Apple On Today's Menu, With Starring Roles From China Talks, Fed Meeting

Watching stocks during a Fed meeting week is normally like watching paint dry. That’s the way it was Monday, as investors seemed shy about taking big new positions ahead of a rate decision.

Today, however, there’s a lot of other stuff that might take peoples’ eyes away from Fed Chair Jerome Powell and company, including Apple Inc AAPL and Advanced Micro Devices Inc. AMD earnings later on and a key inflation reading this morning (see more below).

Some of the earnings news could be overshadowed by new concerns about U.S./China trade relations in the wake of negative tweets from President Trump this morning. The tweets coincided with talks resuming and put pressure on the market before the opening bell.

It’s important for investors to put this type of thing into context. Until pen hits paper on a deal, most of the trade talk news is simply noise. The market is at all-time highs and a little noise is taking a few points off the top. It’s best to keep perspective and not get worked up over nothing.

In earnings developments this morning, Under Armour Inc UAA came into the spotlight as the company missed consensus views on revenue, said it expects 2019 North American sales to fall, and saw its stock dive double-digits in pre-market trading. Over on the Health Care side, Eli Lilly & Co LLY posted a healthy earnings beat and raised guidance, but its shares didn’t show much reaction.

Merck & Co, Inc. MRK was another Health Care outperformer early Tuesday, easily topping Street estimates and raising guidance behind strong sales of cancer drug Keytruda. Staples had its own earnings over-achiever Tuesday as Procter & Gamble Co PG surpassed analysts’ estimates and saw sales increase sharply, another sign perhaps of strong consumer demand in the U.S. economy.

On another earnings-related note, Beyond Meat Inc. BYND saw its high-flying shares taken down a notch after the close Monday when the company announced after reporting earnings that it’s going to have a secondary offering of 3.25 million shares. BYND’s quarterly loss was also worse than expected, though it did beat Wall Street’s revenue estimate and raised guidance.

Treading the Balance Beam with Powell

Going into the Fed meeting, futures prices suggest investors expect a quarter-point (25-basis point) rate cut, the first since 2008. There’s a very low probability of a 50-basis point cut, with chances of less than one in four, but you can hear voices on Wall Street calling for 50 points and other voices calling for no cut. We’ll see how it all shakes out on Wednesday afternoon.

For Powell, it’s a tough plank to walk. Anything he says could be received poorly. If he says the economy is holding up relatively well, the market could react by falling on ideas that it’s a “one and done” rate cut. If he says more action might be needed, it might get people even more worried about the economy. It doesn’t necessarily help that the Fed meeting starts with the market near all-time highs. A rate cut is basically built in, so it might be hard to find additional strength when or if it actually happens.

You can never predict how the market might respond to events, but a 50-basis point cut—which seems unlikely judging from futures market action—could get a fish-eye from some investors even though it would provide more stimulus to the economy.  The market doesn’t like surprises. It might initially rally, but with such a low probability of a 50-basis point easing, the longer-term question might be: “What are you seeing that we don’t see?” In other words, it might imply the Fed sees something ominous ahead, and that wouldn’t necessarily provide a psychological lift.

Assuming the Fed cuts just a quarter-point this time, that leaves an open question about how it might frame things going forward. There are some signs of improvement in data recently, though manufacturing and housing still seem soft. Friday’s payrolls report might be more of a signal to the Fed than many other data points, but the Fed has to wait until after its meeting to see those statistics.

Jobs growth over the last three months has averaged 170,000, and a Briefing.com consensus reading shows analysts anticipating 160,000 new jobs in July.

One slice of the pie the Fed will have on hand Wednesday is its favorite inflation monitor, Personal Consumption Expenditure (PCE) prices, which came out this morning. At first glance, the data seemed mild and didn’t look like it would be likely to change any minds at the Fed in the late going. The headline inflation number rose 0.1% in June from the previous month and 1.4% year-over-year. Core inflation, which strips out energy and food, rose 0.2% for the month and 1.6% for the year.

Here Comes Apple

Apple shares rallied into earnings, which the company is going to share after the close. The stock is back above $210, but still below last year’s all-time highs. Going in, there’s concern about AAPL’s services business and how it performed, but also some optimistic talk that maybe the iPhone market might be improving in China. Remember, AAPL lowered prices there earlier this year, and while that might help unit sales, it could compress margins.

A number that investors often watch with AAPL is the installed base of active devices, which topped 1.4 billion last quarter. The company stopped reporting iPhone unit sales this year, so active devices could be another way to try and keep tabs on how much market penetration the AAPL has gained or lost.

Also consider keeping an eye on iPhone sales as a percentage of total revenue. That number was 53.4% last quarter, down from 61.4% a year earlier and down sequentially from 61.7% in the December quarter. If AAPL can grow overall revenue, or at least slow its decline, and have iPhone sales fall as a percentage of revenue, it might mean they’re showing some ability to replace lost iPhone revenue with revenue from things like services. The company even touted strong iPad sales growth last time out.

Another big name putting out earnings this week before the Fed delivers its decision is General Electric Company GE, which reports Wednesday morning. This could give investors a chance for more insight into the company’s slumping power division. Also, as CNN pointed out, GE makes jet engines for Boeing Co BA, so it could be vulnerable if BA does shut down 737 MAX production, something BA mentioned as a possibility last week.

Earnings Better Than Expected—But Still a Downhill Ride

The Wall Street Journal posted an article yesterday afternoon pointing out that even though Q2 S&P 500 earnings are expected to fall 2.6% year-over-year, average earnings among S&P 500 companies that have reported are up 0.7% from a year earlier.

Last week saw a number of major firms including Alphabet Inc GOOGL, The Coca-Cola Co KO, Twitter Inc TWTR and United Parcel Services, Inc. UPS get some juice out of stronger-than-expected quarters. This might be what helped AAPL on Monday—anticipation of more consumer-driven earnings solidity. It also didn’t hurt that a couple of analysts have raised their price targets for the stock in recent days.

Tech Tables Turn? If you look at the Technology stocks that did well on Monday, including Apple, Cisco Systems, Inc. CSCO, and Intel, it’s quite a contrast with some of the ones that didn’t, including Roku Inc ROKU and Workday Inc WDAY. A single day doesn’t represent a trend, but it is interesting to see this just before a Fed meeting, because it appears that some investors might have been shifting out of higher-risk, volatile stocks with less cash on hand and into legacy names with a lot of cash and more stable fundamentals. There’s some trepidation in the market now as investors wait to hear what the Fed has to say, and that could be driving a bit of interest in companies where there’s more perceived stability.

In general, the tone Monday seemed cautious, with “defensive” sectors like Real Estate, Utilities, and Consumer Staples topping the leaderboard. Treasuries were also popular on Monday, helping send 10-year yields down to 2.06%. That yield seems locked in a tight range between 2% and 2.1%, and it’s not clear what could break it out or which way it might go if it does escape.

Financials Ahead of Fed: Many large banking firms delivered better-than-expected earnings and cited consumer health, even though trading results were generally on the rough side. One interesting thought is that when you look at earnings expectations going forward, a lot of the bank ones appear to build in chances of additional rate cuts by the Fed later this year. If that doesn’t happen, one school of thought suggests, Wall Street’s bank earnings expectations might be too low. That’s why it might be prudent to keep a close eye on how some of the major bank stocks react tomorrow to the Fed’s statement and Fed Chair Jerome Powell’s press conference.

Breaking Down Small-Cap Weakness: The small-cap Russell 2000 Index (RUT) struggled again Monday, falling more sharply than other major indices, after showing a few signs of life last week. One thing that might be holding small-caps back is so much excitement around some of the big Technology sector and consumer names, which are anything but small. There’s a sense that some of the smaller and value names might be getting overlooked as more investors ride stocks like Apple, Alphabet Inc GOOG, McDonald’s Corp MCD and the semiconductor gang higher so far this year. Another possible reason for small-cap sluggishness is the presence of so many regional banks in the RUT. These stocks are particularly vulnerable to low rates, and the U.S. is back in a low-rate environment. The S&P Regional Banks Index (SPSIRBK) was down 12% year-over-year as of late last week, though it has made strides since the start of 2019.

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