Tech Sector Aims To Follow Monday's Bounce As Investors Mark Time Ahead Of Fed Chair's Friday Speech.

(Tuesday market open) U.S. stocks ended a four-day slide Monday with help from the technology sector, which seems poised to provide a further boost Tuesday, overshadowing mixed earnings from retailers Dick’s Sporting Goods DKS, Lowe’s LOW, and Macy’s M.

Futures based on the Nasdaq Composite® ($COMP) were up about 0.8% near the close of overnight trading in a continuation of Monday’s rebound, which followed three weeks of declines. Earnings remain on the market’s front burner for a couple more days as investors mark time ahead of the week’s marquee event: Federal Reserve Chairman Jerome Powell’s Friday address at the Jackson Hole Economic Policy Symposium.

Late Monday, Zoom Video Communications ZM shares rallied in after-hours trading after the company reported stronger-than-expected quarterly earnings. Zoom’s results bookended a day that began with a better-than-anticipated quarter from another tech company, cybersecurity provider Palo Alto Networks PANW. Shares of Palo Alto rallied nearly 15%, helping lift the tech-focused Nasdaq Composite 1.6% from its two-and-a-half-month low last week. Tech will remain on the market’s front burner for another couple days with Nvidia NVDA expected to report earnings Wednesday.

Earnings season otherwise is winding down and investors are gearing up for Powell’s speech while eyeing an ongoing climb in Treasury yields. The yield for the 10-year Treasury note reached a 16-year high on Monday around 4.35%. Continued upside could further pressure equities, particularly in the tech sector. Powell’s words are sure to be thoroughly dissected for indication on the Fed’s next moves. He likely will continue to emphasize the Fed’s laser-focus on taming inflation, even with the central bank’s benchmark funds rate already at the highest level in 22 years.

Morning rush

• The 10-year Treasury note yield (TNX) fell about 1 point to 4.334%
• The U.S. Dollar Index ($DXY) rose slightly to 103.409
• Cboe Volatility Index® (VIX) futures fell 0.50 to 17.5
• WTI Crude Oil futures (/CL) fell 8 cents to $80.04 per barrel.

Eye on the Fed

Investors continue to hold relatively high confidence the Fed will keep rates unchanged at its September policy meeting.

Beyond September, the outlook is less certain. If economic numbers remain robust, speculation is sure to grow that another Fed hike could be in the offing. Minutes released last week from the Fed’s July 25–26 policy meeting showed that central bank leaders remained concerned over inflation and a tight labor market. Inflation has steadily declined in recent months but remains above the Fed’s 2% long-term target.

Early Tuesday, odds that the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, will hold rates unchanged in September stood at nearly 87%, according to the CME FedWatch Tool. Expectations that rates would remain at the 5.25%–5.50% range after the FOMC meeting in November were about 54%, down from 61% a week ago.

Stocks in spotlight

Mixed retail: Earlier Tuesday, Home improvement retailer Lowe’s reported mixed second-quarter results. Earnings per share of $4.56 barely exceeded analysts’ expectations, while revenue of $24.96 billion fell short of forecasts. Lowe’s maintained its outlook for full-year sales.

Among other retailers, Dick’s Sporting Goods shares tumbled sharply after the reported earnings per share of $2.82, about $1 under expectations, and revenue also disappointed. Dick’s also lowered its full-year profit outlook. Macy’s fared better, with earnings per share and revenue that surpassed expectations; however, the company expressed caution over the outlook for consumer spending.

The Macy’s results are “emblematic” of issues facing many retailers, according to Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research. “They’re having to clear inventory via markdowns, which is pressuring margins,” he says. “Macy’s also maintained cautious guidance, which the market has been a major focus of the market recently.”

Tech boom: Zoom shares appear poised for a firm open after the company’s earnings and revenue for the previous quarter surpassed Wall Street expectations. Zoom posted $1.34 earnings per share, about 30 cents above forecasts, on $1.14 billion in revenue. However, Zoom’s guidance for the current quarter was slightly below expectations.

Nvidia’s results Wednesday are one of the most anticipated earnings of the week. The company was the top performer in the S&P 500® index (SPX) in the first half of the year, posting an advance of 179% amid escalating bullishness over artificial intelligence, and posted a sharp gain Monday behind some analyst upgrades.

“Like Monday, much of the tech sector optimism seems to be preemptive ahead of Nvidia earnings,” says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research. “If the bar gets set too high, it could lead to a disappointment.”

What to watch

The week’s relatively light economic calendar starts later this morning with the expected release of July Existing Home Sales. Analysts expect these to come in at an annual rate of 4.15 million, based on a Briefing.com consensus forecast—down slightly from 4.16 million in June. New home sales in July totaled 705,000, according to Briefing.com, which would be up from a seasonally adjusted annual rate of 697,000 in June.

Other economic data this week include New Home Sales on Wednesday, Durable Goods Orders from the Census Bureau on Thursday, and the August University of Michigan Consumer Sentiment numbers on Friday.

Thinking cap

Ideas to mull as you trade or invest

High-grade corporate debt holding up: Fitch Ratings’ unexpected downgrade to U.S. Treasuries rattled global markets earlier this month. Other segments of the debt market have experienced substantially less summer drama—corporate bonds in particular. For the previous three months, ratings upgrades in the investment-grade debt market have outpaced downgrades by a factor of about four to one, notes Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research, citing Moody’s. That’s a marked improvement from April, when upgrades and downgrades were running about 50-50 in the wake of the previous month’s banking turmoil that included the failure of Silicon Valley Bank and two other regional lenders. Riskier, high-yield corporate bonds have outperformed other classes of corporate debt so far this year. But the Fed’s tighter monetary policy poses an increasing obstacle, as higher borrowing costs eat into corporate profits. “We believe investment-grade rated issuers should be able to better navigate an environment of higher rates than high-yield issuers,” Collin says, noting that the average yield of the Bloomberg U.S. Corporate Bond Index is close to 5.5%.

Pay demands still high: The Fed’s string of rate hikes over the past 18 months appears to be slowing job growth to some extent. Americans’ expectations for what they get paid, by contrast, are going the opposite way. According to a Federal Reserve Bank of New York survey conducted in July, the average expected annual salary for job offers in the next four months jumped to $67,416, up 12% from $60,310 in July 2022 and a record for the survey, which started in 2014. “The increase was broad-based across age, education, and income groups, but was most pronounced for respondents above age 45 and for college graduates,” the bank said in a statement. The lowest wage that respondents said they would accept to take a new job also increased, to $78,645, up 8% from a year ago. The Fed’s rate hikes have been aimed in part at slowing wage growth in a tight labor market to tame inflation, but the survey results suggest the central bank still has work to do. 

Ka-ching for Tay-Tay: No rational economist would blame Taylor Swift for starting a recession. But there’s no doubt she’s an economic force, whether or not she shows up in GDP data. The pop star’s Eras Tour crisscrossed the U.S. since last spring, and with fans paying $250 or more for tickets and spending on t-shirts and other merchandise, Swift “has been credited with providing a measurable economic stimulus,” FactSet reports. Swift even caught the attention of central bankers, gaining a mention in the Fed’s July Beige Book economic summary for various U.S. cities. “Despite the slowing recovery in tourism in the region overall, one contact highlighted that May was the strongest month for hotel revenue in Philadelphia since the onset of the pandemic, in large part due to an influx of guests for the Taylor Swift concerts in the city,” the report said. Swift’s U.S. tour was expected to top $1 billion in revenue, The New York Times reported earlier in August. Swift’s last concert for the first U.S. leg of the tour was Aug. 9 in Los Angeles, and she’ll soon be taking her show to South America, Asia, Australia, and Europe before returning the U.S. in October 2024. How the U.S. weathers a Swift-less economy for the next year remains to be seen.

Calendar

Aug. 23: July New Home Sales, and expected earnings from Foot Locker (FL), Kohl’s (KSS), and Nvidia (NVDA)

Aug. 24: July Durable Orders and expected earnings from Dollar Tree (DLTR) and Gap (GPS)

Aug. 25: Fed Chair Powell speaks at Jackson Hole Summit, and Final August University of Michigan Consumer Sentiment

Aug. 29: June S&P Case-Schiller home price index and August Consumer Confidence Index

Aug. 30: August ADP employment and revised Q2 GDP

 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

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