No Month-End Rally?

Today’s market action caught me by surprise.  We closed yesterday’s piece by asserting that barring an economic surprise, the path of least resistance for equities for the rest of the week was to the upside.  The Core PCE report was not a problem, but apparently DELL’s earnings were.  That led to a modest selloff in megacap tech that is outweighing the usual expectations of “don’t short a dull tape” ahead of a long weekend and month-end window dressing.  With the S&P 500 (SPX) about to complete its 4^th straight month of gains, and the Nasdaq 100 (NDX) making it five straight, perhaps there isn’t much need for portfolios to be window dressed.  Or perhaps that can wait until just before the close. 

As noted above, the day’s key economic report had the potential to disrupt but failed to do so.  Core PCE came in with an as-expected 0.3% rise on a month-over-month basis.  Taken out to a second digit, the rise was actually 0.27%.  On the plus side, 0.27% is of course below 0.3%; on the minus, 0.27% represents the fourth straight increase in that reading (0.1%, 0.17%, 0.20%, 0.26%, 0.27%).  The past three months annualize to a 2.9% rate, which also happens to be the same as the year-over-year change in that statistic.  There was some initial enthusiasm that the in-line report could reaffirm the likelihood of a September rate cut, but market expectations for cuts and the bond market overall barely budged.  Remember, amidst the excitement about Chair Powell’s change in stance toward cuts, the FOMC mission statement was revised to more closely target a 2% inflation rate.  A 2.9% reading from the Fed’s preferred inflation measure wasn’t enough to jolt the market, but it also fails to put the rate closer to the desired 2%.

Other economic reports also failed to provide a lift.  MNI Chicago PMI for August unexpectedly plunged to 41.0, well below last month’s 47.1 and the 46.0 consensus.  UMich Sentiment slipped to 58.2 from last month’s 58.6 (also the consensus), but Current Conditions rose, and 1-Year and 5-10 Year Inflation Expectations each dipped. 

Thus, the focus on DELL’s results and its -8% decline are the main influences on the market psyche today.  Sales and EPS both exceeded expectations slightly, but there were major concerns about a significant decline in AI server orders and margins in that division.  They booked $5.6 billion in Q2 AI server orders, well below the previous $12.1 billion.  Margins in DELL’s infrastructure unit were 8.8%, well below the estimate of 10.3%. 

Wait a minute – aren’t AI-related expenditures supposed to be booming?  Yes, according to Nvidia (NVDA), but maybe not according to DELL.  The current bull market and key indices are heavily dependent upon the continued growth and adoption of AI.  Anything that might show weakening of those trends is certainly not good news for equities.  Thus, some slippage in one specific company has broader ramifications than investors might have expected. 

Despite the light pre-holiday volume, or maybe because of it, a late rally wouldn’t be a big surprise.  We haven’t yet seen the usual dip buying that we’ve become accustomed to – especially on Fridays – but the thin markets mean that it won’t take much concerted buying to turn the tape around.  We’ll know soon enough, I suppose.