Big Tech Earnings, Fed Meeting, and Jobs Report: A Pivotal Week Ahead
The stock market is poised for a thrilling week, with Big Tech earnings, a Federal Reserve meeting, and the July jobs report taking center stage. Despite recent volatility, experts are optimistic about the market’s prospects, and we’ll break down the key events and trends to watch. The S&P 500 and Nasdaq Composite recently experienced their worst single-day drops since 2022, struggling to recover losses during a Friday rally. All three major averages closed the final full week of July lower, with the S&P 500 down more than 1% and the Nasdaq falling over 2.3%. Meanwhile, the Dow Jones Industrial Average rose about 0.6%. This week’s events will be crucial in determining the market’s direction, and investors are eagerly awaiting the results.
Fed Meeting: A September Rate Cut in Sight?
The Federal Reserve will announce its latest monetary policy decision on Wednesday, and markets expect the central bank to hold rates steady. However, recent economic updates have investors eyeing a potential rate cut in September. Deutsche Bank chief US economist Matthew Luzzetti notes that the Fed’s tone and Chair Jerome Powell‘s press conference will signal whether a rate cut is on the horizon. The core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose 2.6% over the prior year, its lowest annual increase in more than three years. Separate data for the month showed a significant decrease in another inflation metric, the Consumer Price Index (CPI). Meanwhile, the labor market has shown signs of cooling, with the ratio of job openings to unemployed workers back at pre-pandemic levels and the unemployment rate hitting its highest level since November 2021. These developments have prompted markets to price in the Fed’s first cut in September, and investors will be keenly listening to Jerome Powell’s press conference on Wednesday for any confirmation.
Jobs Report: Labor Market Cooling Down?
Friday’s jobs report will provide a fresh look at monthly job additions, with economists expecting 175,000 nonfarm payroll jobs to be added to the US economy. The unemployment rate is expected to hold steady at 4.1%. Wells Fargo‘s economics team notes that a respectable gain in jobs would still underscore a deteriorating labor market. The labor market has shown signs of cooling, with the ratio of job openings to unemployed workers back at pre-pandemic levels and the unemployment rate hitting its highest level since November 2021. While the jobs report is expected to show a respectable gain, it will be closely watched for any signs of further deterioration. Whether unemployment holds steady or ticks up as it has for the past three months will be in particular focus.
Big Tech Earnings: A Catalyst for Volatility?
Earnings from Big Tech stalwarts Apple, Amazon, Microsoft, and Meta will drive market direction this week. Despite recent sell-offs, experts believe that these companies’ fundamental business trends remain strong. However, with high expectations, even slight misses could lead to significant price reactions. Since July 10, Roundhill’s Magnificent Seven ETF, which tracks Nvidia, Apple, Alphabet, Amazon, Meta, Microsoft, and Tesla, has dropped about 12%. Truist co-chief investment officer Keith Lerner recently told Yahoo Finance that the pullback has made sense given the runup in Big Tech stocks over the past year and how overstretched positioning in many of the large tech stocks had become. This, combined with investors rotating into less-loved areas of the market rally that could benefit from the Fed cutting interest rates, has become the hallmark of the market action over the past two weeks. Earnings from four of the Magnificent Seven tech stocks — Amazon, Meta, Microsoft, and Apple — could change that. But as the sell-off after Alphabet and Tesla earnings showed in the prior week, it’s been a tough season to impress investors with earnings.
Regional Banks’ Strategy
Regional banks are taking a proactive approach to potential interest rate cuts by selling underwater bonds at a loss. This strategy allows them to buy new bonds with higher yields, which could perform well in a lower-rate environment. The move is not without its risks, as selling bonds at a loss can impact a bank’s balance sheet and profitability. However, experts believe that the benefits of this strategy could outweigh the costs in the coming months.
PNC Financial Services Group, for example, took a half billion dollars in losses on its bond sales and reinvented the proceeds into securities with yields “approximately 400 basis points higher than the securities sold.” This move raised the bank’s confidence that it would reap a record amount of net interest income next year. Other banks, such as Truist and Regions, have also taken similar steps, selling underwater bonds and using the proceeds to buy new bonds with higher yields.
The decision to sell underwater bonds is not an easy one, as it requires a careful analysis of the bank’s balance sheet and a forecast of future interest rate movements. However, with the Fed‘s decision on interest rates looming, regional banks are taking steps to prepare for any potential changes in the interest rate environment.
A Busy Week of Corporate Earnings
A busy week of corporate earnings awaits, with 171 members of the S&P 500 expected to report quarterly results. AMD, Arm, Boeing, McDonald’s, and Starbucks will be among the companies highlighting the schedule. Investors will be closely watching these earnings reports for any signs of weakness or strength, as they try to gauge the overall health of the economy. With the Fed’s decision on interest rates looming, investors will be particularly interested in any comments from companies about the impact of interest rates on their business.
Investors will also be looking for signs of how companies are adapting to changing economic conditions, such as inflation, supply chain disruptions, and labor market trends. Earnings reports can provide valuable insights into a company’s financial health, as well as its outlook for the future.
Conclusion
This week’s events will set the tone for the market’s direction in the coming months. With Big Tech earnings, a Fed meeting, and the jobs report on the horizon, investors should be prepared for potential volatility. However, experts remain optimistic about the market’s prospects, and a September rate cut could be the catalyst for a rally. As always, it’s essential to stay informed and adapt to changing market conditions. By keeping a close eye on these key events and trends, investors can make informed decisions and navigate the markets with confidence.
