The Week Behind

While GDP stoked the inflationary fires on Thursday, Friday’s PCE dampened inflationary embers, allowing the majors to tally winning weeks on the backs of strong corporate results. The Dow finished the week ~0.6% higher; the S&P 500 added ~1%; and the NASDAQ gained ~2%.

Highlights 

• The Fed hiked rates by a quarter point, raising the Fed Funds Rate to 5.25 – 5.50%. Powell remained noncommittal during the press conference, emphasizing data dependence. 
• Preliminary 2Q GDP exceeded forecasts, coming in at 2.4%. The robust economic data fueled hawkish sentiment, pushing yields to uncomfortably high levels, which triggered a broad sell-off.
• PCE and the Employment Cost Index were slightly softer than expected, countering the hawkish sentiment from GDP and contributing to stock market recovery to end the week.

Monitoring the Macro

Despite abundant micro data typical of earnings season, the market has shown a strong inclination towards the macro. This trend was evident during Thursday’s and Friday’s sessions.

On Thursday, the market opened higher, led by the NASDAQ, inspired by an exceptional quarter from Meta Platforms. However, the market rolled over when GDP delivered a 20% upside surprise: 2.4% actual versus 2.0% estimate. This robust GDP data fueled hawkish sentiment (expectations of a tighter Fed), driving yields to uncomfortably high levels, which catalyzed a broad sell-off.

On Friday, markets recovered as PCE and the Employment Cost Index came in soft, offsetting earlier hawkish sentiment generated by the GDP report.

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In summary, Thursday began micro-economic optimism but was overshadowed by macro-pessimism. The next day, markets were able to recover as new macro data counterbalanced that pessimism. 

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The market’s inclination to be macro-driven during earnings season, traditionally a time when it is more micro-driven, is intriguing. This observation further supports the notion that market performance over the last few months is most closely tied to investor confidence regarding progress on inflation and its implications for Fed policy. Put another way, this implies that the market cares less about solid corporate earnings than it does declining inflation.

The Week Ahead

If I am correct in interpreting the market as more macro-driven than micro-driven, then job’s week will be consequential.

Tuesday brings Job Openings. 9.8 million is the median forecast. On Wednesday, ADP employment will be released. Expectations are set at 173k. While the ADP report has the potential to move prices, last month’s action showed the market gives more weight to the more reliable payrolls report, which is scheduled for Friday morning. Expectations for job growth are at 200k. Unemployment is expected to remain at 3.6%. Average hourly wages are anticipated to have increased by 0.4% in June. 

To maintain positive inflation sentiment, it is crucial for these metrics, except for unemployment, to come in below forecasts. A below-forecast result would suggest that the Fed does not need to tighten further, as its current policies are effectively curbing inflation by weakening sources of wage inflation that exist in an overly hot labor market.

Regarding corporate earnings, Apple (AAPL) and Amazon (AMZN) will conclude earnings season for mega-cap tech companies on Thursday. AAPL’s earnings call will provide additional details on new products from their developer conference, as well as updates on their operations in Asia excluding China. The focus at AMZN will be primarily on the growth of AWS and secondarily on the impact of Prime Day on their retail division.

Aside from the tech giants, I am particularly interested in the results from Merck (MRK), Caterpillar (CAT), and Cheniere (LNG). Outside of Eli Lilly, MRK is arguably the strongest stock in the lagging healthcare cohort. If MRK’s results inspire bullish sentiment, it could potentially revitalize the fading sector. CAT and LNG will represent the industrials and energy, respectively. Both of which are undergoing a bit of a revival. Industrials are benefiting from future U.S. infrastructure spending, while firming oil and natural gas prices are buoying energy. I hope that CAT and LNG can further advance their respective sectors’ narratives and increase depth to the current market rally.

Rapid Fire Earnings Recap

In this new segment, in an effort to follow-up on stocks I mention, I recap the quarters of such companies that reported last week in two sentences: the first summarizing the quarter, and the second outlining my thoughts on the market reaction.

GOOG: Strong performance in core search, YouTube advertising, and Cloud Profitability exceeded expectations, dispelling competitive concerns. The stock’s 9% rise since the report seems justified.

MSFT: Despite solid results, good wasn’t good enough as investors focused on management’s caution about flat margins due to AI-costs outpacing AI-revenue. The following 4% decline feels less like a catastrophe and more like an opportunity. 

META:  The “Year of Efficiency” continues as impressive revenue growth numbers reinforce META’s place as one of the greatest growth companies ever. After moving up 9%, the stock is positioned to re-enter its pre-bear market trading range above $325.

CMG: Chipotle turned in a mix quarter defined by a miss on same store sales growth. Stabilizing following a 9% free fall, I believe this is the best post-earnings opportunity for interested investors. 

F: Despite beating revenue and earnings expectations and raising guidance, Ford’s stock faded after warning about slowing EV adoption. My feelings on the ~3.5% sell-off depend on comments from competitors (TSLA and GM) regarding consumer appetite for their rival EV offerings. 

MA: Unexpected strength in travel and entertainment spending from previously cautious cardholders led to a top and bottom line beat, further alleviating recession concerns. The ~2.5% slide leaves the shares at opportune levels as the decline was merely a result of unfortunate timing, coinciding with the day GDP spooked the market.