Data Disappointments: Q2 GDP Growth Softer Than Expected, While Jobless Claims Remain High

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

Earnings and the Fed have dominated the week up until now, but this morning data finds a spot in the sun. 

U.S. Q2 gross domestic product (GDP) and a fresh batch of initial jobless claims are front and center today, while Amazon AMZN earnings wait in the wings for after the close. 

Meanwhile, Facebook FB shares fell in overnight trading after the company said revenue growth will slow. This is worth putting into perspective, because comparisons to the year-earlier period start getting tough in coming quarters. As FB put it in their press release, the company is starting to “lap” periods of very strong growth. 

Getting back to the data, the government’s first look at Q2  GDP came in at 6.5%, which would probably have looked incredibly healthy at basically any other time in the last 30 years but sounds like a disappointment now. That’s because going into the report, analysts had expected an 8.5% gain, according to consensus gathered by research firm Briefing.com. The Q1 growth was 6.4%, so today’s data might feed into notions that maybe the economy is cresting. It is worth noting, though, that today’s GDP number means the economy is now larger than it was in pre-Covid days, a significant achievement.

Investors also got a look at the weekly initial jobless claims data, and it also isn’t likely to warm the hearts of economic bulls. For the second straight week, the headline figure hit 400,000, this time right on the nose. That’s down from a revised 424,000 the prior week but slightly above consensus expectations for 385,000. 

The major indices, which were mixed in pre-market trading as investors awaited the data, didn’t immediately make any large swings in the immediate aftermath of the numbers. One way the data could potentially support stocks is by suggesting the economy still needs help, meaning the Fed could be in less of a hurry to change accommodative policy. That would reaffirm some of what we heard yesterday after the Fed’s latest meeting. 

Fed Wraps Up An Uneventful Meeting

The Fed meeting conclusion yesterday was pretty uneventful as the central bank kept policy unchanged with rates still near zero and no updated timetable on slowing its $120 billion a month stimulus program. In general, it was kind of a summer “placeholder” meeting for the Fed, which also didn’t provide any updates in its economic forecast. 

Rising prices “largely reflect transitory factors,” the Fed said. Sounds familiar. The Fed sees improvement in the economy coming out of the pandemic, but says we’re not all the way back yet, especially in the sectors that suffered most. Also very much in line with its previous statements.

One interesting thing about Powell’s press conference yesterday was​​ how he made what sounded like a pretty definitive statement about the price environment. “We won’t have an extended period of high inflation,” Powell said. “Some will fall away as the process of reopening the economy moves through over time.” 

He said the near-term inflation risk is “to the upside” but has confidence that will be less of the case in the medium term. 

Tech Stocks Hit Speed Bump As Facebook Sees Slower Growth

After the Fed meeting yesterday, it felt like the stock market didn’t really know how to respond. The S&P 500 Index (SPX) initially slid, then popped higher, then finished almost unchanged. The Nasdaq Composite GIDS, which is where many of the big-Tech stocks live, went against the trend and finished moderately higher despite weak performances from its two biggest components, Apple AAPL and Microsoft MSFT.

Performance after hours was weak over at Facebook FB too, despite a great quarter for the company’s ad sales. That aspect of FB’s earnings was hardly a surprise considering we already saw Twitter TWTR and Alphabet GOOGL report huge internet ad gains in the quarter. 

What seemed to turn investors sour on FB’s earnings was the company’s forecast for revenue growth to slow in the second half. A lot of the mega-cap Tech stocks rolled up gains going into earnings and now are seeing the flipside after reporting. AAPL and MSFT were two examples and now we’re seeing it with FB, which had risen 22% over the last three months vs. 5% for the SPX.

More and more, investors seem to be looking ahead and worrying whether these big hitters in Tech may have already hit their grand slams and may have to settle for more singles and doubles in the near future. 

Next Up: Amazon Earnings Awaited After Close

The big story tonight is likely going to be earnings from Amazon AMZN, the final “FAANG” stock, and the last of the mega-cap Techs to report. 

With AMZN, there seems to be little doubt among analysts that the online shopping juggernaut will report solid earnings growth. However, the bar set in 2020 is high. Estimates for Q2 sales revenue growth are for at least 24%, according to Wall Street’s consensus views. Long tailwinds still blowing from last year’s pandemic-fueled shopping habits have not yet abated. But investors appear to be doubting that the pace can continue. 

However, AMZN might have something big in its favor. Cloud growth was quite strong for competitors Microsoft MSFT and Alphabet GOOGL in their respective quarters, and AMZN is the biggest player in that industry. Both MSFT and GOOGL reported better than 50% growth in their key cloud products, so today we’ll see if they’re starting to eat into AMZN’s market share there or if there’s a massive tailwind lifting up all the clouds, so to speak. 

Tough Road Ahead? Volatility Not Indicating Potholes

One thing you hear a lot around Wall Street lately is worried about a possible slowdown in earnings and economic growth in coming quarters. This, some say, is what might set the market up for a post-earnings season hangover. 

People who expect a slowdown certainly could be right—not many expect established companies like Apple AAPL and MSFT to improve their revenue growth from current impressive levels that had an assist from easy comparisons to a year earlier. However, volatility doesn’t appear to indicate any massive selloff ahead—in the near term anyway. The Cboe Volatility Index (VIX) flirted with 20 earlier this week but hasn’t really made a major effort to climb above it, and fell below 19 at times on Wednesday. As it stands, VIX doesn’t appear to indicate investors getting extremely nervous or cautious. 

Another thing you hear is that companies beating analysts’ earnings estimates aren’t getting huge rewards from the market, and that seems to be true. Of the three mega-cap Techs reporting huge earnings beats on Tuesday, only GOOGL shares really got major traction on Wall Street. Having said that, many market participants appear to be looking beyond what companies did in the prior quarter and more at margins and guidance. It’s those two factors that could possibly make or break many companies coming out of earnings.

CHART OF THE DAY: SMALL BOUNCE IN YIELDS. After hitting a low last week, which took the 10-year Treasury yield (TNX—candlestick) pretty close to its 50% Fibonacci retracement level (yellow horizontal line), TNX has bounced back a bit. It didn’t move much after the Fed’s decision to keep rates unchanged. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Price Check Awaited: This packed week just doesn’t pull any punches. Just when you thought most of the key earnings and data were done, tomorrow brings a key inflation number. The Personal Consumption Expenditures (PCE) prices, which the Fed says it watches closely, is due before Friday’s open. The Fed has been talking about how elevated inflation levels should ease in the coming months, but PCE prices are expected to have grown in June. Analysts expect a 0.6% rise, vs. 0.5% the prior month, according to research firm Briefing.com. Some inflation metrics seem to have leveled off lately, for instance, lumber and used car prices. On the other hand, companies reporting earnings cite pricing as an issue.

For instance, McDonald’s MCD said it raised prices for some of its menu items, which helped contribute to same-store sales growth in the last quarter. While some companies may have the elastic kind of demand where they can do that (MCD comes to mind), in other cases, it’s not necessarily so cut and dry. A company that feels it can’t pass along higher prices might see an impact on margin, and possibly on earnings. Supply shortages, like the semiconductor chip one that AAPL cited in its earnings, call this week, also could be contributing to price growth.

Capitol Dome: We talked earlier this week about how action on Capitol Hill might help determine direction. The debt ceiling question still hangs over Wall Street and potentially could provide pressure on stocks and a flight into fixed income if it isn’t resolved soon. At least that’s what happened the last time there was a debt ceiling crisis, though the past isn’t precedent. Another issue on the Hill appears to be getting some traction with Wednesday morning’s announcement that the two sides are getting closer on a $1 trillion infrastructure bill. Both Industrials and Materials—two sectors that could possibly benefit from big government spending on roads and bridges—were moving higher shortly after the headlines hit.

Trend-Setters? As the market approached “mega-cap” Tech earnings this week, one thing that seemed possible was that these heavyweight companies might be able to drag major indices one way or another depending on the results. That didn’t appear to be the case too much on Wednesday after AAPL, MSFT, and GOOGL reported the previous afternoon, but their failure to set the overall direction might be easily explained. First of all, the response to their earnings was all over the map, with MSFT roughly flat, GOOGL higher, and AAPL lower. So with little sense of direction from the mega-caps themselves, the market didn’t really respond one way or the other. Also, the Fed meeting being ahead Wednesday might have made for a tight trading range, which is what we typically see on “Fed days.”

There’s still a chance for mega-caps to set the direction with their heavy influence on the major indices as the market reacts to Wednesday’s earnings from FB and this afternoon’s results from AMZN. So perhaps check which direction those two go off in to get a sense of where the broader market might head over the next day or two.

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

Image by Gerd Altmann from Pixabay

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.