Stock indexes are mixed ahead of Q2 2024 earnings results from big Wall Street banks Citigroup, JPMorgan, and Wells Fargo this morning.
Bulls are worried that anxieties about a possible “AI bubble” may be hitting a breaking point with rotation out of the tech sector picking up steam. This is weighing most heavily on the Nasdaq and S&P 500, which both lost ground yesterday while the Dow picked up a few points. Nvidia alone fell by more than -5% yesterday. Money is instead rotating into smaller, overlooked stocks that have not fully participated in this year’s rally amid all the focus on AI plays.
The rotation is also being spurred in part by a weaker-than-expected June inflation read which most on Wall Street feel all but solidifies a September interest rate cut by the Federal Reserve. The Consumer Price Index (CPI) headline rate slowed to +3.0% year-over-year versus +3.3% in May while the “core” rate (strips out food and energy) slipped to +3.3% from +3.4%. Notably, the month-over-month headline reading showed outright deflation, falling -0.1% in June following no change in May. This was led by a decline in energy, gasoline, transportation, and vehicle prices.
The main inflationary force is still shelter costs, which were up +5.2% year-over-year. If you strip out shelter, the headline CPI rate was just +1.8%. With inflation heading the right direction and a September Fed rate cut thought to be inevitable, that brightens the prospects for cyclical stocks and smaller companies that are often more impacted by high borrowing rates.
Lower rates are also viewed as a positive for an array of consumer companies offering everything from goods to travel to entertainment, as lower interest rates in theory should boost consumer spending.
The downside to disinflation is that it could take a bite out of corporate profit margins, particularly across the consumer goods category where we’ve already seen companies cutting prices more aggressively. Lower interest rates could also be beneficial to many banks. While higher rates do earn banks more money in loan interest, they also depress borrowing. At the same time, banks have been forced to pay depositors higher interest rates, which has offset higher profits in banks’ lending businesses.
Some on Wall Street think this conundrum has come into better balance for banks and will be closely scrutinizing “net interest income”, a key measure of bank lending profitability. Less optimistic traders think it will be another couple of quarters before any notable recovery.
Investors also remain concerned about banks’ commercial real estate exposure as more property owners are struggling to refinance at higher borrowing rates amid plunging property values. Though commercial property is a bigger concern for regional banks, big banks are exposed as well.
Investors are also anxious to see banks’ bond balance sheets, where unrealized losses are estimated to be around $517 billion. Investors will also be paying close attention banks’ assessments of US consumer health, which Wall Street is growing more concerned about.
Looking to next week, Q2 earnings results will continue with the financial sector dominating the first half of the week, including BlackRock and Goldman Sachs on Monday; Bank of America, Charles Schwab, Interactive Brokers, Morgan Stanley, PNC Financial Services, and State Street on Tuesday; and Discover Financial, Synchrony Financial, and US Bankcorp on Wednesday.
The key tech results to watch next week include ASML Holding, which reports on Wednesday, followed by Taiwan Semiconductor on Thursday. Other notable releases include United Health Group on Tuesday; Johnson & Johnson, Kinder Morgan, Las Vegas Sands, Prologis, and United Airlines on Wednesday; Abbott Labs, Blackstone Group, Cintas, Domino’s Pizza, D.R. Horton, Intuitive Surgical, Netflix, and Novartis on Thursday; and American Express, Halliburton, Schlumberger, and The Travelers Companies on Friday.
The data calendar next week is on the lighter side with Retail Sales, Import/Export Prices, and Business Inventories on Tuesday; and Housing Starts & Permits and Industrial Production on Wednesday.
Also worth noting, Fed Chair Jerome Powell will participate in a Q&A session at the Economic Club of Washington on Monday, and the European Central Bank releases its latest monetary policy decision on Thursday.
At the moment, the market is thinking there's almost a 100% chance that the Fed will be cutting rates at its September FOMC meeting, the question is by how much?
Keep in mind, however, there's still a couple of more jobs reports and a couple of more inflation reports before the next meeting, so anything is still possible, but the market is looking for a cut in September.
After Years of Price Hikes, Consumers Hitting the Brakes: For the past few years as prices soared, many consumers kept buying affordable treats like Doritos and Lay’s in lieu of bigger-ticket splurges such as restaurants, concerts or travel. But now, they are limiting their spending in all areas, said Jamie Caulfield, PepsiCo’s chief financial officer. Shares of Conagra Brands declined in Thursday trading after the maker of Slim Jim meat snacks and Vlasic pickles reported lower sales for its latest quarter and issued a disappointing profit outlook for its current fiscal year. Inflation in the U.S. is moderating but consumers are feeling the cumulative impact of years of steep price hikes, particularly in their grocery bills. Consumers in recent months have been pulling away from big brands like Starbucks, Chips Ahoy and McDonald’s. Source WSJ
Wall Street’s Fear Gauge Seems to be Lacking the Fear Part Lately: The Cboe Volatility Index, or VIX as it's commonly known, measures implied volatility in the stock market for the next 30 days. It goes up when Wall Street becomes anxious, and the S&P 500 and other market benchmarks typically fall in response. And there are plenty of reasons for investors to feel uncertain right now with the coming U.S. presidential elections, geopolitical tensions across the globe, and central banks trying to navigate soft landings in their economies. Yet, statistically, the VIX is unusually low right now, according to DataTrek Research. Since 1990, the metric’s average daily close is 19.49. But the VIX closed at 12.85 on Wednesday, with a 30-day rolling average of just 12.73, according to Dow Jones Market Data. The upshot here is that the VIX is not just low, DataTrek co-founder Nicholas Colas wrote in a note this week. It is, statistically speaking, very depressed, he added. On paper, that may sound strange, but DataTrek data show that a Zen stock market has happened before, and typically does so for long stretches. Overall, it’s a good sign for the stock market for the rest of the year, especially large-cap names, Colas says. VIX readings lower than 15.55 have happened before in long periods: 1991-1996, 2004-2007, 2011-2019, and the present since 2020. Except for 2018, the S&P 500 was up in all of those years, Colas says Source Barrons
More People Than Ever Expected to Bet On Summer Olympics: Sportsbooks and daily fantasy operators are preparing for a Summer Olympics bump. The games in Paris, set to start July 26, will be the first to take place since legal gambling became widespread in the U.S. The gaming industry expects an increase in wagering from the previous Summer Games in Tokyo, particularly for sports like men’s and women’s basketball, soccer, and tennis. These Olympic Games come at an opportune time for sportsbooks, during the offseasons of high-volume betting leagues like the NFL and NBA. But it remains to be seen whether they move the needle for gambling operators. The effect could be more muted for giants FanDuel and DraftKings, which together hold about 80% of the U.S. online gambling market share, than for smaller players. Still, the Olympics may not cause the betting surge seen with other sports in the U.S. Some state regulations may prevent betting on many events, and users may only be able to wager on medal competitions. U.S. bettors will also face a time zone issue this year. While Paris’s time zone — six hours ahead of Eastern Time — presents fewer difficulties for Americans than Tokyo’s 13-hour gap did in 2021, prime-time events won’t be live this year. Source CNBC
RIP Redbox: In another nail in the coffin of physical media, Redbox is shutting down after more than two decades of serving up DVD rentals from thousands of kiosks across the U.S. Redbox’s network of 24,000 DVD rental kiosks and its streaming services will be shut down after its parent company, Chicken Soup for the Soul Entertainment, converted its Chapter 11 bankruptcy case to a Chapter 7 liquidation proceeding. Chicken Soup for the Soul Entertainment is a subsidiary of Chicken Soup for the Soul LLC, which publishes the namesake book series and isn’t part of the bankruptcy. Chicken Soup for the Soul Entertainment took on about $360 million in debt when it acquired Redbox in 2022. It entered bankruptcy owing money to creditors including Walmart and Walgreens, where some of its kiosks have been located, and several media companies such as Warner Bros. Home Entertainment and Sony Pictures Television. Source WSJ
States With the Oldest Workers: It's not uncommon these days for older Americans to stay in the workforce, particularly in states with older populations. Nationally, 18.7% of adults 65 or over are still working. At the state level, Vermont (25.6%), Iowa (23.9%) and Maryland (23.4%) have the highest share of 65-and-up adults in the workforce, according to preliminary 2023 census data. Today's older workers are better educated, working more hours, and more likely to be receiving employer benefits, compared to past decades, per a 2023 Pew Research Center report. Fewer older Americans are working now compared to during the height of the COVID-19 pandemic, although the share of older adults in the workforce has been generally rising since the late '80s. The 65-and-up population grew in all of America's biggest cities from 2020 to 2023 — by close to 20% in some cases, according to the Census Bureau's latest population estimates. Source Axios
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