Earnings expectations have actually improved over the last week with growth for S&P 500 companies estimated to fall -6.4% year-over-year versus a drop of -7.9% a week ago, according to Refinitiv data. Companies in the "Consumer Discretionary," "Communications Services," and "Industrials" sectors have reported the biggest earnings growth while "Energy," "Materials," and "Health Care" have been the biggest drags.
This week, investors are highly anxious to see results from Apple and Amazon on Thursday following mostly upbeat results and forecasts from other tech giants last week. Arista Networks, AvalonBay, and Diamondback Energy report today.
Bears continue to argue that stock valuations are too high and that headwinds in the quarters ahead may dash hopes for earnings to return to growth in the second half of the year. Disinflation and slowing consumer spending are the key problems that bears see ahead, both of which will make it tougher for companies to generate profits.
On the other hand, bulls believe that a weakening US dollar and possible rate cuts next year open the door to even higher stock prices ahead. Most bulls also doubt that US consumers will pull back on spending as much as some fear, believing instead that a strong labor market and cooling inflation will help keep spending stable.
Data last week backed up that view with Q2 Gross Domestic Product (GDP) showing a fourth straight quarter in a row of expansion and PCE Prices showing inflation cooling more than expected.
The next major test is the July Employment Report on Friday, which is expected to show a gain of +200,000 jobs with the unemployment rate holding at 3.6%.
Other employment data this week includes the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday and ADP's private payroll report on Wednesday. ISM Manufacturing on Tuesday and ISM Services on Thursday will also provide as to how the economy is doing.
The only data today is the Dallas Fed Manufacturing Survey. Moral of the story, Wall Street bulls believe the Fed is done raising rates. The market has the odds at about 33% that rates will be higher following the next two Fed meetings (the next Fed meeting is Sept. 19-20, then the following is Oct. 31-Nov 1). The odds of the Fed cutting rates this year is currently estimated to be under 10%. But most in the market still think the Fed will cut rates two or three times by the end of 2024. Wall Street bulls argue that many investors and traders have simply been paying too much attention to the macroeconomic headlines and not enough attention to corporate profit margins and the fact they could improve steadily during the next several months.
In other words, many bulls on Wall Street are thinking perhaps the worst might now be behind us as the Fed is mostly done hiking rates and inflationary pressure has mostly subsided.
Keep in mind, however, gasoline prices have pushed back to 8-month highs, and food and housing inflation hasn't cooled all that much. Meaning that the inflation monster might continue to stay alive and be more difficult to kill than the bulls are believing.
Gasoline Prices Hit 8-Month High, With No Relief in Sight: Prices at the gasoline pump hit an eight-month high and extended their month-long gains, with signs that prices could keep rising during peak summer driving season. The average U.S. retail gasoline price rose to $3.75 a gallon last week, the highest since Nov. 17, 2022, according to Oil Price Information Service. The move higher is a blow to efforts by the Biden administration to keep retail gasoline prices low and alleviate pain for household budgets. Despite the rally higher, last week's average is still about -55 cents a gallon cheaper than last year’s average of $4.30 a gallon, and still well below June 2022’s peak price of $5.02 a gallon. But gasoline prices have risen about +5% in the past month. The price of crude oil has risen by more than +13% in the past month, which could be linked to refinery outages. Heat-related and other issues have affected refinery operations in Texas and Louisiana. Source Barrons
Trucking Giant "Yellow" Shuts Down Operations: The 99-year-old company with 22,000 Teamsters employees advises customers and workers of shutdown. Yellow, one of the oldest and biggest U.S. trucking businesses, shut down on Sunday, wrecked by a string of mergers that left it saddled with debt and stalled by a standoff with the Teamsters Union. The 99-year-old company is known for its cut-rate prices and has more than 12,000 trucks moving freight across the country for Walmart, Home Depot and many other smaller businesses. What Yellow couldn’t deliver—despite swallowing rivals, getting union concessions and securing a government bailout—was consistent service for customers or profits for investors. The Nashville, Tenn., company sent out notices to customers and employees saying it was ceasing all operations at midday Sunday. The company is preparing to file for bankruptcy and is in talks to sell off all or parts of the business. A failure imperils nearly 30,000 jobs. Source WSJ
NEW Store Concepts for Chick-fil-A: Chick-fil-A is introducing two new restaurant designs in New York City and Atlanta next year. One is a walk-up-only concept that is slated to open next year in New York City. The other concept has four drive-thru lanes that flow below an elevated building with a large kitchen. They said the new four-lane design can work orders for about 75 cars. Source Business Insider
Blackstone Goes from Big Buyer to Net Seller of Property: Blackstone’s $68bn flagship property fund has gone from being one of the world’s biggest buyers of property to a large seller, as it raises liquidity to meet redemptions and invest billions in data centers to feed the artificial intelligence boom. From the beginning of 2021 to the third quarter of last year, the Blackstone Real Estate Income Trust, or Breit, acquired roughly $60bn of property, including hotels, warehouses and self-storage facilities, according to a Financial Times analysis of Blackstone’s securities filings. The wave of dealmaking included taking four publicly listed real estate investment trusts private. But since the autumn of last year, Breit has made no large purchases and instead sold over $10bn in assets to crystallize gains on successful investments and raise liquidity. Source Financial Times
Canadian Dock Workers Reject Labor Deal: West Coast membership of the International Longshoremen and Warehouse Union of Canada voted down a tentative deal late Friday in a two-day vote. The ILWU, Canada chapter is calling on the British Columbia Maritime Employers Association to come back to the table and negotiate. The flow of trade destined for U.S. chemical companies, retailers, and manufacturers is delayed at least two months as a result of 14 days of strikes. For the third week in a row, rail traffic from Canada into the U.S. was down following the on-again, off-again western Canadian ports strike. The first two weeks of the labor strike prevented over 80% of rail trade from entering the United States. The U.S. saw another 12% decrease in trade last week. When the first strike ended on its thirteenth day, delays for rail containers were estimated at 39 to 66 days. Adding another day with the on-again, off-again strike last week brings the congestion removal tally up to 42 to 70 days. The strike is also hitting the bottom lines of railroad companies. The labor unrest will negatively impact Canadian Pacific Kansas City railroad’s revenue by $80 million, Chief Marketing Officer John Brooks told analysts on a conference call last week. Source CNBC
Home Insurers Are Charging More and Insuring Less: Home insurers are insuring less and charging more as they try to claw their way back to profitability after losing money in five of the past six years, analysts and insurance agents say. Losses for home-insurance companies continued to pile up in the first six months of this year. Storms, natural disasters, inflation and supply-chain snafus have sent claims spiraling, leaving many insurers still in the red despite sharp increases to premiums. Since the start of the last year, double-digit rate increases have been approved in 31 states, according to an analysis by S&P Global Market Intelligence for The Wall Street Journal. Arizona, Texas, North Carolina, Oregon, Illinois and Utah had the biggest total of approved increases, ranging from 20% to 30%. Companies are also pulling back from some areas vulnerable to disasters. Many big insurers have exited Florida and Louisiana, both of which have suffered tens of billions of dollars in losses from hurricanes in recent years. In wildfire-prone California, where State Farm and Allstate have stopped writing new home policies, the industry says regulatory curbs on pricing mean they cannot charge enough to cover their costs. Source WSJ
U.S. Hunts Chinese Malware That Could Disrupt American Military Operations: The Biden administration is hunting for malicious computer code it believes China has hidden deep inside the networks controlling power grids, communications systems, and water supplies that feed military bases in the United States and around the world, according to American military, intelligence and national security officials. The discovery of the malware has raised fears that Chinese hackers, probably working for the People’s Liberation Army, have inserted code designed to disrupt U.S. military operations in the event of a conflict, including if Beijing moves against Taiwan in coming years. The malware, one congressional official said, was essentially “a ticking time bomb” that could give China the power to interrupt or slow American military deployments or resupply operations. But its impact could be far broader, because that same infrastructure often supplies the houses and businesses of ordinary Americans, according to U.S. officials. Source NYT
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