Russia’s President Putin warns the US it is risking World War Three on its own shores by helping Ukraine. An Israeli hostage is rescued in a Gazan tunnel. US Special Counsel Jack Smith issues a revised federal indictment for election subversion against former President Donald J. Trump. A ratings cut on a New York City office tower marks the first significant loss on a AAA-rated bond since 2008. These are all newsworthy headlines; however, they fade into the background this week because investors are focused on NVIDIA Corp.’s (NVDA – $128.30) earnings report, expected after the close on Wednesday. The expectations for NVDA, the world’s dominant artificial intelligence chipmaker, are high and analysts say the company needs to report revenue of $30.5 billion or more to generate an upside surprise. The current estimate is for revenues of $28.7 billion and the company typically beats revenue estimates by more than 6%.
Meanwhile, traders in the equity options market are expecting NVDA’s earnings report to spark more than a $300 billion swing in the company’s shares. According to data from analytics firm Options Research & Technology Services (ORATS), current options pricing shows traders are predicting a price move of nearly 10% the day after NVDA reports earnings. That’s larger than the stock’s average post-earnings move of 8.1% over the last three years. The stock is up 159% year-to-date, has a market capitalization of $3.16 trillion, a trailing 12-month PE ratio of 75 times, a forward PE ratio of 37 times, announced earnings per share of $1.30 ($1.19 reported) for fiscal January 2024 and is forecasted to earn $2.75 per share ($2.58 reported) in fiscal January 2025. Rarely does one stock become so big and so important for the stock market. However, Nvidia has been not only the benchmark for chips, but the benchmark for everything related to artificial intelligence and has been at the core of the euphoria around AI’s potential for earnings growth. Unfortunately, the history of the stock market shows that dominance of any one company can only last for a certain period of time before expectations exceed possible outcomes. Either way, this week’s action should be revealing.
Nvidia’s earnings are not the only focus of the week because Friday will include data on personal income, personal consumption expenditures, and the all-important PCE deflator. In June, the PCE price index rose 0.3% month-over-month and 2.5% year-over-year. Investors will be looking for something better than that in July to help support a Fed rate cut in September.
Employment Revisions
Last week the Bureau of Labor Statistics announced preliminary estimates for the upcoming annual benchmark revision to the establishment survey series. The final revision will be issued in February 2025 with the publication of the January 2025 employment report. This revision rarely receives much attention since the annual benchmark adjustments over the last 10 years have averaged plus or minus one-tenth of one percent of total nonfarm employment. However, this year the preliminary estimate shows an adjustment to total nonfarm employment as of March 2024 to be lower than previously reported by 818,000 jobs, or by -0.5%. This is obviously five-times the normal adjustment, the largest since the 2009 recession, and has given rise to controversy over the data. It is a positive for the Fed, since it denotes a weaker job market than previously reported, but it removes a positive cited by the Biden-Harris administration that has boasted of strong job creation. In our view, it puts the establishment survey in line with the household survey which has been showing weak job growth all of 2024. See page 3.
The Housing Sector
The National Association of Realtor’s pending home sales index for July will be reported this week and economists will be watching to see if June’s bounce from May’s post-pandemic low of 70.9 was a one-off blip or the start of a better trend. The housing sector is a very important segment of the US economy since it typically and consistently represents 15-17% of total US GDP. See page 4.
However, housing faces an uphill battle. During the Covid-19 pandemic when people were restricted to their homes and travel was similarly constrained, families reassessed their living conditions and their ability to travel. The demand for homes and autos rose dramatically and so did prices. But the combination of rising prices and higher interest rates has made housing and autos increasingly unaffordable for many households. Assuming that no more than 30% of gross household income goes toward housing costs, the required income for a median-priced home is $119,461 while the median household income is $83,758. In short, a massive affordability gap has opened up and buying an average home is out of reach for the majority of Americans. See page 5.
But July housing data showed some improvement. For the month of July, existing home sales were 3.95 million units, up from 3.9 million units in June, although down 2.5% YOY. Note that existing home sales have been negative on a year-over-year basis since the pandemic peak of August 2021. New home sales were 739,000 in July, up from 668,000 in June, and up 5.6% YOY. In both cases, July’s uptick in sales reversed the steadily declining trend seen for most of 2024. See page 6.
The median price for an existing single-family home was $428,500 in July, up 4.2% YOY, but down from June’s all-time high of $432,900. The median price of a new single-family home was $429,800, down 1.4% YOY and down 7% from the October 2022 peak of $460,300, but up 3% from June. It is possible that a decline in mortgage rates lent support to the housing market in late July and in August, but August data will be needed to confirm this trend. See page 7.
The Conference Board’s consumer confidence index inched up from an upwardly revised 101.9 (previously 100.3) in July to 103.3 in August. This index has been in a narrow range of 95.3 to 115.2 since August 2021 and is currently in line with its long-term average. However, expectations, at 82.5, held above 80 for the second consecutive month, which is an improvement. This follows the University of Michigan sentiment index which also displayed an uptick in expectations in August, led by Democrats encouraged by the Kamala Harris nomination. See page 9.
Technical Update
The 25-day up/down volume oscillator is 2.19, in neutral territory, but up from a week ago. More importantly, a 91% up day on August 23 neutralized the 90% down day from August 5. But with many indices at all-time highs, it will be important for this indicator to confirm with an overbought reading of at least five consecutive days. If the rally which began in October actually was the beginning of a new bull market advance, it should also include several extreme overbought readings of 5.0 or better, which are typical of the first stage of a major advance. To date, this has been absent and represents a lack of persistent buying pressure. The last stretch of five or more days in overbought territory took place between December 13, 2023 and January 5, 2024. See page 12. Nevertheless, the positives in the technical area are seen in the 10-day average of daily new highs at 396 with lows averaging 36, and a new high in the NYSE advance/decline line on August 27, 2024.
Gail Dudack
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