There have been a number of important earnings and economic releases since the close of trading yesterday afternoon. However, it should come as no surprise that a good deal of Wall Street’s focus also remains on the Federal Reserve and its latest monetary policy decision, which came at 2:00 P.M. (EDT) yesterday. As expected, the Federal Open Market Committee (FOMC) raised the benchmark short-term interest rate by a quarter point, to a range of 5.25% to 5.50%. It marks the highest level for the federal funds rate in 22 years. The European Central Bank followed with a 25-basis-point interest-rate hike of its own this morning.
The market reacted to the monetary policy news in an orderly fashion, with no outsized moves in either direction yesterday afternoon. This was likely because Federal Reserve Chairman Jerome Powell in his post-statement press conference again stressed that the FOMC will be “data dependent” in formulating future monetary policy. The Dow Jones Industrial Average finished higher for the 13th straight trading session with a gain of 82 points. This is the longest winning streak for the index of 30 bellwether companies in three decades, and the futures market is suggesting that another winning session may be in the cards today.
Chairman Powell’s commentary, which most pundits think was more dovish than the actual Fed statement, did not change sentiment on Wall Street that the central bank is near the end of its monetary policy tightening cycle. Mr. Powell said that the central bank plans to watch the data, and before the FOMC convenes again, the lead bank will have two more labor and consumer price reports to consider. With the perception on Wall Street that inflation is trending lower and that we have not seen the full effects of the current restrictive lending environment on growth and prices, Mr. Powell’s commentary increased the chances that the central bank pauses again at the September FOMC meeting. Chairman Powell’s comments put some downward pressure on Treasury market yields and prompted some buying in the equity market. The equity futures are pointing to a higher start to the trading day stateside, with the NASDAQ futures up more than 200 points.
This morning, we received some important releases on the health of the U.S. economy. At 8:30 A.M. (EDT), the Commerce Department’s first estimate of second-quarter GDP growth showed an annualized advance of 2.4%, with a notable—and encouraging—drop in the Personal Consumption Expenditures (PCE) Price Index. This gives more credence to the market’s strengthening belief that the Fed can orchestrate a “soft landing” for the economy, as it nears the end of its most restrictive monetary policy course in 40 years. This report is in line with the Fed’s statement yesterday that the economy is expanding at a moderate pace, which is an improvement from its June assessment that the economy was expanding modestly. Other notable releases this morning showed a huge increase (+4.7%) in durable goods orders and a decline in initial weekly jobless claims to 221,000, which is at a level indicative of a tight labor market.
The most important economic news of the week comes tomorrow morning, with the release of June personal income and spending data at 8:30 A.M. (EDT). That report includes the PCE Price Index, the most closely watched assessment of U.S. inflation by the Federal Reserve. It could potentially drive trading on the final day of this very busy five-day strength.
On the earnings front, the headline report came from Meta Platforms (META). The social media giant reported better-than-expected adjusted second-quarter earnings per share of $2.92, on an 11% revenue advance, to $32 billion. Strong gains in daily and monthly active users, a rebound in digital advertising, and raised full-year revenue and earnings guidance were greeted very positively by investors. Shares of Meta Platforms are notably higher in pre-market action. Fellow technology companies ServiceNow (NOW) and Lam Research (LRCX) also delivered strong quarterly results, with better-than-expected growth in both revenues and earnings per share. ServiceNow shares are expected to start the day lower, while Lam Research stock is looking at a higher opening. Auction retailer eBay (EBAY) beat expectations in the latest period, but the shares are indicating a lower start on soft third-quarter guidance.
The earnings news from the restaurant industry varied. Specialty fast-food restaurant operator Chipotle Mexican Grill (CMG) posted mixed results, beating on the bottom line, but sales fell short of the consensus forecast. Dow-30 component McDonald’s (MCD) beat expectations on both lines, as diners opted for budget friendly food options. McDonald’s shares are looking at a higher opening, while Chipotle stock is expected to begin the day in negative territory.
Other notable earnings releases came from toymaker Mattel (MAT), industrial giant Honeywell (HON), and communication services company Comcast (CMCSA). After today’s closing bell, we will get another heavy round of earnings reports, including the latest results from chipmaker Intel Corp. (INTC). This will cap off the busiest day of earnings news this reporting season.
In general, we are seeing some catchup from the more economically sensitive sectors, which have not performed as well as the technology stocks year to date. Growing sentiment that the U.S. economy will avoid falling into a recession this year is powering the recent move higher. Many of these stocks fall in the value category, as they are trading at more reasonable price-to-earnings multiples than some of the high-flying technology names, and that is now bringing the bargain hunters to the table. Given the impact earnings news is having on the performance of individual companies, like we saw yesterday afternoon from Meta Platforms, we continue to recommend investors hold a well-diversified portfolio of high-quality companies that have demonstrated a history of generating steady earnings and cash flows. – William G. Ferguson
At the time of this article’s writing, the author had a positions in several of the companies mentioned.
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