Small Caps, Central Banks, and Earnings

Jeff Buchbinder:

Hello everyone, and welcome to the latest LPL Market Signals podcast, Jeff Buchbinder here, your regular host with my friend and colleague and special guest, Quincy Krosby. Quincy, thanks for joining today. I got to tell you, you're going to have to carry us today because I just got back from vacation and you know what? I'm a little tired, so.

Quincy Krosby:

You need a vacation after a vacation.

Jeff Buchbinder:

I'm sure you'll bring the bring the energy. Yeah, sometimes after a vacation, you need a vacation, for sure. So, anyways, nice to be away. Long weekend in Cape Cod, but pleased to be back and with you talking markets again. So after we look at these lovely disclosures, again, it's July 29, 2024. Here's our agenda for today. In the recap, I mean, how can you talk about anything else besides small caps they've been en fuego So we'll do that. We'll then hit your quick hits, Quincy, here's your three topics for today. The Fed dovishness, is it overdone? And why does the Bank of Japan meeting this week matter? Some people might not be paying very close attention to what we're hearing from the Bank of Japan these days, but it does matter. And Quincy will tell you why.

Jeff Buchbinder:

And then finally, earnings season, which is approaching the halfway point. But we have only gotten one big tech as we're recording this, we will get more tomorrow. So we'll still call it a little bit early in the season, but we'll give you an update and share some numbers there before we preview the week ahead, as we always do. And it is a big week because we have the Fed, we have the ISM, and of course, the jobs report, which maybe other than the CPI is or the PCE inflation, probably the most anticipated economic report that we get all month. And then of course, more earnings as second quarter earnings season rolls along. So let's go to the recap here. And Quincy, I know you've done you know, some interviews on this topic here today, and I'm sure you did last week.

Jeff Buchbinder:

Small caps, you got to start there. Over the last week, small caps based on the Russell 2000, up three and a half percent, while the S&P was down almost 1%. So that rotation continues. It's the third straight big up week for the small cap index. And what jumped out at me when I saw this is, is the year to date, remember the S&P was just way ahead of the Russell for quite a while. Boy, this has the gap narrowed. So, Quincy, you know, I guess two questions. What do you think is responsible for the small caps surge, first of all. And then secondly, will it continue?

Quincy Krosby:

Well, that's the last, we'll start with why did it surge because that will answer whether or not it continues. And that is, we saw this well before this round of movement. I mean, surge, that the small caps would start moving higher even on days by the way, that the rest of the indices were down in the red. Some days you'd see the Russell 2000 in the green, and it all had to do with the possibility of the Fed cutting rates. They are very rate sensitive, particularly in this period where you know, many of them have what we would call floating rate bank loans, right? They just go to the bank, they raise money there, and it's variable, and it's getting harder and harder for them to serve their debt for those that carry a lot of debt.

Quincy Krosby:

And many of the small caps and mid caps do have a lot of debt. So therefore, any possibility that the Fed is going to cut rates comes in and helps underpin a bounce in the small caps. This is more than a bounce, because right now the probability for a September 18 rate cut is almost 100%. The question also for the small caps, and this is very important because they serve quite logically as an economic barometer and in any sense that the economy is slowing, which by the way, we had a report last week on the first read of the second board of GDP, which surprised to the upside. It came in, first read came in at 2.8% when expectations were 1.9%. Certainly not stellar, but certainly solid. They need to have that because for, again, obvious reasons, that they are smaller companies with debt and they want to have a solid economic backdrop.

Quincy Krosby:

But any sense that that is going to change direction, they will sell off and they'll sell off in a hurry. So together with the prospect of rate cuts, underpinned by a solid economic backdrop has been wonderful for the small caps. Now, I do want to point something out. They're volatile. Their risk profile is higher than the risk profile for the S&P 500. And also in terms of the small caps, they have been doing very well because of a preponderance of bank names. They have about 20, 23% of the Russell 2000, just to give you an example, is made up of the banks. And as the larger banks, their larger brethren, so to speak, are doing well. They will follow the small, the small names will follow. Any selloff in the large, larger banks is actually going to dent performance in the small and mid-cap space. They're also heavily populated by industrial names, technology. And also, I want to point out biotech, which is slightly risky, right? They are the kind of the tech names within healthcare, but they've started to come to life, so to speak. And they've been dormant for years. And that has also been giving a boost to the overall performance of small caps.

Jeff Buchbinder:

All good points there, Quincy. I also want to point out that you know, in terms of the growth value mix, I mean, you're really talking about you know, growth value when you talk about financials because that's the biggest value sector. We're of course, talking about tech. We're talking about the magnificent seven mm-Hmm, <affirmative>, that of course is growth. The reversal in value has not been strong enough for us to call that a sustained change in leadership, right? So we're LPL Research still recommends kind of balanced exposure between growth and value and waiting for technical signals to suggest that maybe the value rotation is sustainable. Now, on the small cap side, we're a little closer actually to calling it a sustained turn. I'll show you a chart on that in a minute. But all good stuff on that, Quincy, that's probably the most popular topic in the financial process.

Quincy Krosby:

Oh my goodness, yes.

Jeff Buchbinder:

At least that I've seen lately. Of course, whether AI is going to disappoint is another popular topic in the financial media. You know, how about in the international markets, Quincy, I mean, was really, I mean, kind of rough sledding everywhere. But, you know, Japan weakness stands out. I guess China's weakness stands out. Anything you want to highlight there?

Quincy Krosby:

Well, yeah, I mean, as far as China is concerned, the world's second largest economy, they had their third plenum, which is the, or the top meeting, they meet to prepare for the five-year plan. They only meet a couple of times. And it, you know, how do I say it? The market was hoping for much more. However, the People's Bank of China, that would be in monetary policy has, you know, come in with important rate cuts. And the hope is that it ignites consumer spending and confidence in the Chinese economy. What the market wants and global investors want, of course, is, you know, regulatory reform, market-oriented measures, which you're most likely not going to see from President Xi Jinping. He's not a fan of, you know, open capital markets. And also you're going to, they want to see how are you going to fix the property quagmire.

Quincy Krosby:

You know, their economy, 25% is the tentacles of that property market that help propel the Chinese economy so dramatically to almost double digits. It's come down. And now that they just hope that they can meet their expectations for 5% GDP. So this is the issue. And the issue is how are they going to do it? They're giving money to the local authorities in the form of bonds that they helped what, shall I say, engineer. And the hope is that coupled with cash funding for local municipal localities will go out and try to clean up some of the zombie condominiums that are dotting the entire landscape in China. And much to the chagrin, by the way, I have to add this, much to the chagrin of those owners of condos that paid, you know, a very, very hefty amount.

Quincy Krosby:

And their view is, why are you doing this to us? What you're doing basically is taking away our equity. They, how do I know this? They've been on blogs, and that doesn't last very long, by the way, the Chinese authorities are not particularly enamored with blogs, but there's enough of it that gets picked up by the press, and that's really what's going on. But they haven't come up with anything that strikes the market as being a major catalyst for growth. That's one of the reasons Jeff, that you see the copper has been down, steel has been down. Normally those are associated with China and Chinese growth, especially copper, with the electric vehicle production that they have. And obviously they want to sell as many as they can, but they're running into tariffs from Europe, from the United States. So this is a quandary for the global market. And I also want to point out, you asked about the global economy. Take a look at Germany, take a look at France. All of these are partners, with trading partners with China, and they are not doing well. They're not doing well. The orders that normally that they would expect to come in from China have been incredibly disappointing.

Jeff Buchbinder:

Yeah, certainly, the China sensitive commodity complex. Exactly. It's been pretty obvious that the market's not too thrilled with the growth trajectory over there. Exactly. You know, and yes, you're right. The third plenum was kind of a, I mean a yawner from what I've seen. So yeah, continue to struggle there. And then I guess Japan, I mean the, we'll get to this more with the Bank of Japan on one of your quick hits, but clearly the currency is a challenge, right? And so and they've got rate hikes probably coming. Until the market gets comfortable with that transition to higher rates in Japan. And you know, more stability till the market's confident, the yen will be stable. And at a, certainly a comfortable level you may see, you know, bumpy ride.

Jeff Buchbinder:

We've been talking about how China, how Japan's going to have a bumpy ride for a while around the currency. And we're certainly seeing it probably even more bumpy than I expected it to be. We did get a pretty calm bond market last week here, you see almost across the board gains in bonds. You know, we had this you know, so-called Trump trade, you know, initially, maybe lifting yields a little bit, but that was short-lived. I mean, maybe now the Trump trade is unwinding a little bit. And then you've also got more and more conviction in the markets that Fed cuts are coming. The inflation data, the core PCE data was fine. So you ended up with you know, a little bit of a dip in rates and some gains in bonds. Here you see the commodities turning to the right on this table here, the commodity complex down almost 2%, energy, especially in natural gas,

Jeff Buchbinder:

very weak lately. So you had the energy complex down almost 3%, metals down too, was really across the board. So again, a lot of that is a read through the China that the growth just is not coming through. I guess natural gas kind of does its own thing around weather and supply dynamics in the U.S. but still the China's demand landscape is certainly not helping. So let's keep going. Here's the S&P 500. We had said multiple times that when it gets to the top of this channel, it's a logical place to pull back. Well, sure enough, that's what happened. We got a logical place to pull back. Not only did we pull back from the top of this rising channel, but we actually broke a little bit below, temporarily anyway, a little bit below the 50-day moving average which on this chart, 5,436.

Jeff Buchbinder:

So we got a little bit of a gain today on Monday as we're recording this. So you know, I guess a little bit of cushion between where we are at this second and the 50-day, but still, that's certainly a key technical level to watch. So we'll see if that holds. The relative strength index, RSI, 14 looks kind of middling, so we're not overbought, we're not oversold. And then in terms of the percentage of stocks within the index, within the S&P 500 that are overbought over 70, it's a pretty low, you know, 15%. We've certainly been much higher than that you know, over the last, call it six months. So we've taken a little bit of the froth out. I think that's a good way to put it.

Jeff Buchbinder:

So, Quincy, continuing your small cap discussion here. You know, I mentioned that in terms of growth versus value, we haven't really seen a breakout into a new relative uptrend, but on small caps, at least the high-quality small caps that make up the S&P 600, we've actually seen a relative strength breakout. Now it's very early and it's very minimal, but this is really something to watch carefully. The you see on this bottom panel, when you do the ratio chart of the S&P six over the S&P five you've had this downtrend and the up, this, we broke the upper end of this downward sloping channel, which certainly is the first step in a reversal, a sustained reversal. We'll see if we get it, maybe the Fed cutting will help, but remember, we're late cycle, and when you're late cycle and the economy is slowing, that can be a difficult environment for small caps.

Jeff Buchbinder:

So despite this progress, we're not ready to shift to small over large. We also have to see what we get from earnings with the big cap tech names before we would make any sort of call on that. But for now, we're going to stay kind of neutral across cap, which is where we've been. This is also encouraging, this is breadth. So the percentage of stocks within these various indexes that are at all at a 52-week highs, not all-time highs, 52-week highs. And you see let's see. So we've got the mid caps in blue, the large caps in black, the small caps in orange, and they're all, you know, mostly doing the same thing. If the top half of this is above the moving or above the 200-day moving average, they're all right in the same vicinity, high seventies, very good readings.

Jeff Buchbinder:

And then on the bottom, what we've seen a little bit more dispersion in terms of 52-week highs, the S&P doesn't have as many 52-week highs, but look at the small caps, because they have done poorly for longer, more of these runs have produced 52-week highs. So you have 16% of the S&P six at 52-week highs. You have 14% of the Russell mid. And then the S&P five is 7%, a little over 7%. So this is encouraging. You're getting improving breadth from the small and mid-cap indexes, which are where this market's really been lagging. So let's turn now to your quick hits, Quincy, and I think, I mean, frankly, most people probably want to hear about the Fed and earnings, but you'll tell us why the Bank of Japan matters too.

Jeff Buchbinder:

So why don't you start with the Fed which meets this week. Nobody really expects cuts. Boy, that would be a surprise, <laugh>. But the question we poses is, is the dovishness overdone? People are really counting on September as being a done deal and talking about three cuts this year. Second, does the Bank of Japan matter? This is a, you know, key factor in the yen, right? So I think maybe that makes it more interesting as an investor potentially in Japan equities. And then third, what have we learned from earnings season? Any sort of early thoughts that you have based on the companies that have reported. So Quincy, take it away.

Quincy Krosby:

So let's look at the Fed and why it matters. It matters because it is the leading central bank, and it is home in essence for King Dollar. And those who thought that the dollar was going to collapse, there was some well-known economists coming out over a year ago with headlines. Well, the dollar is poised to collapse, sorry, didn't happen. The dollar has been strong. King Dollar is resting now. And the reason is, and I just want to go over, this is a little geeky, sorry about that. But currencies are strong, and vis-a-vis other currencies. And when we look at the dollar, we compare the dollar with its peers, its global peers, and the Japanese yen is certainly one of them. So is the euro, Bank of England, and the looney up in Canada. But here's the thing.

Quincy Krosby:

Powell became more dovish, if you remember, in 2023, in November 1. And in December, he was more dovish. And the dollar actually pulled back a bit as the market was thinking, whoa, he sounds like he's thinking about a rate cut. And then when he realized what, how it was interpreted, he suddenly, he went on the, oh, we need more and more information, higher for longer became the underpinning for the dollar. Now, when the dollar is strong, the other currencies have problems, especially in emerging markets. I just want to add that. We saw interventions in Vietnam, Indonesia, they have to go in and they have to bolster their own currency. Now, with the Japanese yen, this is particularly interesting. Keep in mind that Japan is the largest foreign holder of U.S. Treasuries. So that's important. We need buyers, right? We need buyers of our Treasuries because our debt keeps going up. I don't want to say the number now, but the headline, it shows that we just had got a new number for our country's debt. So we need buyers. Now, here's.

Jeff Buchbinder:

You don't want to scare our listeners by offering that debt number.

Quincy Krosby:

No, I'm not going to do, I don't want to scare myself. Thank you, <laugh>. But in any case, here's the thing. So the yen, Japanese yen, got pushed down, pushed down. There's a level at which it looks, you know, they keep comparing it with, you know, 20 years ago and so on. It looks unstable. And the problem is, one is the Bank of Japan. Now, if the Bank of Japan were more hawkish, the yen would climb vis-a-vis the dollar. And one of the things we're watching for this week, Bank of Japan is meeting this week, is whether or not they raise rates. Remember, they finally raised rates once. The hope is, just from the currency side of it, that they raise rates again this week. That would help bolster the Japanese yen, because it would show that the Bank of Japan is a bit more hawkish, right?

Quincy Krosby:

Not dovish, sitting there and saying, no, well, we can't do it now. But here's the other part of it. They have intervened on the currency market. It's very expensive to do it, extremely expensive. We know that there have been at least two major currency interventions to bolster the Japanese yen. Now, the other side of the story is that we saw that Japanese exports actually did quite well amid a backdrop of global demand weakening. It did well, thank you weaker currency. It's one of the reasons that many leaders wink, wink, like to see a softer currency, because it makes their exports a lot more attractive. However, you can only go so far with that. You can't have a currency that looks as if it's collapsed, because in Japan, there's quite a bit of speculation. Speculators, hedge funds, go in there trying to assess what is going to happen with the Japanese yen.

Quincy Krosby:

So the Bank of Japan, the head of the Bank of Japan doesn't say very much going into the meeting. He doesn't want, they don't want to feed the speculators. So we don't know if he's telegraphing internally, is there going to be a rate hike at this meeting? If that is the case, it should help bolster the yen. But they don't want it to be too strong because of exports. Japan is a major exporting nation. So, you have to have that fine tune. Here's the other one, why it really matters too, for us in the United States. All of the analysts who work on this believe, given the timing of their two major two major currency interventions, at the end of April and beginning of May. And they may have just done one a couple of weeks ago. There's a suspicion they did.

Quincy Krosby:

But what they have seen is that the Japanese holdings of U.S. Treasuries came down, and that suggests that they sold that those holdings in order to supplement their cash reserves. So you don't want that to happen. And I want to add here, Jeff, because this is important. It isn't as if the Japanese central bank or the finance ministry that they do this on their own. They do talk to the U.S. officials. That is one thing that is very important. They don't want to surprise markets. They don't want to upset markets. So right now as they go into their meeting, I'm sure they've had discussions with Janet Yellen, and I'm sure that the Federal Reserve folks who work in international have spoken with their counterparts in Japan. We don't know what they're going to do. But there's one other element here, and that is, you know, that they had mentioned that they were going to slow down their purchases of bonds.

Quincy Krosby:

They've been buying bonds and bonds, and that's very expensive. They have had quantitative easing for years. The question is, are we going to find out at the end of this meeting that they have cut it? They're not going to be buying bonds, and maybe they're going to start selling them, winding them down. This is also going to have an effect. So this is very important for global markets. And I'm going to add one more thing. Anyone who's listening may know what the carry trade is. And the carry trade is basically this. I go to a weak currency, I borrow from it. I borrow it, and you can't get any better than the Japanese yen. And then I take that and I go around the world and I find a currency that's stronger, and I make that money and I go back and I pay back with the Japanese yen.

Quincy Krosby:

The Mexican peso, by the way, was a favorite for a long time. That is halted because of issues with our election issues with the election that Mexico just had. So now we've seen the Japanese yen going to Australia looking there. That's the carry trade. What is going to happen, however, is if the yen is bolstered by a rate hike, then we could see the carry trade sort of scrambling. Most people know that this Federal Reserve meeting with the Bank of Japan, and they probably are out of the market because it could cause a quite a bit of losses. So you also have that element. For the Fed and the relationship with the yen. If we hear from Chairman Powell, and he sounds extremely dovish and sort of pushing the market towards September 18, the dollar, U.S. dollar is going to weaken a bit, not fall apart, but just have a nice breather. However, if there's a change, if for whatever reason he doesn't want to do that, and he comes out talking tough and hawkish, that is not good for currencies in the emerging markets, nor for the Japanese yen. So we always have to remember, currencies don't go up or down on their own. It's always vis-a-vis another currency,

Jeff Buchbinder:

Right. So, but wouldn't that be good for Japan, Quincy, if the Fed is dovish right, cuts rates, that helps strengthen the yen and their problem has been yeah, yeah. To some extent that the yen has been too weak. Yeah. So is that the right way to look at it?

Quincy Krosby:

Yeah, absolutely. I mean but what I was saying is if, that's what we expect that he's going to push the market towards September 18, that's what the market expects. If he surprises the market and he comes in with a rate cut, I mean, he's known to surprise markets, by the way, Jerome Powell is, but it would scare the market. Our market and the dollar would weaken. There'd be fear that they're cutting rates in July because they're worried about the economy. They're worried about the labor market. It would make the market quite nervous, quite frankly. But the dollar would weaken, and obviously it would, if you want to look at it that way, it would help the Japanese yen. It is when the dollar is so strong vis-a-vis the other currencies that it puts pressure on them. And that's what has been happening with the Japanese yen. So we don't expect that, we expect that he's going to just basically make it clearer to the market. I don't how much more clear you could be, because right now the probability for a September 18 rate cut is practically 100%. Mm-Hmm,

Jeff Buchbinder:

<Affirmative>. Yeah, I know, you know, some people are talking about the yen carry trade funding tech investments as well. And so part of the tech weakness in the U.S. recently some are saying was connected to unwinding of the carry trade. So, this is why the yen and the Bank of Japan matters so much, right? Those relationships they're all over the place, right? And so you could get a downdraft, I mean, we already did, right? We got, I mean, what was NVIDIA down you know, recent peak to trough.

Quincy Krosby:

Yeah,

Jeff Buchbinder:

You know, it was quite a bit, yeah, it wasn't quite a bear market, but it was quite a bit. So you're certainly seeing some of that too. So let's call it ripple effect. So we got to watch the yen, we want it to remain calm, and we certainly don't want any surprises. Going back to the Fed Quincy, I mean, you mentioned surprises. One surprise we could get from Powell would be 50 basis points in September. What do you think the chances are of that?

Quincy Krosby:

Oh, yeah. Well, you know, you could argue that that would definitely surprise markets. But also he has said over and over again, look, we're independent. We're going to do what we think is necessary. You are right there in the midst of the campaign. You, how much closer can you get to the campaign? If you were to go in there and do 50 basis points? Now, mind you, mind you, if the economy is weakening, if the labor market, he's very focused on the labor market. If we see the rates unemployment rates climbing, he is going to go in, I would think Jeff, before September. He's not going to wait. Remember, the Fed can cut rates or raise rates anytime they want. They don't have to wait for a meeting. The worry is that it may scare the market. And that's something they want to avoid.

Quincy Krosby:

And let's remember something about the market. The market wants the Fed to cut rates because inflation is coming down, not because the economy is weakening. And there's a big difference in there. And also, by the way, for the small caps, because if the small caps even felt, an iota that a rate cut is coming because the economy is weakening, and to use Chairman Powell's own word, or the labor market is showing signs of deterioration, that is going to worry the small caps. That's not what they want. And it's not what the, you know, the broader market wants either. They want the Fed to be cutting rates because inflation is coming down and no longer or is higher for longer warranted. So, that's also part of what's going on, trying to figure out what the Fed would do.

Quincy Krosby:

But make no mistake about it, none of us should. He will do what he thinks is necessary, and they all will do it. The Republicans on the Federal Open Market Committee and the Democrats to ensure that they try to get in there quickly. I don't know if anyone who's listening, Jeff, you remember this, we've talked about it, when the Fed was hiking rates by 25 basis points. Remember that was how they started. And then during a blackout period, just as we are now on the Friday before the Fed meeting, an announcement came, and that announcement was we're not going to be doing 25 basis points, we're going to be doing 50. Remember, Chairman Powell has been, he's wanted to get the market ready. Remember that? At the press conference, at that Fed meeting, one of the reporters said, sir, why didn't you just wait? Why did you do this during the blackout period? And this is what he said. He said, we couldn't wait six weeks between meetings. So therefore we have to ask, what is he going to do if the labor markets start showing signs of unemployment increasing? Is he going to wait till September? Ask yourself that question. The answer has to be no.

Jeff Buchbinder:

Yeah, interesting. I mean, we also have the fact that it's not really clear politically that a rate cut helps Harris <laugh>, right? Because it's kind of, well, you know, more Biden's economy than maybe it's not even worth getting into, but No, no. You know, if they go before September, clearly they will be minimizing the potential influence on the election, even if perceived and not real. Exactly. Yeah. So, let's go to earnings next thanks for all that Quincy. So you know, this is our earnings season dashboard. And it, you know, it looks decent. It doesn't look great to be perfectly honest, but it looks decent. You know, earnings beat rate, solid 78%. The revenue beat rate is solid. Not, like, not better than it usually is at this point, but pretty good, almost 60%.

Jeff Buchbinder:

And we have gotten over 10% on the earnings growth rate, but that's not a lot of upside, right? We were, you know, over nine before we even started getting reports. So I think that's my first observation here, is that we're not getting a ton of upside early on. That's logical. Again, it's late cycle, right? We haven't been in a recession for a while since the pandemic. And, you know, expectations have sort of matched reality as you know, analysts have caught up with the AI boom. So, you know, not only is the bar higher to beat estimates as you get later in the cycle, the AI enthusiasm has, you know, really reached a boil, I guess you could say. And so we saw it with Alphabet's results, right? The results on the surface were just fine, right? But, you know, the stock sold off sharply.

Jeff Buchbinder:

That's not the pattern throughout the market. In fact, I have a stat on this. In general, the reactions to better-than-expected numbers have been positive. With after the you know, roughly the first 200 companies that have reported, if you beat on EPS and sales stock's been up 2.4% on average the next day, this stat comes from Bank of America. That's actually the highest since 2018. So, you know, companies are being rewarded when they beat. The historical average is only a point and a half, so that's almost a point better in return the next day than the historical average. So I think that's an encouraging sign. We talked about how we thought earnings would be in general, a positive catalyst for stocks. So yeah, they have been, but we just haven't gotten through big tech, which is just so important.

Jeff Buchbinder:

Yeah, I guess you could also say that financials and healthcare have been pleasant surprises because they've generated the biggest upside surprises on average to date. And actually financials are growing double digits. Healthcare too. We're going to get double digit earnings growth actually out of both of those sectors. So that's, I think, worth highlighting. We would prefer financials as an investment over healthcare right now. And financials might even get a little bit of a boost if Trump wins. But for now, still financials, the environment's gotten a little bit better for those, as Quincy mentioned when she was talking about small caps. And then the, again, it's still kind of early, but you know, and you're talking about consumer discretionary when you don't have Amazon's numbers, but consumer discretionary has missed, including Tesla, overall and real estate, again, early, but so far, real estate's missed.

Jeff Buchbinder:

So those are the two sectors that on average have had shortfalls. And then last thing, and then I'll turn over to you, Quincy, for anything you've observed. The you know, I love to look at how forward estimates hold up during earnings reporting season and they're holding up, well, not as well as the last couple quarters, but they're still holding up well. We're only down about a half a percent. Now, that could be down 1% after tech reports, or it could be up <laugh>, right? Because this week you'll see it on the next slide here. We get Apple, we get Amazon, we get Meta. See right. And Microsoft. So, you know, don't I don't want to say take this with a grain of salt because you know, certainly 207 companies is meaningful, but these numbers which are decent, you know, I call it mixed. Yeah, I guess it's kind of mixed, but boy, it could change in a hurry. So, Quincy, your thoughts,

Quincy Krosby:

Well, I think, you know, the market this week has a number of gates, right? That gates that they've got to navigate, and those earnings are crucial. We know why we, and again, as you pointed out, we saw what happened with Alphabet, YouTube, you know, their ad revenues weren't good, but basically it was, hey, you're not moving fast enough on AI that, I mean, at the end of the day, that was, you're spending money on it. It's not being integrated quickly enough. This is what the market is going to focus on. And we've been talking about this earnings report, after earnings cycle. The market wants to see progress and monetization of AI. What are you doing with it? You been spending all this money on it. How is it increasing your productivity?

Quincy Krosby:

What about being able to sell some of the software that you're creating? And is it important enough? Now you're getting to the point where it's, well, wait a minute you know, this isn't, doesn't seem so great. This doesn't seem so revolutionary. That's what the market is focused on. They know how much the bank is, NVIDIA sells it to them, correct? Mm-Hmm, <affirmative>, Taiwan Semiconductor, ASML, you know, with the equipment, they know what they're saying and now they want to see what's happening. So to speak on the ground, show me. And that's where the disappointment can come in. And also we have to mention in terms of seasonality, this is not a particularly positive period for the market overall. It tends to be dicey pockets of volatility, but particularly for tech, Jeff, particularly for tech.

Quincy Krosby:

So it doesn't mean that, you know, we're going to remember that if it disappoints. But the fact of the matter is, there is concern going into these numbers, and it does matter and it matters for the entire market. So the question everyone has now, if it how much does it have to disappoint to bring down the entire market? You know? I mean, that gets into the kind of like the I don't know, surreal world. But the fact of the matter is, as you pointed out, as everyone did, why the punishment for Alphabet, you know, I mean, you have to ask yourself, I listened to the earnings call, I saw the numbers, and there you are. I was like, sorry, sorry. It reminds me of the time that NVIDAI disappointed the market because of China. Remember that? They had great numbers, great outlook, great guidance. They mentioned China, and then that was enough to bring the share price down after hours. Sure.

Jeff Buchbinder:

Yeah. You, you can't overstate how important these names are. There's massive capital expenditures going between them. Yeah, a lot of it's going to NVIDIA. So, you know, if you get more CapEx, that's more earnings. If you get less CapEx, that's less earnings. And when stocks are trading at, you know, 30, 40, 50 times earnings any disappointment is going to be punished. So, hugely important week for earnings, probably the most important week for earnings of the entire earnings season, even though we're not getting we'll just see how high that bar is. But you know, these companies have started to monetize AI. There are real revenues coming in. They're not telling you exactly what revenues are coming in, but they're starting to come in and the confidence from these corporate leaders is not waned at all from what I can see. So yeah, it'll be a very interesting week to watch. No doubt. I mean, I'd say earnings and the Fed matter more than anything else this week. But I mean, you made an argument for the Bank of Japan that certainly matters.

Quincy Krosby:

Payroll

Jeff Buchbinder:

And the ISM and the jobs report certainly matter. So anything you want to highlight here with either ISM or jobs?

Quincy Krosby:

Well, I do, I mean, we've been watching the initial unemployment claims. They're a leading indicator. They've been holding steady and the continuing claims holding steady, but inching higher, suggesting that folks are having trouble getting a job, that's really what it is. But here's another one. And that is, if we see the unemployment rate move to 4.2% up from 4.1%, it's going to get the markets attention. Now, I do want to add here you can listen to many economists and they will say, well, wait a minute. Hold on a minute. This is a reflection of more people coming into the labor market looking for jobs. The participation rate is higher. And if they don't get jobs right away, it causes the unemployment rate to move higher, climb higher. That's the one survey versus the other survey. For the market, there's no distinction. It is uh-oh, unemployment is climbing higher, and that is going to get the markets attention. All the explanations, the rational explanations do not matter. It is that is what's happening. And therefore the next thought will be consumer spending is going to slow down. Right? The engine of growth in our country, consumer spending, is going to slow down, just listen to what happened to McDonald's. Correct?

Jeff Buchbinder:

Sure. It already has. Yep.

Quincy Krosby:

It already has. So this is the concern and why Friday morning is going to be extremely important.

Jeff Buchbinder:

Yeah, absolutely. I mean, it goes back to the, you know, reports we got last month, Nike being one. I mean, the story about consumer spending slowing, or companies or individuals pushing back on price hikes has, we've been hearing it more and more over the last several months. You've also heard more and more about how the lower income consumer has been challenged, right? We've heard, certainly heard that from a number of consumer facing companies. Yeah. Certainly the automakers, <laugh>, the automakers and the airlines are having some troubles. We're starting to see delinquencies on credit cards tick up. So there.

Quincy Krosby:

Look at Visa, what Visa's, you know, everyone pointed to Alphabet, by the way, right? I was thinking to myself, you know what, I think it's about Visa. Take a look at Visa's numbers.

Jeff Buchbinder:

Yep.

Quincy Krosby:

It was pretty shocking actually.

Jeff Buchbinder:

Yeah, absolutely. They confirmed it. I mean, the Visas and the MasterCards of the world have about as good of a look at consumer spending as any companies I can think of. I mean, maybe the banks that are issuing these cards too. Yeah. But absolutely. So again, slowing, not falling off a cliff. Yeah, you know, we'll see where we are in a quarter or two, but for now, we're in a good place. So we'll keep watching for the, you know, of course jobs matters a ton for consumer spending. Wages matters a ton. We'll just hope that we continue to get this gradual soft landing type pattern, which is what we've seen so far. I mean, you can't deny it, especially after the strong GDP. So a lot to watch in addition to the 171 S&P 500 companies reporting earnings, it's a busy, busy week.

Jeff Buchbinder:

So yeah, I guess I'm glad I'm back from vacation because I have a lot of exciting things to pay attention to <laugh>. So, with that we'll go ahead and stop there. Quincy, thanks for your thoughts on a lot of really interesting topics, you know, thank you, especially the central banks. Really, really important for investors to watch this week and into the fall. We'll probably talk more election in the next couple of weeks. We didn't do too much of that today, but thanks everybody for joining. As always, thanks for listening to LPL Market Signals. We'll be back with you next week.