09/03/2024 Market Strategy
Where to from Here?
With a Robust Q2 Earnings Season in the Bag, Market Participants this Week Get a Look at Economic Activity in August
Key Takeaways
- With earnings season nearly wrapped up, investors will turn their attention to the first indicators of economic activity in August with the nonfarm payrolls and ISM surveys due this week.
- With 99% (or all but seven) of the firms in the S&P 500 index having reported, earnings are up a robust 11.4% from Q2:2023 on revenue growth of 5.2%.
- Nine of the 11 sectors showed positive earnings growth with five at double-digit rates. Just two sectors showed earnings declining from a year earlier.
The level where the S&P 500 starts this week from its record high and what a slew of economic data to be released this week is likely to mean for the Fed’s next rate decision on September 18 are likely to be of primary focus to traders and investors. With futures primarily favoring a 25 bps rate cut but with some concerned the first cut could be deeper, there’s likely some opportunity for the markets to revisit volatility in a month that is historically known to keep investors on their toes.
The S&P 500 begins the first week of the last month in the third quarter of this year just 0.33% or a little less than 19 points away from its record high of 5,667.20 reached on July 16.
With just seven S&P 500 companies left to report second quarter results this week in a better than expected earnings season market, participants are likely this week to hone in on the heavy tranche of economic data due this week that should provide forward-looking clues for greater clarity as to where monetary policy and the markets might be headed from here to the end of the year.
We expect data scheduled for release this week should shed considerable light on construction spending, manufacturing activity, job postings, mortgage applications, vehicle sales, job cuts, jobs added, unemployment, labor costs, productivity, services activity, payroll revisions and the labor force participation rate.
Notwithstanding the dramatic revisions to the nonfarm payroll numbers that markets digested remarkably well as August drew to a close there’s plenty for market participants to ponder over the course of the next four days in this holiday abridged week.
And of course there’s the added consideration for investors of the election that looms in the now “not too distant future” in which potential policy from either side of the political aisle tied to fiscal spending, taxation, energy, and defense--each potentially with ramifications for the economy and the markets--are likely to be parsed, pondered and reacted to by the markets.
The degree of uncertainty that all this presents provides in our view both risks and opportunities for investors that will require the courage of their convictions whether they are private or institutional investors.
The good news in our view is that the Federal Reserve has made it pretty clear that it now plans to begin cutting its benchmark rate sooner than expected perhaps as soon as the next FOMC meeting. September 18 is the date they’ll make their decision known.
This week the release of the initial jobless claims and continuing claims numbers on Thursday followed by Friday’s payroll numbers should provide preview to what the Fed’s decision will look like mid-month.
We are looking for a 25bps rate cut to be announced on September 18, potentially to be followed by cuts of 25 bps in November and December if needed.
We look for the Fed’s pivot in policy not to infer that a recession is likely but rather that the progress that has been made by the Fed to curb untoward levels of inflation thus far is enough to warrant a “down payment” or “good faith deposit” to calm nervousness about rate policy and recession risk worries that exist on Main Street and Wall Street.
In our view, highly sensitive action of the Fed in practicing its two fold mandate over the course of eleven rate hikes and nine pauses (skips) since March of 2022 along with: a wave of watershed quality innovation in technology that is likely to benefit all eleven sectors of the equity markets; resilience evidenced in S&P 500 earnings and revenue growth along with a resilient consumer suggest more good developments ahead for the economy and the markets--notwithstanding the inevitable uncertainty that comes with life as the world turns.
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