Markets face what could be the most important week of the summer with the Fed, earnings and economic data
Traders work on the floor of the New York Stock Exchange (NYSE) on June 10, 2022 in New York City.
Spencer Platt | Getty Images
There is a dizzying amount of news for the markets in the coming week, the most important of which will be the Federal Reserve’s midweek meeting.
The two largest US companies – Microsoft and Apple – report on Tuesday and Thursday, respectively. Alphabet, parent of Google, reports results on Tuesday, and Amazon reports on Thursday. Meta Platforms, formerly Facebook, reported Wednesday. In total, more than a third of S&P 500 companies publish reports.
On top of that, several voluminous economic reports are expected to fuel the debate over whether the economy is heading towards or already in a recession.
“I think next week will be the most important week of the summer between economic reports coming out, in terms of GDP, the employment cost index and the Fed meeting – and the 175 companies of the S&P 500 reporting earnings,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management.
Second-quarter gross domestic product is due Thursday. The Fed’s favorite personal consumption expenditure inflation data is out Friday morning, as is the employment cost index. Home prices and new home sales are released on Tuesday, and consumer sentiment is released on Friday.
“I think what these big companies are saying about the outlook will be more important than the earnings they are posting…When you combine that with the statistical reports, which will be looking back, I think it’s going to be a volatile and important week, “said Grohowski.
The build-up to the July 26-27 Fed meeting has already proved dramatic, with traders at one point convinced that a full rate hike was imminent. But Fed officials have pushed back on that view, and economists are widely expecting another three-quarter point hike, on top of a similar rise in June.
“Obviously a 75 basis point hike is in the cake for next week,” Grohowski said. “I think the question is what will happen in September. If the Fed continues to be too tight for too long, we will have to increase our probability of a recession which currently stands at 60% over the next 12 months. “
The Fed’s rate hike is the most aggressive in decades, and the July meeting comes as investors grapple with whether the central bank’s tighter policies have already triggered or will trigger a recession. This makes the economic reports for the coming week all the more important.
Topping the list is second-quarter GDP, which many forecasters expect to be negative. A contraction would be the second in a row on top of the 1.6% drop in gross domestic product in the first quarter. Two consecutive negative quarters, confirming the drop in other data, are considered a sign of a recession.
The much watched Atlanta Fed GDP Now followed by a 1.6% decline for the second quarter. According to Dow Jones, a consensus forecast by economists is for an increase of 0.3%.
“Who knows? We could have a brutal recession with the next GDP report. There’s a 50/50 chance the GDP report will be negative,” Grohowski said. “That’s the simple definition of two bottom quarterbacks in a row.” He added, however, that this would not mean that an official recession would be declared by the National Bureau of Economic Research, which takes into account a number of factors.
Diane Swonk, chief economist at KPMG, expects a drop of 1.9%, but she said it was not yet a recession as unemployment is also expected to rise, to 0, 5%.
“It’s two negative quarters in a row, and a lot of people are going to say ‘recession, recession, recession,’ but it’s not a recession yet,” she said. “Consumption slowed down a bit in the quarter. Trade remains a huge issue and inventories have been depleted rather than built up. Interestingly, these inventories have been depleted without much discount. I suspect stocks were ordered at even higher prices.”
Last week’s stocks were higher. The S&P 500 ended the week with a 2.6% gain and the Nasdaq rose 3.3% as earnings boosted sentiment.
“We’re really shifting gears in terms of what’s going to be important next week versus this week,” said Art Hogan, chief market strategist at National Securities. “We’ve really had economic data that has been largely ignored. Next week, that will likely equal the attention we’re giving to surnames that pay off.”
Earnings better than expected?
Companies continued to surprise on the upside last week, with S&P 500 earnings 75.5% better than expected, according to I/B/E/S data from Refinitiv. What’s even more impressive is that the earnings growth rate for the second quarter continued to rise.
On Friday morning, S&P 500 earnings are expected to rise 6.2%, based on actual reports and estimates, from 5.6% the previous week.
“We’ve got kind of a perfect storm of inputs, pretty in-depth economic reports across the board, with things that have become important, like consumer confidence and new home sales,” Hogan said. “For me, the real tell will be whether the attitude of investors continues to be that earnings season is better than they feared.”
As stocks gained last week, bond yields continued to slide as traders worried about the potential for a recession. The reference The 10-year Treasury yield fell to 2.76% on Friday, after weaker PMI indices in Europe and the United States sent a chilling warning about the economy. Yields move opposite the price.
“I think the market is pivoting,” Grohowski said. “I think our concerns at least are rapidly shifting from lingering inflation to concerns about recession.”
The potential for volatility is high as markets focus on the Fed, earnings and recession concerns. Fed Chairman Jerome Powell could also create waves, if he is more hawkish than expected.
“There are a lot of signs of slowing economic growth that will bring inflation down. Let’s hope the Fed doesn’t stay too tight for too long,” Grohowski said. “The risk of a policy error from the Fed continues to rise as we continue to see signs of a rapid cooling – not just a cooling – in the economy.”
Calendar for the coming week
Earnings: Newmont Goldcorp, Squarespace, Whirlpool, NXP Semiconductor, TrueBlue, F5
Earnings: Microsoft, Alphabet, Coca-Cola, McDonald’s, General Motors, 3M, UPS, PulteGroup, Raytheon Technologies, Texas Instruments, Archer-Daniels-Midland, Chubb, Chipotle Mexican Grill, Mondelez International, Canadian National Railway, Pentair, LVMH, Paccar , Kimberly-Clark, Albertsons, General Electric, Ameriprise, Teradyne, Ashland, Boston Properties, FirstEnergy, Visa
FOMC begins 2-day meeting
9:00 a.m. S&P/Case-Shiller home prices
9:00 a.m. FHFA Home Prices
10:00 a.m. Sales of new homes
10:00 a.m. Consumer confidence
Earnings: Boeing, Meta Platforms, Bristol-Myers Squibb, Ford, Etsy, Qualcomm, T-Mobile, Kraft Heinz, Norfolk Southern, Netgear, Cheesecake Factory, American Water Works, Ryder System, Genuine Parts, Waste Management, Hilton Worldwide, Boston Scientific, Owens Corning, Sherwin-Williams, Fortune Brands, Lam Research, Flex, Hess, Community Health Systems, Molina Healthcare
8:30 a.m. Durable goods
10:00 a.m. Door-to-door sales pending
2:00 p.m. FOMC statement
2:30 p.m. Press briefing by Fed Chairman Jerome Powell
Earnings: Apple, Amazon, Comcast, Intel, Merck, Pfizer, Honeywell, Mastercard, Northrop Grumman, Southwest Air, Harley-Davidson, Anheuser-Busch InBev, Diageo, Shell, Stanley Black and Decker, Carlyle Group, Southern Co, Lazard, Roku, International Paper, Sirius XM, Hershey, PG&E, ArcelorMittal, Keurig Dr. Pepper, Hertz Global, T.Rowe Price, Valero, Embraer, First Solar, Beazer Homes, Hartford Financial, Celanese, VF Corp, Eastman Chemical, Frontier Group
8:30 a.m. Initial Claims
8:30 a.m. Real GDP [Q2 advanced]
Earnings: AstraZeneca, Weyerhaeuser, Sony, BNP Paribas, Eni, Aon
8:30 a.m. Employment cost index
8:30 a.m. Personal income/expenses
8:30 a.m. PCE deflator
9:45 a.m. Chicago PMI
10:00 a.m. Consumer Sentiment