After a rather light day of news to start the busy week, Wall Street is bracing from an onslaught of data beginning today. The first wave of information will come from the corporate world with a number of quarterly reports issued since the close of trading yesterday. Today will bring the start of a slew of earnings releases from the big technology companies, including Microsoft (MSFT) and Google’s parent company Alphabet (GOOG) after the closing bell, and also kicks off the Federal Reserve’s two-day monetary policy meeting that is expected to produce a quarter-point hike to the federal funds rate, bring it to a range of 5.25% to 5.50%. The market moved higher on the eve of the Federal Open Market Committee (FOMC) meeting, primarily driven by the release of some better-than-expected earnings results late last week, particularly from the nation’s biggest banks.
This morning, the results from the corporate world have added to the better-than-feared earnings narrative. Specifically, automaker General Motors (GM) reported better-than-expected operating and profit margins, and the stock rose in pre-market action. 3M Company (MMM) surpassed Wall Street’s revenue expectations ($7.99 billion versus the consensus estimate of $7.87 billion) and earnings per share reached the low end of the company’s guidance bracket. The company also boosted its fiscal 2023 profit guidance. Shares of the industrial conglomerate, which have been under pressure for an extended period, are pointing to a higher opening today. Likewise, telecom giant Verizon Communications (VZ), which has been one of the worst S&P 500 performers over the last 12 months, hurt recently by concerns about the presence of toxic lead-covered legacy cables, beat earnings forecasts, and the stock is rallying some in pre-market action.
Looking ahead, in addition to the aforementioned technology behemoths, we will get results from credit card processing giant Visa (V) after today’s closing bell. The equity futures following the latest patch of quarterly results are presaging a mixed and relatively flat start to the trading day stateside, with the biggest initial move to the upside likely coming from the tech-heavy NASDAQ Composite.
Later this morning, we will receive an important reading on the U.S. economy. At 10:00 A.M. (EDT), the Conference Board is scheduled to release its July data on consumer confidence. The Consumer Confidence Index, which measures and compares how consumers view the overall economy, business conditions, and labor market presently and over the next six months, is expected to show an increase from the June reading of 109.7. The U.S. consumer sector has been the linchpin behind the nation’s recent economic expansion, and another uptick in consumer confidence would only add to the sentiment that the central bank can orchestrate a “soft landing” for the economy. (Investors should note that we will get the first estimate on second-quarter GDP this Thursday from the Commerce Department.)
Signs that the economy is faring better than most pundits feared at this stage of the Fed’s monetary policy tightening cycle are giving a boost to the economically sensitive companies. That, along with a weaker dollar is helping the U.S. multinational companies, many of which can be found in the Dow Jones Industrial Average. The index of 30 bellwether companies is currently on an 11-session winning streak.
As noted above, the Federal Reserve will commence its two-day monetary policy meeting later this morning, which is expected to produce a 25-basis-point increase to the benchmark short-term interest rate. That expected move is already priced into the market, so we think the market’s biggest reaction will once again be to Federal Reserve Chairman Jerome Powell’s post Fed statement press conference. It should be noted that the market seems to be pricing in that this will be the last federal funds rate hike for a while, so any commentary from Chairman Powell that is deemed to be hawkish in nature could put some pressure on equities, particularly the higher-growth stocks. We also think the possibility of a more hawkish Chairman Powell is much greater than a more dovish one, as there is more than six weeks to the next FOMC meeting in September and Mr. Powell may not want to add fuel to an already red-hot stock market and risk adding to the inflation situation stateside via increased asset valuations.
Given this near-term backdrop and the strong rally year to date, which has left valuations looking quite frothy, we would continue to recommend that investors focus on the stocks of high-quality companies that have demonstrated a history of generating steady earnings and cash flows. These entities are less likely to deliver the type of dour financial results that would spark a sharp selloff. In recent weeks, the market has traded on narratives (i.e., disinflation and the Federal Reserve) rather than fundamentals. But with the S&P 500 companies looking overbought and the earnings news likely to bring the attention back to some of the individual names, those that deliver disappointing results are likely to feel the wrath of Wall Street. Tesla (TSLA) stock, which has been a darling of the Street this year, fell sharply last week after it reported weaker profit margins in its latest quarterly report. - William G. Ferguson
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.
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