Stephanie Link: The word of the day is seasonality

Key Concepts

• Government Shutdown Deal: Potential agreement in the Senate to end the government shutdown, requiring House passage.
• Seasonality: The tendency for the fourth quarter to historically show positive market performance (average 8.5% cumulative gain over 50 years).
• Economic Strength: Underlying robust economic conditions, with strong GDP estimates and positive earnings growth (12.5% for earnings, 8% for revenues).
• Market Breadth: The concept of market gains being supported by a wider range of stocks and sectors, not just a few large ones.
• Bare Market Territory: Sectors or stocks experiencing declines of more than 20% from their 52-week highs.
• Cyclical Companies: Businesses whose performance is tied to the overall economic cycle.
• Cash on the Sidelines: Significant amounts of money available in cash that could potentially enter the market.
• Big Tech Earnings: Upcoming earnings reports from major technology companies that could impact market sentiment.
• Consumer Sentiment: Concerns about the strength and spending habits of consumers.
• Starbucks Turnaround: Potential for Starbucks to recover and grow under new leadership and strategic initiatives.

Government Shutdown and Market Impact

The market is reacting positively to reports that the Senate is nearing a deal to end the government shutdown. While this still needs to pass the House and may take a few more days, the prospect of resolution is seen as a factor that could alleviate concerns about inflation and valuations, potentially putting the bull market back on track.

Seasonality and Sector Allocation

The discussion highlights seasonality as a key theme, noting that the fourth quarter historically performs well, averaging an 8.5% cumulative gain over the past 50 years. The volatility experienced in November is viewed as an opportunity to add to positions, especially given the lack of expected volatility in September and October. Recommended sectors for adding exposure include:

• Financials
• Energy
• Industrials
• Technology
• Discretionary

This allocation is supported by the strong economic footing and robust earnings growth, with earnings up 12.5% and revenues up approximately 8%, and margins exceeding expectations. The advice is to buy pullbacks, particularly in stocks that have declined with the broader market, especially if their fundamentals are improving.

Economic Strength and Market Breadth

The economy is described as being on "very sound footing," with strong GDP estimates for the current quarter. The Atlanta Fed has reportedly increased its GDP estimate.

However, a point of concern is raised regarding the S&P 1500, which includes mid and small caps. Both communication services and tech sectors are noted to be in bare market territory, down more than 20% from their 52-week highs.

Despite this, the perspective presented is that this broadening of pullbacks across various names is actually encouraging. It signifies a potential broadening out of market gains, which has been a desired but inconsistent trend. The recommendation is to own technology stocks but also to invest in the other sectors mentioned that are expected to outperform into year-end. Mid and small caps are also considered, though a preference is expressed for large-cap cyclical companies due to their similar trading factors. The presence of $7 trillion in cash on the sidelines is seen as a significant tailwind, even if not all of it enters the market.

Upcoming Earnings and Market Movers

Several significant earnings reports are scheduled for the week, including those from Coreweave, Cisco, Applied Materials, Sony, and Soft Bank. The potential for these reports to impact the market, similar to Palantir's recent performance, is discussed.

• Cisco: Highlighted as an interesting company due to its broad global exposure. Its commentary on the global economy is considered valuable. The company's recent acquisitions are expected to be synergistic.
• Applied Materials: Also viewed positively, with a favorable outlook for equipment players in the semiconductor industry.
• The overall tone is suggested to be improving as the government shutdown situation progresses.

Starbucks as a Top Pick

Starbucks is presented as a top pick for the day. The rationale behind this choice is a belief that the consumer is not as weak as some fear.

• New CEO Impact: The stock rallied 49% when Brian Nickel was announced as the new CEO, who previously led Chipotle to over 700% growth.
• Current Valuation: The stock has since given back that 49% gain and is currently down 6%.
• Turnaround Signs: The CEO indicated that the turnaround is happening faster than expected. Notably, Starbucks reported its first positive same-store sales figure for the overall company in two years.
• Strategic Initiatives: The company is revamping its stores, store experience, mobile order system, and menu.
• The current price is seen as not fully appreciating these positive developments.

Conclusion

The market sentiment is cautiously optimistic, driven by the potential resolution of the government shutdown and strong underlying economic fundamentals. Seasonality in the fourth quarter is expected to provide a tailwind, supporting investments across various sectors, including financials, energy, industrials, technology, and discretionary. While some sectors are in bear market territory, this is viewed as a sign of broadening market participation. Upcoming big tech earnings will be closely watched, but companies like Cisco and Applied Materials are expected to provide positive commentary. Starbucks is highlighted as a compelling investment due to signs of a significant turnaround under new leadership and strategic initiatives, with its current stock price not reflecting these improvements.