This morning, the news on the U.S. economy was rather light, with the only notable report coming from the Labor Department. At 8:30 A.M. (EDT), we learned that initial jobless claims for the week ending July 13th totaled 243,000. That figure was up 20,000 from the previous week’s revised tally and indicative of some softening in labor market conditions. Elsewhere, the Federal Reserve Bank of Philadelphia reported that the July reading on manufacturing activity in the greater Philadelphia area came in at 13.9 in July, which was well above the expectation of 2.9. Later today, we will hear from several Federal Reserve Regional Presidents, with Chicago President Austin Goolsbee the first to speak. The equity futures, which were mixed heading into the economic data, are still indicating a divided start to the trading day stateside, with the major averages moving in the opposite direction from where they ended yesterday’s session.
Meantime, second-quarter earnings season is about to gain steam. The big bank money centers, including JPMorgan Chase (JPM) and Bank of America (BAC), kicked off the festivities in recent days with strong results and, for the most part, positive prognostications. Since the close of trading yesterday afternoon, we have received a few prominent corporate reports. Semiconductor giant Taiwan Semiconductor (TSM), the world’s largest producer of advanced microprocessors, beat revenue and profit expectations, helped by strong demand for processing chips used to power artificial intelligence. TSM stock is slightly higher in pre-market action.
Major airline company United Air Lines (UAL) also posted solid second-quarter bottom-line results, but its third-period outlook was softer than expected due to overcapacity issues. UAL shares are looking at a relatively flattish start to the trading day. Novartis AG (NVS) beat both revenue and profit expectations in the latest quarter and raised its guidance. However, Novartis shares, which were up more than 10%, year to date, heading into the report, are looking at a lower opening today. Finally, shares of D.R. Horton (DHI) are slightly lower in extended market action after the nation’s largest homebuilder beat top- and bottom-line estimates in the June quarter, but said new orders came in below expectations and it tightened its annual forecast. After the close of trading today, the latest quarterly results from streaming giant and original content producer Netflix (NFLX) are expected to be closely watched by the market.
Trading this week has been bifurcated, but overall has had a bullish undertone, which included the Dow Jones Industrial Average and the Russell 2000 recording notable gains over the first three sessions, despite some profit taking in the latter index yesterday. The blue-chip Dow 30’s advance has been fueled, in large part, by stocks of its financial companies. The financial sector, which did not participate much in the first-half equity market gains, has been on fire this month, helped by another round of strong quarterly results from the big banks.
We have also seen a notable move into the small-cap sector. The Russell 2000, even when factoring yesterday’s 1% pullback, is up roughly 10% since July 9th. The small-cap index surged on the release of inflation data late last week and some dovish commentary from Federal Reserve Chairman Jerome Powell. These events raised the odds of a near-term interest-rate cut in the futures market, with perhaps one occurring as early as the September Federal Open Market Committee (FOMC) meeting. The growing optimism on Wall Street that the central may soon begin to loosen the monetary reins was a boon for the stocks of the interest-rate sensitive small-cap companies. The performance of the small-cap sector significantly lagged that of the broader S&P 500 Index and the technology-dominated NASDAQ Composite during the first six months of this year.
Speaking of the NASDAQ Composite, it was under significant selling pressure yesterday. The main culprit was a poor showing from most of the semiconductor and semiconductor equipment stocks, which have been on fire for most of this year on artificial intelligence (AI)-driven euphoria on both Wall Street and Corporate America. Shares of the largest semiconductor companies fell sharply in response to a pair of political developments in the United States. The Biden Administration is considering tighter restrictions on chip manufacturing to China, while former President Trump vowed to increase tariffs on China if he wins reelection in November. It should be noted that shares of Intel (INTC) and GLOBALFOUNDRIES (GFS), which are more domestically centered and used funds from The Chips and Science Act (enacted in 2022) to increase their stateside manufacturing capabilities, were higher yesterday. – William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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