Rally Expanding Beyond a Few Mega-Cap Darlings

The S&P 500 continues to edge higher on mostly positive earnings reports (see below). And more importantly, we’re finally beginning to see this rally expand out from just a few mega-cap names to a more broad-based representation of the US stock market. Even the Dow is beginning to participate.

Retail sales rose .2% in June from prior month levels, somewhat less than expected. The annual rate of spending growth slowed to 1.5%. The Census Bureau’s report suggests lower sales at building materials stores, gas stations and grocery stores. On the other hand, spending at restaurants, furniture & electronics outlets grew modestly. This data mostly tracks sales of goods rather than services, so it doesn’t capture the entirety of consumer spending. But it does suggest that demand for goods is slowing, and goods prices are beginning to fall. We call this disinflation and you’re going to hear that term more often through the balance of the year. Although inflation is slowing, prices levels are still much higher than they were pre-Covid. Slower demand will ensure that prices reset lower.

Morgan Stanley (MS) reported second quarter results roughly in line with analysts’ expectations. Total revenue grew 2% from the year-ago quarter, though profits fell 14%. Business segment performance was sort of mixed. Revenue from wealth management rose 16% and the firm attracted $90 billion in new client assets. But higher interest rates and the 2022 bear market have negatively impacted equity trading and investment banking. Fortunately, CEO James Gorman said he believes those businesses have bottomed and will now begin to gradually improve. When asked why the stock is up 7% today, he summarized the investment thesis: 1) clear signs of improving business momentum; 2) strong capital levels; 3) good organic growth in wealth management; 4) high dividend yield.

Elevance (ELV), the health insurer formerly known as Anthem, reported strong second quarter results and the stock is up over 5% this morning. Policy premium revenue came in about $1 billion more than anticipated. At the same time, the portion of premiums paid out in medical costs fell to 86.4% vs. 86.9% expected. As a result, profit margins improved and management raised guidance for full-year 2023 profits. I have to say that this report blind-sided investors and analysts, who until today assumed that rising healthcare utilization and costs across the industry would continue to drag down margins.