Microsoft, Alphabet Earnings Loom as Fed Meets, Industrial Earnings Impress

Morning rush

• The 10-year Treasury note yield (TNX) ticked up 3 basis points to 3.89%.
• The ($DXY) rose slightly to 101.43 and is up each day over the last week.
• Cboe Volatility Index® () futures were steady at 14.01.
• WTI Crude Oil (/CL) is flat at $78.83 per barrel.

Stocks in Spotlight

Industrial might: Quarterly results this morning—dominated by industrials sector firms—generally exceeded Wall Street’s expectations. Some of the companies that beat the average analyst estimate on both top- and bottom-lines included Alaska Air (NYSE:), Dow (DOW), General Electric (NYSE:), General Motors (NYSE:), and Kimberly-Clark (NYSE:).

Verizon (NYSE:) surpassed Wall Street’s earnings per share (EPS) estimate but fell short on the revenue side. Still, the telecommunications stock rose in premarket trading in part thanks to solid broadband subscribership gains.

GM’s results easily beat Wall Street’s estimates and the company raised guidance for fiscal 2023. GM targets being able to build 1 million electric vehicles (EV) annually in North America by 2025.

3M (MMM) also beat estimates and raised guidance. Sales fell by 2.2%, but that was better than analysts’ estimates of a 4.5% decline.

Generally, the industrials sector—one of the better performers of the last month—posted solid earnings this morning. Forward earnings projections from the sector are also on a tear.

Microsoft on deck: Shares of Microsoft recently hit all-time highs but have since leveled off a bit. AI and the cloud likely are what investors want to hear about from the company when it reports today after the close.

While AI is the theme of the moment, it’s important not to underestimate the value of the company’s cloud business. Though Microsoft is second in this arena to Amazon (NASDAQ:), its latest results and forecast could provide a first read into overall corporate demand for information technology (IT).

The year began with widespread concerns about an IT spending dip, though the AI excitement helped tech companies forge huge market gains. Last week’s soft forecast by Taiwan Semiconductor Manufacturing (TSM) reignited those old worries about a slower global economy’s impact on IT spending. We may find out today whether Microsoft supports that thesis, as well. Meanwhile, Goldman Sachs (NYSE:) sees Microsoft’s Azure cloud revenue rising 27% year-over-year in the quarterly report today, which would be a solid performance.

Texas Instruments also reports this afternoon. In its last earnings call, the semiconductor and integrated circuit maker’s executives said they saw signs of demand improving.

Ads clouding Alphabet? Ad spending has been a weak spot for tech so far this year, and in Alphabet’s most recent quarterly earnings call, executives cited a “challenging” economic environment and an “uncertain” outlook. Revenue growth retreated to the low single-digits in recent quarters as advertisers pulled back. Alphabet announced the layoff of 12,000 employees earlier this year.

While the company’s Q1 results beat Wall Street’s expectations, its 3% revenue growth didn’t exactly knock the ball out of the park. Analysts expect Alphabet to report Google ad revenue of $57.45 billion in Q2, according to Bloomberg.

Eye on the Fed

Futures trading indicates a nearly 100% probability that the FOMC will raise interest rates by 25 basis points at the conclusion of tomorrow’s meeting, according to the CME FedWatch Tool.

The mystery isn’t so much what the Federal Reserve will do tomorrow, but what it might signal for the next meeting in September. The market enters today’s FOMC gathering with high expectations of a September pause, but it wouldn’t be surprising to hear a hawkish spin both in the committee’s post-meeting statement and during Fed Chairman Jerome Powell’s press conference.

“The Fed won’t be so quick to declare victory on inflation,” says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research. “Members of the FOMC had a chance to cheer the June Consumer Price Index (CPI) data, but the fact that some members reaffirmed their call for two more hikes means there isn’t widespread agreement that the inflation beast has been slain, and there will likely be more dispersion in members’ views moving forward.”

The European Central Bank (ECB) and Bank of Japan (BOJ) also meet this week. The ECB is seen raising rates by another quarter-point, according to a Reuters survey of analysts, but the BOJ is expected to keep policy unchanged.

What to Watch

Data on tap: Key headlines to watch include The Conference Board’s Consumer Confidence reading today, New Home Sales figures on Wednesday, Q2 Gross Domestic Product (GDP) estimate on Thursday, and Personal Consumption Expenditure (PCE) prices on Friday. PCE prices arguably outweigh the other numbers in terms of potential market impact because it’s the Fed’s preferred inflation meter.

Confidence vote: The Conference Board’s Consumer Confidence report for July, due out today after the open, has big shoes to fill after June’s eye-popping leap to 109.7. The Expectations category improved to 79.3 in June, but readings below 80 are associated with recession. Consensus for the headline is 111.5, according to Trading Economics.

Balance beam: Wall Street’s rally has widened recently, but investor sentiment has some “frothiness.” Read more about current market conditions in the latest post from Schwab’s Chief Investment Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon.

CHART OF THE DAY: CRUDE GUSHER? The 200-day moving average (blue line) has been a technical barrier for front-month futures (/CL—candlesticks) since last fall. An attempt to push above it failed in April, and futures fell to their 2023 low. They’ve since rebounded all the way to above the 200-day MA. Sometimes this can trigger technical buying. Data source: CME Group (NASDAQ:).

Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Barbenheimer Part Two? Hollywood cheered the $300 million opening weekend for the films Barbie and Oppenheimer—and so did Wall Street. Shares of Comcast (NASDAQ:) and Mattel (NASDAQ:) rallied Monday, though shares of Warner Bros. Discovery (NASDAQ:) fell after a big run so far this year. Analysts noted how neither blockbuster was a sequel, meaning audiences flocked to theaters to see something new and fresh. (Barbie’s story, to be fair, is nearly 65 years old in the toy market.) Before flashing that on the marquee, however, it’s worth noting that about half of the biggest-grossing movies so far this year were sequels, according to IMDB. Popular characters like Spider Man, the Little Mermaid, Creed, and Guardians of the Galaxy keep drawing crowds. The calendar shows the biggest movie makers sticking with this reliable format. Warner Bros.′ new Justice League entry opens today, for instance, as does Sony (NYSE:) Group’s (SONY) new Resident Evil film.

FOMC rear-view mirror: The Fed has seen inflation ease over the last few months. However, the labor market hasn’t slowed appreciably until recently, wage growth remains well above 4% annually, and core PCE prices stayed in a narrow annual range of 4.6% to 4.7% over the last several reports (the June update is due Friday). No one at the Fed likely wants to make the mistake the central bank made 40 years ago when it eased rates before inflation was in check. Inflation bounced back and the Fed had to reboot, triggering a recession that saw unemployment soar to nearly 11% by late 1982. Schwab Chief Fixed Income Strategist Kathy Jones says that with inflation still far above the Fed’s 2% target, the Fed will likely keep the option open for another rate hike.

Height or width? Another quarter-point rate increase probably won’t have a huge impact on the economy, but as one former Fed official told CNBC Monday, it’s how long rates remain high that ultimately matter most. The longer rates stay elevated, the more stress on many small businesses and the regional banks they depend on for financing. But the Fed seems committed to risking possible recession to slay the inflation demon. It’s questionable whether the Fed will have enough data by March to cut rates that soon, but that’s when the futures market dials in better than a 50% chance of the Fed’s first rate cut since 2020.

Calendar

July 26: FOMC rate decision, June New Home Sales, and expected earnings from AT&T (T), Boeing (NYSE:), Coca-Cola (NYSE:), Union Pacific (NYSE:), Chipotle (NYSE:), and Meta Platforms (META)

July 27: Q2 Gross Domestic Product (GDP) first estimate, June Pending Home Sales, June Durable Orders, and expected earnings from AbbVie (NYSE:), Baxter (NYSE:), Bristol-Myers (BMY), Honeywell (NASDAQ:), McDonald’s (MCD), Ford (F), and Roku (NASDAQ:)

July 28: June Personal Spending, June Personal Income, June PCE Prices, July University of Michigan Final Consumer Sentiment, and expected earnings from Colgate-Palmolive (NYSE:), Aon (NYSE:), Exxon-Mobil (XOM), and Procter & Gamble (PG)

July 31: July Chicago PMI and expected earnings from CNA Financial (CNA) and Tenet Healthcare (NYSE:)

Aug. 1: July ISM Manufacturing Index and June Job Openings, and expected earnings from Altria (NYSE:), Caterpillar (NYSE:), Illinois Tool (ITW), Advanced Micro Devices (NASDAQ:), Merck (MRK), Pfizer (NYSE:), Uber (NYSE:), Allstate (NYSE:), and Starbucks (NASDAQ:)

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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