in-line or cooler-than-expected, which helped lower rate hike expectations from the Fed. However, retail sales missed significantly, and consumer confidence also took a notable dip. Retail Sales has shown resiliency this year up until this report, so it's only one data point to be aware for now but is something markets will monitor in the coming months. Here's a breakdown of the reports:

• Consumer Price Index (CPI): The headline CPI increased 0.1% in July, which puts the annual inflation rate at +3.4%, both in line with expectations. Core CPI rose 0.2% in July, which translates into a +2.6% annual inflation rate (both in line with expectations). Both annual figures ticked down 0.1% from June levels.
• Producer Price Index (PPI): The headline PPI was flat (0.0%) in July, which was below the 0.2% expected. Core PPI rose 0.2%, which was below the 0.3% estimate. On an annual basis, headline PPI increased 4.7% in July, down from 5.5% in June and below the +4.9% expected. Core PPI rose 4.2% on an annual basis in July, down from 4.7% in June and in line with expectations.
• Retail Sales: Headline retail sales dropped 0.6% in July, which was well below economist expectations for a 0.1% increase. This represented the largest decrease since May of 2025. Core retail sales declined 0.3%, which was below the +0.1% consensus estimate. The Control Group, which excludes food services, auto dealers, building materials stores and gasoline stations, and feeds directly into GDP calculations, declined 0.4% month-over-month in July, which was well below the +0.3% expected.
• NFIB Small Business Optimism Index: Rose 2.4 points from the prior month to 99.8, which represents the highest reading since August of 2025. A substantial improvement in hiring plans was the biggest contribution to the rise in the index.
• University of Michigan Consumer Sentiment – Preliminary: The overall index fell to 51.0 in August, down from 55.2 in July and well below the 55.0 economists were expecting. Inflation expectations among older consumers, lower-income consumers and those without a college degree contributed to the decline. Year-ahead inflation expectations rose to 4.3% from 4.2% in the prior month, while 5-10 year inflation expectations remained flat from the prior month at 3.3%.
• Existing Home Sales: 4.06M vs. 4.06M est.
• Business Inventories: 0.0% vs. 0.2% est.
• EIA Crude Oil Inventories: +17.42M barrels.
• EIA Natural Gas Inventories: +36 bcf.
• Initial Jobless Claims: Initial applications for US jobless benefits increased 9K from last week's (upwardly revised) 200K to 209K. Continuing Claims decreased by 22K from the prior week to a seasonally adjusted 1.777M.
• The Atlanta Fed's GDPNow initial "nowcast" for Q3 GDP was revised down to 4.3% today from 5.8% last week, primarily driven by this morning's retail sales data.

U.S. Treasury yields moved lower on the front end of the curve, but rose on the long end of the curve, which resulted in some steepening of the yield curve. This week's cooler-than-expected monthly inflation data helped ease rate hike expectations from the Fed. Compared to last Friday, 2-year Treasury yields are down ~5 basis points (4.148% vs. 4.204%), 10-year yields moved up ~2 basis points (4.686% vs. 4.66%) while 30-year yields increased ~6 basis points (5.271% vs. 5.21%).

Market expectations around a potential rate hike from the Federal Reserve continued to ease this week, primarily driven by this week's benign monthly inflation reports (CPI/PPI). Per Bloomberg, the probability of a Fed rate hike at the September FOMC is now down to 30% today from 44% last Friday. The first theoretical 100% probability of a rate hike has now been pushed out to January 2027 from December last week.

The S&P 500 Equal Weight (SPXEW) continued to slowly climb to fresh all-time highs this week in summertime "melt up" fashion. The intermediate-term uptrend is intact, the technicals are bullish, but on a very near-term basis, a modest pullback or digestion period wouldn't surprise at some point next week. The Relative Strength index (RSI) has been hovering around 70 over the past 24 hours, a level which has coincided with a short period of digestion over the past four months.

Near-term technical translation: slightly bearish to neutral (consolidation time?)
Intermediate-term technical translation: bullish

The Nasdaq 100 index ($NDX) is on track for modest weekly gains, though I would characterize this week's price action as a healthy period of consolidation above the 50-day SMA following a strong bounce off the July 29th lows. The lows on that day essentially coincided with the implosion of Situational Awareness and strong earnings reports from AMZN & MSFT. There were several fundamental data points around the AI secular growth story that are likely supportive of tech – Nvidia's Jensen Huang partnering with six major Wall Street asset managers to establish a $500B financing platform for AI infrastructure; AI server maker Super Micro issuing strong guidance (revenue 25% above analysts estimates) and SanDisk forecasting strong growth out until 2030 at yesterday's Analyst Day. As for the NDX, the prior all time high (30,762) appears to be the next level of resistance to transcend, but otherwise the technicals are bullish.

Near-term technical translation: moderately bullish

The Bitwise 10 Large Crypto Index is down 3% since last Friday, with bitcoin down 3% and ether down 2% at the time of writing. Bitcoin continues to trade as a low-correlation asset, with this week's CPI and PPI releases having limited impact on its price. Last week, the Senate left DC for summer recess without a vote on the CLARITY Act. While a cloture vote is scheduled for September 14, the likelihood of passing remains slim before midterms. Looking at other examples of regulatory changes over the past fifty years, regulatory clarity has often been associated with increased investment and capital formation. Digital assets have operated on the outskirts of the traditional financial system since 2009, and with financial institutions across the world beginning to adopt this technology, lack of regulatory clarity could potentially impact longer-term plans. Historical analogs may provide perspective on how regulatory clarity has influenced investment and adoption in other industries. While there are several examples over the previous fifty years, two examples stand out as strong analogs.

Blockchains are fundamentally digital infrastructure, so viewing regulatory clarity through the lens of infrastructure investment may help provide perspective. The telecom industry was historically highly regulated and upon passage of the Telecommunications Act of 1996, deregulation opened the market to broader competition. Following passage of the Act, annual fixed-asset investment more than doubled from 1996 to 2000, while cell sites grew from ~30,000 to over 175,000 over the next decade.

The primary use of blockchain technology is financial in nature today. Financial institutions and markets are heavily regulated. Regulatory clarity (in this case regulation as opposed to telecom deregulation), could provide a concrete policy framework for traditional financial institutions that are beginning to explore integrating blockchain technology into their businesses.

Today there are roughly $45 billion in tokenized real-world assets, and an additional $300 billion in stablecoins. These are large numbers, but drops in the bucket compared to global asset markets, with global stocks market cap at ~$125 trillion, global bonds at ~$250 trillion and global real estate at roughly ~$400 trillion according to data from Bloomberg, SIFMA and Savills. Through the lens of telecom infrastructure investment, crypto regulatory clarity may offer a similar analog. Under this framework, investors may want to understand where value may accrue if additional investment is directed towards blockchain technology, including networks, settlement rails and infrastructure.

The Bloomberg chart below shows the current % of members within the S&P 500 (SPX), Nasdaq Composite (CCMP) & Russell 2000 (RTY) that are trading above their respective 200-day Simple Moving Averages (SMA). In short, stocks continued to "melt-up" this week and market breadth correspondingly expanded. In fact, SPX market breadth is above January highs. Compared to last Friday, the SPX (white line) breadth improved to 75.20% from 71.74%, the CCMP (blue line) moved up to 49.36% from 47.22%, and the RUT (red line) expanded to 68.37% from 67.01% (all week-over-week).