Fed’s Jackson Hole event in August could provide clues into the late-2023 rate policy.
Apple, Nvidia among major companies reporting in August, but is the tech rally fading?
Rising yields, crude prices, and changing market leadership could pressure the SPX in August.
The heat dome that’s settled over much of the country this summer might have you wishing for a trip to the mountains, and that’s exactly what the Federal Reserve gets in August at its approaching Jackson Hole symposium.
However, just the words “Jackson Hole” might trigger an investor flashback to last year’s affair, when Fed Chairman Jerome Powell’s hawkish comments scotched a much-needed market rally. It’s not clear yet if he’ll arrive in Wyoming feeling any differently on August 24, but earnings and data between now and then could provide clues.
Until late July, Wall Street had been on a roll, partially on hopes the Fed might be near the end of its 16-month rate hike cycle that’s raised the target range for interest rates by 500 basis points. Stocks recently hit 15-month highs as U.S. inflation eased and job gains appeared to slow, but the Fed still raised rates 25 basis points at its July 26 meeting. Chances of a follow-up hike in September started to heat up a bit in the futures market.
August puts the focus firmly on the Fed and includes earnings from corporate bellwethers, including Apple (AAPL), Nvidia (NVDA), and Berkshire Hathaway (BRK.A). August is also the first full month of trading following the recent special rebalancing of the Nasdaq-100® Index (NDX), which Nasdaq engineered to reduce the impact on the index from its largest components including AAPL and NVDA. Some analysts expect this to put pressure on mega-caps as mutual funds ease exposure to those stocks to match the updated index weighting.
Cooler breeze in Wyoming this time?
The Fed’s Jackson Hole Symposium runs from August 24 – 26 and is titled “Structural Shifts in the Global Economy.” Each year, Powell makes a speech in Jackson Hole, and investors tend to parse words for clues about future policy and economic metrics. Last year, Powell used the speech to warn that the fight against inflation would bring “some pain.” And it did; the Fed launched a series of 75-basis-point rate hikes that sent Wall Street running for cover.
In mid-August last year, the S&P 500® index (SPX) closed at a summer peak just above 4,300 before Powell spoke, then cratered to 3,577 by mid-October. That was the lowest it got last year before rebounding 27% by mid-July.
Bad memories aside, one could argue things are very different now, and there’s no need for fire and brimstone from Powell. Inflation in June—the last reading available—fell to its lowest level in more than two years, though it remains well above the Fed’s 2% target. And the Fed’s current target interest rate range of 5.25% to 5% following the July 26 hike puts rates within one 25-basis-point increase of where the Fed said in June they’d peak this year. Many analysts believe the Fed ultimately won’t raise rates any further than it is now despite that projection from June. All this helps explain why investors became much more bullish about stocks in June and July.
August could tell a different story—or not—depending on company reporting and key data like the August 4 Nonfarm Payrolls report for July. The Fed remains concerned about a labor market that’s still hot and drove wages up more than 4% in June from a year earlier.
Inflation, jobs data key in August
It’s hard to slow inflation when companies face pressure to raise wages. That often means businesses choosing between raising prices to cover the rising cost of labor or taking a punishment on profit. What the Fed wants to prevent is a so-called “wage-price spiral” where higher wages lead to higher prices, which lead to higher wages, and so on.
Slowing jobs growth would likely help prevent that, but until June of this year, each monthly payrolls report came in much higher than analysts expected. The main reason for that is a “services” sector—hotels, restaurant meals, plane tickets—which remains strong as consumers keep spending amid low unemployment.
June jobs growth cooled to just 209,000, and there were downward revisions to the prior two reports. A repeat on August 4 would possibly ease rate and inflation fears, which remain on investors’ minds judging from recent strength in Treasury note yields.
The July Consumer Price Index (CPI) data the week of August 11 is another huge report to watch after total CPI tumbled to just 3% in June. Even the more closely watched core CPI reading, which subtracts volatile food and energy prices, dropped from 5.3% in May to a lower-than-expected 4.8% in June.
However, investors should keep the July CPI report in context, especially its year-over-year data. June’s report had an easy comparison against a very hot report the previous year. That’s not the case in July and may mean a more substantial increase in annual growth. The month-to-month numbers may be more useful as a gauge of how well the Fed’s inflation battle is going.
Another economic gauge in August is company results. Earnings season got off to a fair start, although analysts expect a 9% decline in year-over-year S&P 500 earnings per share, according to FactSet. About 75% of S&P 500 companies beat Wall Street’s estimates in the first two weeks of earnings season, near the 74% 10-year average.
PLAYING CATCH-UP: After lagging the S&P 500 index (SPX—candlesticks) for months, the Dow Jones Industrial Average® ($DJI—purple line) has advanced more quickly in the last few weeks as a rally once focused mainly on heavyweight tech broadened to embrace industrials and financial stocks better represented in the $DJI. Data source: S&P Dow Jones Indices. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Tech titans step to the plate
Apple hit $3 trillion in market capitalization in July for the first time since early 2022 and is expected to report on Thursday, August 3. Expectations might be elevated considering how far the stock has come this year. Many high-flying stocks have seen their values clipped after reporting as “buy the rumor, sell the fact” sentiment picks up on Wall Street.
Last time out, AAPL beat Wall Street’s expectations, driven by solid iPhone sales. At the same time, Mac, Services, and iPad revenue failed to meet analysts’ forecasts. That means those products could come under scrutiny when AAPL reports in early August—especially services, which generate so much profit. The question is whether AAPL is increasingly dependent on iPhone to keep earnings from slipping.
On the product side, investors might be on the lookout for updates on AAPL’s recently introduced Vision Pro headset and 15-inch MacBook Air laptop. Also, look out for potential updates on the iPhone 15, which according to Barron’s is expected to launch sometime in September. Anything the company says about artificial intelligence (AI) might get noticed too.
Nvidia is another trillion-dollar market-cap tech company reporting in August, and its earnings will be under a microscope after the semiconductor firm shocked Wall Street with its prodigious guidance. Though shares pulled back a bit recently, NVDA is one of the top performers so far this year with gains well above 100%, and its coming earnings might show if NVDA was able to pull off revenue feats it promised last time out. NVDA is scheduled to report after the close on August 23.
As you’ll recall, NVDA said in its last earnings release that it expects fiscal 2024 Q2 revenue of $11 billion, up from $7.19 billion in fiscal Q1. “The computer industry is going through two simultaneous transitions—accelerated computing and generative AI,” said Jensen Huang, founder and CEO of NVDA, in its Q1 press release. “A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service, and business process.”
NVDA and other semiconductor shares fell in late July after Taiwan Semiconductor Manufacturing (TSM) issued weak guidance amid softer demand for electronic devices. Some analysts say Nvidia might be less exposed to overall chip market weakness because of the strength in AI, where Nvidia has strong market share.
Market leadership changing
In late July, the SPX slowed from steep climbs earlier this summer. 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 where info tech shouldered most of the load. The question is whether this pattern continues once August begins.
Retreats in trillion-dollar names like AAPL, Microsoft (MSFT), and NVDA coincided with improved performance for sectors like financials, industrials, and energy, many of which struggled earlier this year. One problem with this scenario is it could mean less upside for the SPX because its performance depends heavily on mega-caps. Other sectors would need to rise an enormous amount, Barron’s noted, to move the index up meaningfully in the second half if tech takes a powder.
Yields, oil could squeeze
Two other things to watch in August that raised eyebrows in July are Treasury note yields and crude oil (/CL).
Treasury yields retreated in mid-July from above 4% for the 10-year Treasury yield (TNX) early that month but remained at an uncomfortable high above 3.8%. High yields can sometimes act as a brake on stocks, especially small-cap stocks and growth firms that rely more on borrowing to grow their business.
And the inversion between the 10-year Treasury note yield and the 2-year Treasury note yield stayed steeply elevated at above 100 basis points. This inversion, now in its second year, typically means investors are taking a defensive stance ahead of possible economic stress.
So far this earnings season, executives and some analysts sounded relatively sanguine about possible recession, but a series of soft data in mid-to-late July increased worries. U.S. housing, retail sales, and manufacturing showed signs of weakness and so did earnings from major companies like American Express (AXP) and CSX (CSX). Meanwhile, rising near-term Treasury yields put pressure on growth sector stocks, which tend to rely more on borrowing to grow their businesses.
Additionally, China—sometimes thought of as the world’s “factory”—saw lighter-than-expected Q2 Gross Domestic Product (GDP) growth, a sign to some economists that U.S. and European companies may be hit by falling demand for their products.
Weakness in China might normally mean a drop in crude oil prices, but instead, /CL is up about 10% from recent lows as OPEC’s production cuts finally seem to be filtering through the supply chain. Any further rise could take some sizzle out of the U.S. economy and stock market as the calendar ticks toward back-to-school season and the Fed heads out West.
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