U.S. stock market indexes were already digesting cooler inflation data as last week began, and rate cut probabilities grew as evidence of a potential cooling of the economy started to show.
Tallying last week, the S&P 500 declined by 1.97%, the Nasdaq 100 fell by 3.98%, and the Dow Jones Industrial Average ended the week higher by 0.72%.
U.S Stocks & Major Earnings
Stocks traded lower overall in a mostly orderly fashion last week, with added tensions stemming from the attempted assassination of former president Donald Trump and uncertainty surrounding Joe Biden’s reelection campaign.
As earnings season began, many looked to blue-chip stocks to potentially minimize volatility, and the strength was evident in the Dow’s outperformance last week.
Earnings pick up steam this week, as we get Tesla, Alphabet, ServiceNow, and GE Aerospace results, among others.
As of last Friday’s market close, 14% of the companies in the S&P 500 have reported their actual results for Q2 2024. Out of these companies, 80% have reported actual earnings per share (EPS) above estimates. This percentage is higher than the 5-year average of 77% and the 10-year average of 74%.
Crowdstrike Outage Friday
Major data systems provider CrowdStrike Holdings suffered a major outage on Friday, affecting industries from finance to travel and everything in between.
The outage primarily affected servers running Microsoft Windows operating systems. A morning software update caused the dreaded BSOD (Blue Screen of Death). Given that many companies use CrowdStrike for IT, the impact was pronounced and widespread.
Crowdstrike is advertised as being used by more than half of Fortune 500 companies.
At the close of last week’s trading, Crowsdtrike had shed 17.87%, while Microsoft had shed 3.62%.
Fed Rate Cut Probabilities
According to the CME FedWatch Tool, at the end of last week, there was only a 4.1% chance of a cut at the July 31st Fed meeting. Going out further in time, there was a 98.1% chance for a cut in September.
Slowing inflationary data helped to bring a rate cut right to the center of the table for September.
Retail Sales Flat in June
Amid many predictions of a slowing economy, June retail sales came in unchanged versus Bloomberg economist expectations for a 0.3% decline.
“This report shows that the consumer is holding in there well and maybe is not spending at the heady pace that we saw in the second half of last year but is certainly not falling off a cliff,” Citi senior global economist Robert Sockin told Yahoo Finance. “And I think for the Fed, this will take some urgency off of easing rates, out of fears that the economy may be slowing down more sharply. So I think they’re going to still signal at the July meeting a September cut is very likely, given progress on inflation.”
So, the consensus on the economy seems to be that it is cooling, yet growing.
Meat and Potatoes
It’s an election year. Election years have been known to feature narrative shifts and/or volatility.
Given the length of the inflationary cycle and “higher” interest rates, we could potentially be at an inflection point where economic expansion slows or stalls while the markets get the lower interest rates that they have wanted for so long.
But those who have thought in such a manner prematurely have missed out on broader equity index gains that have been impressive for the past couple of years.
While others panic, let’s be pragmatic. The S&P 500 is the broadest measure of the U.S. economy, and it was only down 1.97% last week after an attempted assassination of a former president. Then there were questions about President Biden dropping out of the race, which, of course, came to fruition on Sunday. That’s 2% on these events so far — not 5% or 10%.
The point is that the broadest measure of the U.S. economy has managed these events in an impressive and orderly fashion thus far. That said, these types of catalysts can potentially correlate to narrative shifts in financial markets.
This Week
We will see how the markets digest the news of President Biden dropping out as we begin the week. Then, attention will turn to Friday’s Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation. We will also get gross domestic product (GDP) data and continued corporate earnings results.
It has been a long time since a substantial pullback in the broader U.S. equity indexes. And so far, the S&P 500 has a total year-to-date return of around 16.30% at the time of writing, even after last week’s 2% selloff.
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