Morning Notes — Tech Earnings in Focus

The market-cap weighted S&P 500 (SPX) is on track to gain +11% for the month of November, while the equal weight S&P 500 (SPW Index) is on track to gain +15.5%.  Years of Tech outperformance have left the SPX with a 25.7% weighting to the sector.  While there’s no fundamental reason to sell Tech, investors seem willing to watch earnings growth catch up with multiples that expanded to records during the spring and summer.  We’re keeping a pro-cyclical/pro-value outlook for the time being (expect a 2-3 quarter move) on expectations for improving global manufacturing PMIs, slowly rising bond yields and curve steepening.  The spread between the 5-year and 30-year Treasury yield is the easiest way to follow the shape of the yield curve.  The 5-year yield should stay mostly anchored by Fed policy, while 30-year Treasury yields are almost entirely determined by market expectations of future inflation.  The 5/30 yield spread is currently ~121bps, and levels greater than ~143bps would likely result in a more asymmetric preference for Financials and Materials. After years of massive monetary stimulus dating back to 2007, the table for a reflationary period is now set as it was a year-ago at this time.  A slow recovery from the 2007 financial crises was followed by China’s decision to de-lever in 2014, rising US-China trade tensions and then COVID in January 2020.  Each disinflationary event was met with increasing levels of monetary and fiscal stimulus that now have a chance of being more fully utilized.