Weekly Market Preview: Rate Cut Hangs In the Balance As Second Quarter Earnings Season Arrives

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A strong U.S. economy and monetary easing from the Fed — is that too much to ask? That’s precisely what investors demand. But will the Fed oblige? Should they?

If gauging by the fed funds futures market, traders are betting on a 93% chance that the Fed will cut interest rates by a quarter-point when it meets later this month, according to the CME FedWatch tool. But Federal Reserve Chair Jerome Powell, who will speak to Congress this coming week, will have an opportunity to manage those expectations. And what he says (or don’t say) will impact how investors approach their strategies for the second quarter earnings season.

Meanwhile, the strong jobs report released Friday raises questions about the merits of any monetary easing, regardless of what the market has priced in. The U.S. labor market added 224,000 jobs in June, according to the Department of Labor on Friday, marking the best jobs growth of year to date. Notably, the number is an impressive recovery from the meager 72,000 jobs that was reported for May, which came in much fewer than the 172,000 jobs which has been the average so far in 2019.

On the flip side, economists are quick to point out that the 172,000 average falls well below the 223,000 per month average from 2018. So, given the blowout jobs report, what will the Fed do? As I mentioned in the opening, the strong jobs reports underscores the strength of the U.S. economy and serves as reinforcement that corporate growth is sustainable. The question is, for how long, given that global economy is not as strong, while concerns about trade still hangs in the balance? Thus, the idea of a so-called “insurance cut.”

With markets near all-time highs, investors demand the Fed to act in case data on the U.S. economy, which is a lagging indicator, takes a sudden turn for the worse. “These [payroll data] are good numbers, but a rate cut in July is still all but inevitable,” said Luke Bartholomew, investment strategist at Aberdeen Standard Investments, according to CNBC. Still, it would seem investors are less enthusiastic about what the Fed will do than prior to the jobs report.

Equities ended Friday’s session lower, pulling back from all-time highs hit earlier this week. The Dow Jones Industrial Average shed 41 points, or 0.2%, to end near 26,922.12, while the S&P 500 — snapping a five-day winning streak — ended down 0.2% to finish around 2,990.41. The tech-heavy Nasdaq Composite was down 0.1% to end around 8,161.79. For the week, the Dow was up 1.2%, S&P was up 1.7%, while the Nasdaq was the biggest gainer at 1.9%.

Second quarter earnings season will be in full swing in about a week. Investors will get a much clearer picture not only about the health of the U.S. economy, but also on any impact the trade war has had on revenue and profits. With earnings per share contracted during Q1, there is some concern that this will be the case in for the second quarter and likely the rest of the year. Thus, how corporations guide for Q3 and, possibly Q4, will dictate how much risk investors are willing to take, while giving the markets a better understanding of what is priced in and what isn’t.

For now, Powell’s semi-annual testimony to Congress this coming Tuesday, combined with the publication of the minutes of the June FOMC meeting which will be released on Wednesday will be the key market events to watch. As I said in a recent posts, the Fed’s job this week, among other things, is to balance its economic mandates with an awareness to not screw up the market. And to answer the question in the opening, yes, it’s a tall ask. Here are the stocks to keep an eye on this week.

PepsiCo (PEP) – Reports before the open, Tuesday, Jul. 9

Wall Street expects PepsiCo to deliver EPS of $1.60 per share on revenue of $16.42 billion. This compares to the year-ago quarter when earnings came to $1.61 per share on $16.09 billion in revenue.

What to watch: The company is adjusting to consumers’ need for healthier beverage choices with low salt, low sugar, and more natural ingredients. The stock, meanwhile, has exceeded all expectations and trade near 52-week highs, outperforming the struggling consumer packaged goods space. While the company has benefited from its Frito Lay businesses, investors are now paying 22 times forward earnings for the stock. Notably, this is even though expected revenue growth is a 4%, while earnings growth is expected at 7%. On Tuesday the company will need to both erase fears about its growth drivers and deliver the type of outlook that suggests investors’ confidence about the company’s competitive position is warranted.

Bed Bath & Beyond (BBBY) – Reports after the close, Wednesday, Jul. 10

Wall Street expects Bed Bath & Beyond to deliver EPS of 8 cents per share on revenue of $2.58 billion. This compares to the year-ago quarter when earnings came to 32 cents per share on $2.75 billion in revenue.

What to watch: Bed Bath & Beyond has seen its stock price fall more than 40% since reporting Q4 results for fiscal 2018. The market is pricing little-to-no growth at all. The company is trading at a forward PE of around 5, compared to a P/E of almost 11 prior to the announcement of its Q4 2018 results. In other words, the multiples have contracted amid lower same-store-sales and profit margins. Could this be a buying opportunity, particularly as activist investors have circled the company headquarters demanding change. The company is now focusing on product differentiation, front-end optimization and value propositions to drive its sales. Wednesday’s results will reveal how effective these initiatives have been and can be in the future.

Delta Airlines (DAL) – Reports before the open, Thursday, Jul. 11

Wall Street expects Delta to deliver EPS of $2.24 per share on revenue of $12.46 billion. This compares to the year-ago quarter when earnings came to $1.77 per share on $11.78 billion in revenue.

What to watch: Delta stock has been one of the better performers of the transporting sector, rising more than 10% in June. These gains have been driven by a combination of factors, namely increased investor confidence that the airliner was benefiting from strong consumer demand. This assumption proved correct as the company recently reported a 7% rise in May revenue per available seat mile. This suggests that the company is filling a higher percentage of its seats, compared to last year. Notably, that strong number comes even though the company grew capacity by just 5.3%. On Thursday investors will see just how correct they were when the company releases its quarterly results and guidance for the rest of the year.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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