A Pivot from Earnings to Economics, from Inflation to Employment

Corporate earnings are strong, appear to be robust for the year, and are forecasted to be even higher next year.  Earnings eventually manifest themselves in stock prices.  As the Second Quarter Earnings Season winds down, the focus now turns to macroeconomics and more specifically, actions to be taken by the Federal Reserve.    

From Powell’s Jackson Hole speech, the release of minutes from the most recent FOMC meeting, and the US Labor Department’s showing significantly fewer jobs created than initially reported, the Fed’s focus seems to be shifting toward promoting full employment over fighting inflation.  As a result, it seems rate cuts are on the horizon.

Details - Important Data and Dates

Wednesday, 8/21/24, Minutes from the July 31 FOMC meeting were released.  Two days before the ugly employment report on the first Friday of August, the FOMC met.  Minutes from the meeting read that “A majority of participants remarked that the risks to the employment goal had increased, and many participants noted that the risks to the inflation goal had decreased.”  Fed- speak for unemployment is beginning to tick up, while inflation is getting closer to the Fed’s goal of 2%.

Wednesday, 8/21/24, The US Labor Department announced that the number of jobs believed to be created between April 2023 and March 2024 might have been lower than initially thought by some 818,000.  This was the preliminary revision which will be recalculated and announced again this coming February.  This represents approximately 28% fewer jobs created than initially announced.  Economists point out that the next calculation could negate some of the shortfall. Regardless, it appears the job market has not been as robust as initially thought.   

Friday, 8/23/2024, After its first hike of this cycle in March 2022, and months of subsequent higher rates, Chairman Powell acknowledged that “the time has come for policy to adjust.  The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risk.”   This is Fed-speak for its time to start easing rates.

Wednesday, 8/28/24 Nvidia is scheduled to report corporate earnings.  Artificial intelligence has driven much of the earnings growth in the markets.  Nvidia is the poster child for AI.  This report will offer guidance as to the health of AI spending and advancement.  This release has the potential to move the entire market.

Friday, 8/30/24 PCE – Personal Consumption Expenditures Price Index the Fed’s preferred measurement of inflation is to be released.  This will offer an insight as to the Fed’s ability to ease rates, and by what degree.

9/6/24 Non-Farm Payroll Numbers and Unemployment.  Will this report show last month’s weaker data as an anomaly, or the beginning of a new trend?  This too will likely influence the Fed’s magnitude of, and potential frequency of, upcoming interest rate cuts.

9/11/24 CPI – Consumer Price Index.  Although the Fed might not place as much significance on this report, investors do.  This data is to be released one week prior to the Fed’s scheduled interest rate decision.

9/18/24 FOMC Meeting, Press Conference, and SEP – Summary of Economic Projections.  Many, if not most economists, believe this will be the day the Fed begins to change policy by lowering interest rates.  The SEP is released quarterly and shows the then current viewpoints of members of the FOMC – specifically interest rate forecasts, employment projections, and GDP outlook.

Other Potentially Impactful Issues to the Economy and / or Markets:

• Geopolitics
  • Middle east tensions and potential escalation
  • Russia / Ukraine
  • China /Taiwan

• Domestic Politics
  • A divided government or winner takes all.
  • Clear outcome or ongoing uncertainties.
  • Fiscal Policy

• Energy Prices  
• Mpox / West Nile / Covid
• Valuation of the US Dollar vis-à-vis Other Currencies
• GDP – strengthening or weakening
• Sovereign Debt Levels
• Tariffs and/or Changes in Tax Policy
• Seasonality of Returns – September is known to be the worst performing month of the year in the equity markets, although there are exceptions to the rule.  Presidential election cycles, etc…

Although Many Moving Parts, Corporate Earnings Remain Strong

There are clearly many moving parts.  Much of the above data will be in focus at least until mid-October when Q3 earnings reports begin to be issued.

So, we end where we began and that is with the foundation of fundamentals – corporate earnings.  Fortunately, for long equity investors, corporate earnings are strong, appear robust for the year, and are forecasted to be even higher next year.  Earnings eventually manifest themselves in stock prices.  For these reasons we remain encouraged for investors with a longer-term time horizon.