Stock indexes are mostly flat ahead of several key events coming up this week, including Federal Reserve Chairman Jerome Powell’s two-day testimony before Congress that begins today.

Wall Street insiders expect the Fed Chair will be grilled by members of the Senate Banking Committee today over the central bank’s current high interest rate policy, which many lawmakers have become more critical of due to the burden it places on individuals and businesses.

Most think it’s unlikely that Powell will provide a firm timeline for when rate cuts might begin and expect he’ll stick to the same script we’ve heard for months - the Fed wants to see more evidence that inflation is trending down toward its +2% target rate. At best, some think Powell could signal that rate cuts are for certain coming in 2024, though this also seems like a long shot. Powell will also probably face harsh criticism about proposed requirement for banks to hold more capital.

Powell testifies before the House Financial Services Committee tomorrow. With Powell’s remarks expected to be light on details, the bigger influence on Wall Street’s expectations for Fed policy is likely to be the Consumer Price Index (CPI) on Thursday.  While the Fed is not expected to cut rates at its upcoming meeting on July 30-31, most believe it’s critical for inflation gauges to continue showing a downward trajectory in order to provide Fed officials with their long-sought “confidence” that inflation won’t bounce back once they start cutting.

Stock bears are starting to talk more about the upcoming Q2 2024 earnings season and the high bar that Wall Street has set for the market’s leading companies.

Overall, S&P 500 companies are expected to report earnings growth of nearly +9%, which would be the highest since Q1 2022 while also marking the fourth straight quarter of earnings growth. According to FactSet, companies  in the S&P 500 are trading at 21.4 times their projected earnings over the next 12 months, compared with the five-year average of 19.7.

Many of the top companies that have driven the stock market to all-time highs are already sitting on very hefty gains - Nvidia is up more than +132% year-to-date, Facebook-parent Meta is up almost +40%, Google-parent Alphabet is up +24%, and Amazon is up over +17%. The S&P 500 index itself is up nearly +17% and the Nasdaq is up almost +23%. Bottom line, companies could be severely punished by investors if earnings disappoint. And it’s not just about meeting analysts’ consensus estimates for earnings. Many Wall Street insiders are worried that investors have come to expect the big tech heavyweights to deliver spectacular earnings beats, something that will likely become tougher and tougher to do in the coming quarters.

Big Wall Street banks "unofficially" kick Q2 earnings season off on Friday. We will start seeing some AI-related results next week (ASML, Taiwan Semiconductor) but the major tech results don't get rolling until July 24 when Alphabet, Microsoft, and Tesla report.

There are no earnings of note today and the only economic data due out is the Small Business Optimism Index.

I should note, some Wall street bulls are worried that the recent crypto meltdown could eventually spill over and cause some liquidation and perhaps a pull back in the stock market. Keep in mind, Bitcoin has been down hard the past couple of weeks, and was recently down over -25% from its all-time high of nearly $74,000 posted back in March. While still up over +30% so far this year, this is the worst one-month period for Bitcoin since late-November 2022. 

Throughout History, Measuring Inflation Has Always Been Controversial:  Mark Twain captured America’s enduring spirit of skepticism when he listed the three kinds of lies, “lies, damn lies and statistics," though he might have added government statistics to the mix. That skepticism is playing itself out in the current inflation debate. Since peaking at 9.1% in June 2022, inflation fell sharply toward the Federal Reserve’s goal of 2% before plateauing above 3%, according to the Consumer Price Index, or CPI, compiled by the U.S. Bureau of Labor Statistics. But recent reports of prices still pushing higher have fueled rumors of statistical conspiracies. Those who believe the government data are quick to point toward the changing nature of Americans’ spending is seen in a comparison of today’s expenditures with those of the Great Depression. From 1935-39, food represented 33.9% of an average household’s expenses; it accounts for just 13% today. Apparel ate up 11% of a Depression-era paycheck; it’s 2.6% today. Shelter costs, however, have risen from 33.7% to 36.1%; and medical care is up from 4% to 7.9%. Source Barrons

Record +3 Million Airline Passengers Screened in Single Day: TSA agents screened 3,013,413 people Sunday in a post-Fourth of July travel blitz, surpassing the all-time high on June 23, when about 2.99 million people were screened, the agency said Monday. The heavy travel was widely expected around the Fourth of July holiday, and eight of the 10 busiest days in TSA’s history have been this year as travel surges above pre-pandemic levels, The Associated Press reported.  

Hedge Funds Are Piling Into Commodity-Sensitive Stocks:  Hedge funds picked up commodity-sensitive stocks at their fastest pace in five months in the week ending on July 4 as they piled into U.S. energy and materials companies for a third week in a row, new data from Goldman Sachs’s prime-brokerage division shows. Goldman’s analysis shows that until just three weeks ago, hedge funds were net sellers of commodity-sensitive stocks for six consecutive weeks. Hedge funds have now reversed course in a buying spree that has seen them plow into the materials and energy sectors via a flurry of long bets on firms in sub-sectors, including oil, gas and consumable fuels, energy equipment and services, containers and packaging, and mining and metals, the report said. Energy stocks have rallied in 2024 on the back of a rebound in oil and gas prices driven by stronger-than-expected growth in the global economy and heightened tensions in the Middle East that have seen the S&P 500 Energy Sector Index advance by +8% to date in 2024. Many Wall Street insiders are arguing that energy stocks are particularly appealing at the moment, with projections showing double-digit cash returns for 2024, supported by robust buyback yields.  Source Market Watch

US Consumer Borrowing Rises Most in Three Months on Credit Cards: US consumer borrowing increased in May by the most in three months, reflecting a jump in credit-card balances. Total credit outstanding rose $11.4 billion after a revised $6.5 billion gain in April, according to Federal Reserve data released Monday. The median forecast in a Bloomberg survey of economists called for an $8.9 billion increase for May. The figures aren’t adjusted for inflation. Revolving credit, which includes credit cards, advanced $7 billion, also the most in three months. Non-revolving credit, such as loans for vehicle purchases and school tuition, increased $4.3 billion. That may explain a recent pullback in consumer spending. Retail sales barely rose in May and prior months were revised down, according to the latest data. The monthly consumer credit report doesn’t include mortgages. The latest quarterly data from the New York Fed show that household debt, including mortgages, rose to a record $17.7 trillion in the first three months of the year. Consumers have added $3.4 trillion in debt since the pandemic, and borrowing over the past few years is carrying much higher interest rates. The Fed’s report Monday showed that borrowing rates on credit cards that charge interest rose to 22.76% in May, just shy of a record in data back to 1994. Source Bloomberg

Where Have All the Good Stocks Gone? Low interest rates are good for stocks. Are they good for the stock market? That seems like an odd distinction, but it is one that could weigh on American investors’ future returns.  Most investors are pleased with their portfolios these days, whether they own some of the popular names like Nvidia, Microsoft, and Apple or the mutual funds lifted heavenward by the same group of companies. It is at times of top-heaviness like these that contrarians who want to stay invested have pivoted to the market’s forgotten corner: small stocks. For example, the leading large-company index, the S&P 500, beat the most popular small-company equivalent, the Russell 2000, by +93 percentage points during the 1994-99 tech boom. Like today, a handful of large companies made up a disconcerting share of those gains. Then through 2014 the small-cap index beat the S&P by +114 percentage points. But the latest bull market has damaged that escape ramp. Look no further than one of the broadest measures of U.S. equities: The FT Wilshire 5000 Index had far more stocks to choose from than it could fit a quarter-century ago. Recently it was down to 3,381 members. At the same time, there are now close to three times as many stock funds available as listed American companies. How can both be true? The explanation is that a long period of low interest rates and the rise of index funds made smaller U.S. companies attractive acquisition opportunities. Source WSJ

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Property Fraud Allegations Snowball: U.S. prosecutors are cracking down on commercial mortgage fraud, a growing push that is sending shudders through the $4.7 trillion industry by raising questions about the numbers underpinning major property loans. Regulators and federal prosecutors say that property loans based on doctored building financials and valuations have been rising. This type of fraud became more widespread between the mid-2010s and 2021, federal investigators and real-estate brokers say, when commercial property prices surged to new highs and landlords had much to gain from such maneuvers. Now, the drop in property values caused by higher interest rates and a rise in defaults are exposing more of these schemes. Federal prosecutors are ramping up their efforts to root out fraud, often working together with investigators at the Federal Housing Finance Agency’s Office of Inspector General, according to court records and people familiar with the matter. Meanwhile, government-backed mortgage enterprises Fannie Mae and Freddie Mac are cracking down on questionable practices in their rental-apartment lending business.  Source WSJ

Retail Investors Stick Around: Legions of retail investors flooded the stock market in 2021, eager to chase volatile “meme stocks” with strong social media followings and weak financials. This passion to own a piece of companies such as GameStop Corp. and AMC Entertainment Holdings Inc. seemed like a fever that was sure to break. Flash-forward three years, and it’s abundantly clear: We’re living in a new age of finance. It’s never been easier to bet your money—anytime, anywhere—and meme-stock craziness is here to stay. A wave of technological advancements has coincided with new apps and platforms to create a thriving ecosystem where everyday people can trade stocks with the ease of swiping for dates on Tinder. Young people can open a trading account in minutes. Members of Generation Z start investing when they’re 19, on average, according to a Charles Schwab Corp. survey released in June. That compares with 32 for Gen X and 35 for baby boomers. Schwab also found that almost 3 in 5 Americans today are investing in stocks. Federal Reserve data show this proportion represents the highest on record. Retail investors also have plenty of ways to play once-exotic and out-of-reach markets. Exchange-traded funds that invest in Bitcoin premiered this year, and a boom in zero-day options has taken the retail community by storm. The bull market makes trading seem easy and fun, but it may well end badly for investors. When the S&P 500 fell -19% in 2022, retail traders collectively lost -$350 billion, according to Vanda Research. The average retail portfolio was down -30%. Source Bloomberg


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