Daily Brief - Dot.com valuations

TLDR: Valuations reach once again for 22x P/E forward. Will it hold?

The dovish Fed has gifted us with another 2.6% piece of the rally, and the market seems in good shape to keep making new highs. Momentum is strong.

So what about all the bearish calls? They might actually be helping propel the market higher. With net short positioning persisting, there’s a lot of short covering that might push prices up.

Where does it end?

At this point, with strong EPS growth, the key factor to keep an eye on is valuations: the market has failed repeatedly against 22x forward P/E and there’s no reason to expect any difference.

So keep an eye on P/E and on leading PMIs for any sign of weakness.

How to trade it

For allocators, long treasuries + overwrite your equity longs remains our standard call.

For traders, if you wish to test your mettle against this momentum, vanilla puts or even better skewed 1x2x1 put butterflies puts are your go-to tools.

Market Movers: If SPX Forward P/E crosses 22x

Here are the top 3 and bottom 3 performing US sectors, according to their 1-month returns:

Top 3 Performing Sectors:

1. S&P Technology: 1.92%
2. S&P Telecom: 1.90%
3. S&P Health Care: 1.48%

Bottom 3 Performing Sectors:

1. S&P Materials: -0.46%
2. S&P Real Estate: -1.63%
3. S&P Utilities: -1.93%

Earnings Spotlight: On the road to $1K

Costco's stock has surged nearly 40% year-to-date, recently surpassing $900 per share, reflecting strong investor confidence ahead of the company’s upcoming fiscal Q4 2024 earnings report.

Analysts anticipate Costco will post earnings of $5.08 per share, marking a 4.5% increase year-over-year, with revenues projected to grow by 1.2% to $79.91 billion.

Despite a challenging consumer spending environment, Costco continues to gain traction, supported by new warehouse productivity and market share expansion. Additionally, the company’s untapped potential in digital media presents a promising revenue stream for future growth.