(Thursday Market Open) Investors might be ready to take a breather after yesterday’s Fed rate rally, but with slower second-quarter GDP numbers and even more earnings and global economic data arriving through Friday, there will be little time to rest.
Potential Market Movers
Equity index futures were trading lower before the opening bell as the U.S. dollar gained strength after weaker economic data in Europe. The Eurozone Business and Consumer Survey came in lower than expected, noting confidence had hit a low not seen in about a decade while inflation expectations rose. The stronger dollar appeared to be pulling equity index futures lower.
In the U.S., Gross Domestic Product (GDP) was down 0.9% in the first print, which will likely be adjusted as data is shored up. Nonetheless, this made two consecutive quarters of negative GDP, which many consider to be a recession. However, the National Bureau of Economic Research (NBER) gets the official say, and it considers whether an economic contraction is “prolonged, pronounced, and pervasive” when making its determination.
Whether we’re ready to call it a recession or not, the economy appears to be weakening at much faster pace than people expected. The GDP report showed that gross domestic purchases fell from Q1 to Q2 as consumers are focusing more on services and less on goods.
After the GDP report, the dollar gave back some of its gains, which boosted equity futures nearly even to yesterday’s close.
After the market closed on Wednesday, Meta Platforms (NASDAQ: META) reported misses on earnings and revenues joining its big tech cohorts Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL) in the negative surprises camp. Meta fell 3.61% in after-hours trading as their daily and monthly active users declined and the company offered a disappointing earnings forecast. Twitter’s (NYSE: TWTR) disappointing earnings report last week has helped to adjust investor expectations for Meta and Alphabet, but if Meta breaks support at $160 it could spark increased selling in the stock.
Qualcomm QCOM reported beats on earnings and revenues but offered lackluster earnings guidance that caused it to fall 2.75% in after-hours trading. The semiconductor group has tried to make a comeback as the PHLX Semiconductor Index (SOX) finished up almost 22% Wednesday from its July low. The QCOM results could be a drag on the SOX as well as the Nasdaq ($COMP).
Several more earnings reports were released this morning. Let’s look at some highlights. Note that all returns were during the premarket.
- Mastercard MA reported better-than-expected earnings and revenue as consumers have yet to pull back on spending despite rising inflation. The stock rose 1.26% on the news.
- Pfizer PFE beat on top- and bottom-line numbers boosted by COVID-19 products. PFE rose just 0.58% despite raising their forward earnings guidance.
- Merck MRK topped analysts’ estimates due to higher sales from its COVID-19 antiviral drug Lagevrio and its cancer drug Keytruda. MRK traded a little more than 1% higher.
- Honeywell HON surprised on earnings, causing the stock rally about 1.4%.
- Harley Davidson HOG was up 5.7% as the company’s turnaround is showing progress with better-than-expected earnings and by reaffirming their forward guidance.
- Stanley Back & Decker SWK missed on top- and bottom-line numbers and cut its forward earnings guidance causing it to plunge 13.15%.
- Southwest Airlines LUV offered mixed guidance as it saw cost per revenue seat mile expenses rising faster than revenue. Its shares traded down 5.81%.
After the closing bell, big tech week continues as Apple AAPL and Amazon AMZN are scheduled to report earnings.
Reviewing the Market Minutes
Yesterday afternoon, the Federal Open Market Committee (FOMC) announced that it would raise the overnight rate by 75 basis points, in line with market expectations. The FOMC expects to have further hikes in the future as it remains focused on its goal to get inflation back down to 2% annually.
In its interest rate decision statement, the Fed expressed concerns over changes in recent indicators showing a softening in spending and production. It noted a slowing in demand for homes, cars, and other items.
During the press conference after the announcement, Federal Reserve Chairman Jerome Powell said that the central bank’s June dot plot was still relevant with the overnight rate topping out around 3.5% by the end of the year. If this is the case, then the September hike would likely be around 50 basis points and then 25 basis point hikes would likely occur in November and December.
The CME FedWatch Tool is reflecting this sentiment; however these probabilities are likely to change as data come in over the next eight weeks.
The markets appeared to interpret the Fed statement and Mr. Powell’s post-meeting comments as dovish. After some initial volatility, the 2-year Treasury yield fell back below 3%. The 10-year Treasury yield (TNX) fell five basis points to close at 2.734%.
Stocks were already trading higher ahead of the Fed announcement but briefly sold off before rocketing higher once again after Powell’s press conference. By the close, the Nasdaq ($COMP) finished 4.06% higher, the S&P 500® index (SPX) shot up 2.62% and the Dow Jones Industrial Average ($DJI) rose 1.37%.
Microsoft (MSFT) and Alphabet (GOOGL) reported earnings misses but still rallied respectively 6.69% and 7.66% as investors appeared to acknowledge like the misses were already baked into the stock prices. The tech giants were also boosted by the surge in growth investing related to Fed’s interest rate decision.
Shopify (SHOP) rallied after missing on earnings and revenue estimates due to shrinking margins and announcing on Tuesday it had laid off 10% of its workforce. It closed up 11.7% on the day, regaining much of its 14% loss on Tuesday.
Three Things to Watch
GETTING SENTIMENTAL: If the Fed is really starting to get dovish and rate hikes are near their end, then investors can stop recalculating valuations on stocks, which should bode well for growth stocks. Over the last seven months, investors appeared to be revaluing stocks with every hint of a rate hike and every basis point gain in the 10-year Treasury yield (TNX).
The revaluing of stocks is one reason why the S&P 500 Pure Growth Index fell from its high in November of 2021 to its low in June of 2022. However, the growth index has risen 13% off that June low and rallied 3.66% in reaction to the Fed’s decision yesterday.
For comparison, the S&P 500 Pure Value Index is up only 6% from its low and rallied 1.27% yesterday. Of course, it kept climbing through about mid-April before it started its slide and was down just 17% from its peak to its low set in July.
SENTIMENT SHIFT: The dovish sounds of the Fed caused the Cboe Market Volatility Index (VIX) to fall 5.87% on Wednesday, taking it back near the 23 level and back below its June lows. This could signal a change in investor sentiment that is likely to be more bullish. If and when the VIX falls below 20, then investors could see increased bullishness.
PLAYING FAVORITES: During the Q&A part of yesterday’s press conference, Chair Powell was asked about the differences between the Consumer Price Index (CPI) and the PCE Price Index. He said that there wasn’t a lot of difference between them but that the Fed tends to prefer the PCE Price Index because it better reflects how prices affect the public.
The PCE Price Index is due on Friday. If it comes in hotter than expected, then all of these good feelings about the potential end to rate hikes could quickly become a memory.
Notable Calendar Items
July 29: PCE Price Index and earnings from Exxon Mobil XOM, Procter & Gamble PG, and Chevron CVX
Aug 1: ISM Manufacturing PMI and earnings from Activision Blizzard ATVI, Simon Property SPG, Devon Energy DVN, and Aflac AFL
Aug 2: JOLTS job openings and earnings Archer Daniels Midland ADM, Caterpillar CAT, PayPal PYPL, Starbucks SBUX, and Occidental Petroleum OXY
Aug 3: ISM Non-Manufacturing PMI and earnings from CVS Health CVS, Booking BKNG, Moderna MRNA, MetLife MET, and Yum! Brands YUM
Aug 4: Initial jobless claims, Trade deficit and earnings from Eli Lilly LLY, Amgen AMGN, ConocoPhillips COP, Cigna CI, and Toyota TM
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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