Daily Brief - Buy the dip?

TLDR: Ah summertime. When managing directors and portfolio managers sail on yachts and the markets are thin.

At pixel time we’ve seen a drawdown of circa 10% from the peak on July 26th (5,721.25) to the trough on August 5th (5,151.14).

Market commentators obviously went for the easy explanation, id est the bursting of the AI bubble. But we think there’s many more factors at play.

Here’s a non-exhaustive list:

(a) the first Fed cut is a bearish signal,

(b) a ‘take profit’ phase was due for a while, the summer is the perfect time to to expect it,

(c) lower rate expectations are already reflected in the long bonds that went from 4.6% to 3.8% in a matter of weeks, and this will push money back in other asset classes, and finally

(d) Presidential fall terms are bullish

So is it time to buy the dip? It might well be that August gives us the trough of the quarter, so stay poised.

How to trade it

For allocators, we recommend sticking to the good ole risk parity, bonds did good to counterbalance equity losses this time. Also, with the Fed rate cut we might be at the end of the cycle, so ease on the high-momentum AI and look at value.

For traders, you have to sit at the window and wait. There’s a compelling trough around the corner, keep an eye on our Leading Indicators as they caught this peak perfectly.

Market Movers: What next for S&P Sectors?

Below is the historical 1-month response from S&P sectors, following previous 10% drops in the S&P 500 while 10Y yields are below 4%:

1. S&P Real Estate: 9.95%
2. S&P Telecom: 9.54%
3. S&P Energy: 7.38%
4. S&P Materials: 7.25%
5. S&P Consumer Discretionary: 7.07%
6. S&P Health Care: 6.72%
7. S&P Technology: 5.97%
8. S&P Utilities: 5.55%
9. S&P Industrials: 4.43%
10. S&P Financials: 3.56%
11. S&P Consumer Staples: 3.51%

Earnings Spotlight: Disney Parks Segment Falls Short

Disney's fiscal third-quarter earnings exceeded expectations, driven by the surprising early profitability of its streaming businesses. The company reported adjusted earnings per share of $1.39, beating the expected $1.19, and revenue of $23.16 billion, surpassing the anticipated $23.07 billion.

Total segment operating income rose by 19% to $4.225 billion, with significant contributions from the entertainment unit. For the first time, Disney's streaming services—Disney+, Hulu, and ESPN+—posted a combined operating profit of $47 million, a stark improvement from the $512 million loss a year ago. Disney+ Core subscribers increased by 1% to 118.3 million, and Hulu subscribers grew by 2% to 51.1 million.

However, the U.S. theme parks faced challenges with a 6% drop in operating income due to inflation and slowing consumer demand. Despite this, Disney's overall revenue grew by 4% to $23.155 billion, showcasing strong performances in other divisions.