The futures market shows that stocks are set for a solidly positive open to today’s trading. Prior to the bell, new economic data for the month of June were released. The Bureau of Economic Analysis (BEA) reported a month-to-month increase in the personal consumption expenditures (PCE) price index of 0.1%, matching economists’ outlook for a 0.1% expansion; the headline PCE index was unchanged in May. On a yearly basis, the index rose 2.5%, on a par with estimates and below the prior reading of 2.6%. Excluding volatile food and energy prices, the monthly core PCE advanced 0.2%, also in line with the consensus expectation and above the May step-up of 0.1%. Annually, the core index was up 2.6%, one-tenth of a point above what was anticipated, and the same rate as that reported a month earlier. Investors are cheered that inflation continues to generally trend in the right direction.
At the same time, the BEA reported on personal income and personal spending for June. Income markedly eased to an increase of 0.2%, compared to growth of 0.4% (revised) in May. Spending trended 0.3% higher, one-tenth of a percentage point under the revised previous rate. These data points are in keeping with Wall Street’s anticipation of a “soft landing” for the U.S. economy, more specifically, continued modest expansion and the avoidance of a recession. Later this morning, the University of Michigan will issue its final measure of consumer sentiment in July. That measure is expected to show little surprise and come in at the level of 66.0. Sentiment has declined from a peak of 79.4 this past March. The five-year high is 101.0.
The Federal Reserve is preparing for its upcoming meeting, scheduled for July 30-31. At this meeting, the Federal Open Market Committee (FOMC) will decide on whether to adjust short-term interest rates. The federal funds rate currently stands at 5.25%-5.50%. A majority on Wall Street seems to believe that the Fed’s next move on rates will be a 25-basis-point reduction and that won’t come until the FOMC’s September meeting. Indications of a softening labor market back the assumption of a cut. Aside from closely watching the labor situation, the Fed has a keen eye on the corporate earnings season now in progress. Thus far, results have been a bit mixed but, most notably, investors were disappointed by reports from Tesla (TSLA) and Alphabet (GOOG). There’s concern that the electric vehicle market might already be maturing and that the adoption of artificial intelligence may not reap its benefits as soon as expected.
Of the remaining Magnificent 7 high-tech industry leaders, quarterly earnings reports are due from Apple (AAPL), Amazon.com (AMZN), Microsoft (MSFT), and Meta Platforms (META) next week. As has been the case this week, the major market indexes will probably react to each company’s financial performance and any forward guidance given, in addition to any unexpected news from the Fed. Volatility is sure to stay elevated.
Thus far this year, even with the latest givebacks, the tech-heavy NASDAQ has advanced 14.5%, while the broader Standard & Poor’s 500 is up over 13%, and the blue-chip Dow Jones Industrial Average has gained 6%. It’s notable that, over the past two weeks, the small-cap Russell 2000 has jumped 8.3%, outperforming the other major market indexes by wide margins. With the prospect of lower interest rates, investors are rotating out of the tech sector and moving into the cyclical/value equity arena, inclusive of utility, financial, and consumer staples stocks. Small and mid-cap equities have gotten more attention, lately. Investors may want to diversify into the lower capitalization issues, while maintaining a core of big-cap industry leaders in their portfolios. Note that the Magnificent 7 stocks historically have a way of bouncing back, after enduring some heavy operating/macro challenges. – David M. Reimer
At the time of this article’s writing, the author held positions in none of the companies mentioned.
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