Market Breadth's Role in Upcoming Earnings, TSM Revenue Shows Investors are "Spoiled"

SPEAKER_1 (0:00)

Welcome back to Morning Trade Live. It's time now for the big picture. Let's welcome in Joe Mazzola, head trading strategist at Charles Schwab. Good morning to you, Joe. So, Morning, Sam. Higher oil, higher yields, higher dollar, stocks pulling back, pretty self-explanatory today.

Joe Mazzola (0:15)

It is, but I gotta be honest, the market's holding up fairly well amidst some of those headwinds. You know, we've come back throughout the course of this morning. Future's pointed to more of a deeper drop, but overall, the Csmp down 15 basis points, Nasdaq down less than 30 basis points, kinda shows that we're in a bit of a range-bound trade here, not that far off the highs.

One thing that's a little bit concerning to me is maybe the weakness in the small caps. If you look at the Russell, we're getting real close to correction territory, about an almost 10% drop, and I think it really shows some of their exposure to the higher yields, specifically if you're looking at the non-profitable companies, weighted average cost of capital for those companies continues to expand, and they're not faring well in this environment. It's showing also, Sam, that it's a real tight, narrow rally. It's really being led by the MAG-7. If you look at the difference in returns, just going back to beginning of August, it's about a 5% spread between the MAG-7 versus the S&P 500, and it's over 11% if you look at the MAG-7 versus the equal weight S&P 500 So, just narrow leadership.

And in this environment, it doesn't mean we can't set all time highs. It just means that as we're moving into earnings, and specifically technology earnings come into focus in the next couple of weeks, there's gonna be some heightened sensitivity.

SPEAKER_1 (1:48)

Well, exactly, because obviously you started off saying that things are hanging in there. It's easy to assume that things are, because of course the index level continues to obviously come off the lows today. 7800 on the S&P 500 yesterday. I mean, that looked encouraging as well. But as you point out, there's the caveat that under the surface, we've seen this dramatic deterioration of breadth. I mean, small caps absolutely getting clobbered, as you point out here. I mean, how sustainable is this that we're relying on a handful of sectors and stocks?

Joe Mazzola (2:17)

Well, we're also relying on earnings kicking off next week. Remember, expectations are about 29.5% year-over-year increase in S&P 500 earnings growth for Q3, and that's fact-set estimates.

So, that's a high bar. I mean, I think that has to be stated.

And while we crushed expectations in Q2, remember, a lot of that was driven by a couple names, Micron being one, Nvidia being two. So, just those two names alone accounted for a lot of the beats that we've seen. So far, now, going forward, like I said, it's not to say that this can't happen, but just look at today's action with maybe Taiwan Semi and Samsung, which to me is really interesting. You're looking at almost, what, eight, ninefold increase from Samsung in terms of revenue and profits. And we're going to time on semiconductors, talking about 50% increase in sales, and we're not really seeing any positive movement with those names. And in relation to that, you might think that that would give a little bit of a boom to some of the memory chips, and we really haven't seen that today either. So the question in my mind, and I think for all investors, as we head into the earning cycle, is how much of this is priced in? And what's the sensitivity to maybe, I wouldn't say misses, because I think expectations are that you're going to see primarily beats, but guidance going forward, how high, how strong does it have to be to keep this momentum going?

SPEAKER_1 (3:49)

Well, that's exactly right. And look, we've seen this story before. I mean, you go back to Samsung's preliminary Q2 earnings with that sell-off that we saw. I mean, obviously we saw spillover into the US market. Not as heavy selling pressure as we're seeing today, but these were fantastic numbers. Good numbers from Samsung, good numbers from TSM, not good enough for the market. What does that tell you about how demanding it's become? I mean, these are preliminary figures that obviously feed into those more comprehensive reports that we'll get later in the month. But what does it tell you about the current market pricing in?

You know, of all this AI spend.

Joe Mazzola (4:27)

What can you say? Yeah, we're spoiled, Sam. I mean, that's what it is.

And this is what's interesting, and my colleague, Lizanne, has talked about this quite a bit. The idea that it's not that multiples are high, it's just that earnings are really, really high. And with that, you know, with that compression of multiples, it shows that it's actually made the market cheaper, which I think is a good thing.