Big Tech Earnings and Important Fed Meeting Highlight the Week Ahead

Quincy Krosby:

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good morning, everyone. This is Quincy Krosby. It is Monday morning, it's the Talking Point, it's July 29. This market is going to face a very, very busy week. But before we get to this week, I would like to just talk about a couple of things from last week, and that is the market got some good news. The good news was that the second quarter GDP report, remember there are a number of readings, but the first print showed that there was growth in the economy. Now was it stellar? Was it like, oh my goodness, unbelievably fantastic? No, but it was extremely solid. It came in just under 3% of GDP, enough for the market to say, whoa, this is not a hot economy, kind of an economy that's going to just ignite inflation again.

Quincy Krosby:

But it certainly didn't indicate an economy that looked as if it was on the verge of collapsing. Quite a bit came from consumer spending continuing to hold on. What we also saw in that report was an indication that we were seeing that spending picking up. But we also saw in that report and in a separate report, that capital expenditures, in other words, what companies are doing, actually starting to pick up. So, for example, in the durable goods report that we had, quite a bit of the downturn there came from the airlines, and transportation. But underneath the hood, again, we saw that capital expenditures picking up. That's what companies do, right? How are they looking at it? Because what we know is if companies are really worried about the economy, really worried about a potential recession or impending recession, they're going to hold back their spending.

Quincy Krosby:

But we saw a pickup in that and that was good news for the market. Also, in terms of the labor market, we saw that initial claims not spiking higher, continuing claims remaining in a contained, this is what the market wants to see. For the Federal Reserve, all of this is extremely important because they're meeting this week. The market is expecting that they are going to set the stage for a rate cut at the September 18 meeting. But remember the chairman of the Federal Reserve, Powell, has made it very, very clear that if the labor market were to deteriorate, and that's a word that he has used, deteriorates, at a faster pace, they are prepared to come in with a rate cut. They have invoked increasingly the mandate. Remember, price stability is the mandate we heard over and over again. That's the mandate from Congress, price stability, making sure that inflation doesn't take hold in the economy.

Quincy Krosby:

But also the Fed has a second mandate, which is just as important and that is the maximum employment mandate. And the Fed Chairman Powell, has talked about this over and over again. So they're watching the labor market and so far they must be convinced that the labor market remains solid. Not stellar, but solid, in terms of employment. This is going to be important this week because at the end of this week we will have another labor report. But remember even absent the big labor report, the big payroll report, every week on Thursday morning, we get two reports at 8:30 Eastern, initial unemployment claims considered to be a leading indicator and also continuing claims. Last week, those reports remained within a range that signaled the conditions were still okay, even though we know that the labor market is slowing, but it is not collapsing.

Quincy Krosby:

The link between the labor market and consumer spending is key, obviously, because if Americans felt that they were about to lose their jobs, consumer spending would actually freeze very, very quickly. So overall, this market this week is going to pay very close attention to the number of job openings. Now I want to report something here. Job openings, that's crucial. But there have been questions regarding the methodology of the job opening report because simply is questionable. But on Wednesday we're going to get the ADP employment report. Now this is the private sector report and again, it doesn't have a 100% positive correlation with what we're going to get in the Friday's report, but nonetheless, we pay very close attention to it because we want to see within the private sector, this doesn't count obviously government jobs, where are the jobs coming from? Is it healthcare, education?

Quincy Krosby:

Because you would expect now education to pick up and also, we're seeing healthcare jobs pick up, but we want to see if it's including the leisure sector and hospitality. Expectations are that it increases just a little bit. We also, again, want to see what they say about wages. Then also this week we are going to have pending home sales. The expectation, by the way, remember this is the consensus estimates, is that it inches up just a tad in positive territory coming into positive territory from weakness from the last report. And then on Wednesday will be the Federal Reserve decision. The market is expecting that the Fed starts to indicate and telegraph that there will be a rate cut coming at the September 18 meeting. Some people think that Chairman Powell could actually surprise the market with a cut at this meeting, given that September 18 is a long way off.

Quincy Krosby:

However, there's been no indication of that. And right now the futures market is really focused on September 18, and then we'll hear what he has to say at the press conference as always. And then on Thursday we are going to have a manufacturing report, we're going to have a construction spending report. But overall, on Thursday morning, we are going to look at those initial unemployment claims. Expectations are they will remain in the range that it's been and remember this is a leading indicator. It's a leading indicator for the Fed to see if more and more Americans are losing their jobs and they're going in and saying we need to have unemployment insurance. And then the same day, same time, we will see the continuing claims. And I think this one is extremely important because it has started to move higher, indicating that Americans are not getting jobs as quickly as they had been.

Quincy Krosby:

And that's important as well for the view of the overall economy. And then on Friday, that's it. You know, this is the one we look at. It's the payroll report coming out of the government. Expectations are that we move down a bit. Remember, last time the market on the headline number, which is 206,000, but this time we're looking for something below that, about 190,000. Also extremely important is the unemployment rate. We expect that to remain at 4.1%. Now please keep in mind that if it climbs higher but the participation rate also climbed higher, that is how many people are coming in and looking for jobs. Because what happens is if they don't get the jobs, the unemployment rate ticks higher. And you'll hear a lot of folks saying, oh, don't worry about that number. It doesn't mean that the unemployment rate has really climbed higher because it just means a lot of people coming in and looking for jobs did not get jobs.

Quincy Krosby:

That is a different survey. But nonetheless, the market does pay attention to that, keep that in mind. And so does the Fed. They don't want to see that number climbing higher. The reason is that as it climbs higher, it continues to actually inch higher at a faster clip and the Fed does not want to see that. Remember Chairman Powell has been very clear, if we see the landscape, the unemployment rate climbing higher, and we see more quote unquote deterioration, we are going to come in and cut rates quickly. Now remember, the Fed doesn't have to wait for a meeting in order to cut rates or raise rates for that matter, but they, in terms of cutting rates, they don't want to come in and really scare the market because that is exactly what would happen if they came in between meetings and cut rates. And for the market, the market doesn't really want rate cuts based on the landscape, the payroll landscape deteriorating.

Quincy Krosby:

It wants to see that the Fed is cutting rates because inflation is coming down and that is key. And the PCE report last week, Personal Consumption Expenditures Index, which is the Fed's preferred measure, actually suggested that at the margin inflation is continuing to come down, it's continuing to ease. Remember also that the CPI report showed that again, little by little inflation is coming down. In fact, in the CPI report, Consumer Price Index report, that actually helped trigger another move going into, by the way, the small cap and mid cap names. Why? Because those names are rate sensitive. They want to have lower interest rates because many of them, you know, get bank loans. And so that floating bank loan rate becomes more important for these small and mid cap names, they have to service them and with a lower rate it actually becomes easier for them.

Quincy Krosby:

So we're going to be paying attention to all of this as is the Fed going to be paying attention to all of this. The other thing about the small and mid caps, I do want to point out that they also are very much vulnerable to any sense of a pullback in the economy. They will sell off and think about the reason. Here they are, they're regional, they're local, and the labor market is very much at the behest of how things, the overall economic conditions. So small and mid cap names are also focused very much on that. And they had some very good news last week when the first read of the GDP report for the second quarter came in above expectations, that helps underpin the market in the small and mid cap. One last thing about the small and mid cap names, many of the banks are in there, in the indexes actually, that represent or reflect the small and midcap names.

Quincy Krosby:

And what we've seen overall is that the financials have been holding up. So their large cap brethren have been doing substantially better than the tech names. We pay attention to that because the small and mid cap also, again, as I just said, have a preponderance of financials in those indices. So that also is helpful. But remember, please remember, that to see it to continue, they need to know that the Fed is going to be cutting rates and they also need to know that the underpinning, the economic underpinning, is solid. We don't need to have it super strong, but at least resilient and solid. This week as well, there won't be any Fed speak, but there'll be Fed speak at the meeting, right? And that'll be Jerome Powell. This morning, I do want to add that we saw McDonald's coming in, missing, missing top line, bottom line, you name it.

Quincy Krosby:

This is not good because again, it's a reflection of the consumer, a much more discerning consumer. The fact of the matter is folks are not going there and McDonald's is saying that they're going to keep $5 deal going longer than they had expected. So we have this week, however, and I'm going to end with this, we have none other than the big mega tech names. It is going to be Microsoft, it is going to be Meta, it is going to be Apple and Amazon coming in. Why is this so important? We know why it's so important, because we saw how the market really did not appreciate what they heard from Google or Alphabet and Tesla. So it's going to be crucial to hear what they have to say, especially in terms of the integration of AI in their operations. The market looks at it as show us how you are monetizing AI and the market was not pleased again when it heard from Alphabet.

Quincy Krosby:

So this is why this is a very important week for the tech names. In terms of NVIDIA, remember they come in at the end of the earnings season, so the market has to wait to hear what they have to say. Also, this week we're going to hear from Starbucks. That's going to be the same day that we hear, that's tomorrow. But Starbucks is interesting because you're also going to hear how they're doing in China and whether or not they've been able to get that going in China because they have suffered and that's a big market for them and how they're going to have the U.S. market pick up. Maybe make it a little bit faster to get what you order. In any case, also on Friday, I do want to mention that Exxon and Chevron will be reporting, very important. Oil prices do matter for these big names.

Quincy Krosby:

Right now, oil prices are down below in terms of West Texas Intermediate crude, are down, right this morning below $80 a barrel. Any sense that we are going to see the Middle East having an issue, there's been a tremendous amount of back and forth and back and forth on this latest issue in the Middle East with Israel and Hezbollah, just back and forth, lobbying back and forth diplomacy. We'll see if that cools off a bit, but any sense that this can lead to something deeper in terms of the Middle East, where the oil is actually produced, is going to push oil prices up. In addition, let me add that the hurricane season looks as if it could be pretty difficult. And remember that can lead to a disruption of supply. That's what the oil market focuses on, it's disruption of supply. Any sense, whether it's geopolitical, whether it is hurricanes, whether it is a strike. You know, that where people stop working, is going to push up the prices. So we'll keep our eye and listen to what Exxon and Chevron have to say. So it's going to be a crucial week for the market. Above all else, it is going to be those earnings reports. It is going to be the Fed and we are going to pay very close attention on Friday to the employment report. Have a good week. We'll be back next week. Thank you.

Speaker 2:

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Speaker 2:

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