Monday’s Light Calendar Belies Major Week Ahead Including Fed, Earnings Parade

Earnings kick off in a big way with Microsoft (NASDAQ:) tomorrow afternoon. Other major companies reporting later this week include Meta Platforms (META) and Alphabet (NASDAQ:), along with a host of energy, pharmaceutical, and industrials firms. Almost 20% of earnings season was complete as of Friday’s close, with 79% of S&P 500 companies beating Wall Street’s earnings expectations. About 61% surpassed revenue expectations, FactSet says, which is light historically.

Analysts now have lower average expectations for EPS this quarter of -9%, according to FactSet. That’s down from -7% before quarterly reporting began. Profit margins reported so far are trending weaker versus last quarter.

From a growth standpoint, Q2 earnings are +5.1% year-over-year so far, versus an estimate of -6.8% when the quarter ended. Q2 revenues are +9.4% year-over-year so far, versus an estimate of -0.4% when the quarter ended. Year-over-year, earnings are looking much better than expected, but it’s still early.

Morning rush

• The (TNX) dropped 4 basis points to 3.79%.
• The ($DXY) climbed to 101.2, near a two-week high.
• Cboe Volatility Index® () futures traded at 14.24, up from below 14 on Friday.
• WTI (/CL) jumped to $77.55 per barrel—the highest since April, and crossed above its 200-day moving average near $77.20.

Crude (/CL) is getting traction from OPECs’ supply cuts and the hopes that China could add stimulus to its sputtering economy. Crude strength might underpin energy stocks, but it could be a speed bump for transportation-related companies like airlines, railroads, and trucking firms.

Stocks in Spotlight

Earnings this week are broad-based, including consumer firms like McDonald’s (MCD) and Coca-Cola (NYSE:), chip firms, and the tech and communications services firms already mentioned.

Microsoft/McDonald’s Boosted: Wall Street firms lifted their targets recently for two heavyweights reporting this week.

Goldman Sachs (NYSE:) raised its target price for Microsoft (MSFT) based in part on a positive revenue outlook for Microsoft’s CoPilot digital assistant product. This artificial intelligence tool is still in preview, with Goldman expecting launch in Microsoft’s mid-to-late fiscal 2024. CoPilot adds to Goldman Sachs’ conviction that Microsoft’s Cloud, which also includes Azure and Office, can continue to grow at a rate of 20% or more annually over the coming years. Microsoft is scheduled to report fiscal Q4 2023 earnings after the close Tuesday, and Goldman Sachs sees Azure revenue rising 27%.

Also, BTIG Research raised its target for McDonald’s ahead of the fast-food giant’s Q2 earnings this Thursday, saying checks of franchisees highlighted continued sales momentum, strong digital sales, and lackluster competition. The firm also says easing pressure on commodities and labor prices may drive improved profitability.

Eye on the Fed

Futures trading indicates a nearly 100% probability that the Federal Open Market Committee (FOMC) will raise interest rates by 25 basis points at its meeting next week, according to the CME FedWatch Tool. A quarter-point hike “may be the last of this tightening cycle,” says Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research.

More eyes are turning toward September’s FOMC meeting. As of Friday, the futures market priced in odds of a follow-up hike at 16%, down from 27% earlier this month. The probability crept up a bit Thursday after a surprisingly low weekly Initial Jobless Claims report that suggested the labor market remains robust.

Another thing to monitor when the Fed announces its decision Wednesday afternoon is its statement. The wording might not change much from June, leaving the door open to another 25 basis-point hike this year that would bring the Fed’s target range to its terminal, or peak, projection of between 5.5% and 5.75%. It’s now 5% to 5.25%.

The European Central Bank (ECB) and Bank of Japan (BOJ) also meet this week. The ECB is expected to raise rates, but the BOJ is expected to keep policy unchanged.

What to Watch

Trading was choppy Friday as portfolio managers recalibrated their funds to account for an unusual Nasdaq-100 (NDX) rebalance taking effect today. There’s been a bit of volatility related to the rebalancing, which was designed to lessen the dominance of the handful of mega-cap companies in the index.

Technically, the bulls are still in control, but there may be some consolidation developing, says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. He points out that the Relative Strength Index (RSI) for the SPX is at highs only seen three times in the last two years, all of which were followed by weakness.

At the same time, he adds, there’s some sector rotation taking place as investors add exposure to defensive areas like health care and consumer staples.

Data parade: Economic reports accelerate after a light calendar last week. Key headlines to watch include The Conference Board’s Consumer Confidence reading on Tuesday, 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.

Consumer Confidence for July, due out tomorrow after the open, has big shoes to fill after June’s eye-popping leap to 109.7. That was above analysts’ expectations and up from 102.5 in May. An improvement in the Expectations category to 79.3 was another positive, but readings below 80 are associated with recession, Briefing.com warns. Consensus for tomorrow’s headline is 111.5, according to Trading Economics.

CHART OF THE DAY: WIN-WIN: The Dow Jones Industrial Average ($DJI—candlesticks) is on a 10-day winning streak, its longest since August 2017. It’s been bolstered by the banking sector (IXM—purple line), which was on a win streak of its own before losing ground Friday. Data source: S&P Dow Jones Indices. 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

Labor and delivery: The countdown is underway toward the deadline for a possible strike at United Parcel Service (NYSE:). The union and company have until August 1—a week from tomorrow—to prevent 340,000 employees from walking off the job and tangling up package delivery across the country. Though many companies have reportedly made plans for getting around potential delays or interruptions, others may not be ready, and extra volume might test competing carriers like FedEx (NYSE:). UPS accounts for about a quarter of the 59 million packages delivered in the United States each day, divided about 50/50 between businesses and homes, according to the Washington Post. Interruption of UPS service could put supply chains back into jeopardy and perhaps trigger higher prices in a worst-case scenario—not a bullish playbook for Wall Street. The market might react to headlines on the situation this week, so stay tuned.

More to the picture: Anyone watching the SPX last week probably noticed the pace slowed from the steep climb of June and early July. That’s not necessarily a sign of weakness. The mega-cap heavyweights that make up about 30% of the SPX by market capitalization began to pull back after their long ascent, while smaller stocks in the index rose. Those smaller stocks don’t have as large an impact on the overall index, but their rebound reflects a broadening of the rally. That could be a healthy sign after many months during which info tech shouldered most of the load. Retreats in trillion-dollar names like Apple (NASDAQ:), Microsoft (MSFT) and Nvidia (NASDAQ:) late last week coincided with improved performance for sectors like financials, industrials, and energy, many of which struggled earlier this year. The wider rally was reflected in both the Dow Jones Industrial Average ($DJI)­—which recently enjoyed its longest win streak since 2017—and in the (RUT) small-cap index. Both have heavy exposure to banks, and regional bank stocks have rallied recently.