For those of you who would prefer to listen:
This was another week of some serious Market-moving activity. We just knew it would be. On tap was a Fed meeting, a slew of earnings and more trade talks. The week would end with the July Jobs Report. There was a whole lot to chew on for investors, though many answers remain unknown. Volatility has definitely picked up, despite the S&P hitting new, all-time highs this week. But those gains turned to losses midday Thursday. They accelerated lower on Friday. This was no sleepy Summer session for investors. The reasons are many. Here’s another rapid rundown.
Let’s start with Earnings. More than anything else, it’s earnings that drive stock prices. This was the biggest week for Q2 Earnings Season. Roughly 40% of the S&P 500 Market cap reported results. The headliners were definitely the Tech Titans. This week brought Microsoft, Meta, Amazon and Apple. These 4 companies combine for over $11 Trillion in value. That’s 20% of the S&P 500 Market cap right there.
Microsoft
Microsoft reported a double-beat on an impressive 18% revenue growth. That’s the fastest sales have increased in 3 years. The strength came from Azure, its cloud business. Azure revenues grew a whopping 34%, reaching $75 Billion for the first time. AI is the theme, and Microsoft continues to be a leader in this revolution. “Cloud and AI is the driving force of business transformation across every industry and sector,” said Satya Nadella, Chairman and CEO of Microsoft. “We’re innovating across the tech stack to help customers adapt and grow in this new era”. This week, Microsoft joined Nvidia in the exclusive $4 Trillion club.
Meta
Meta reported a really strong quarter, handily beating expectations for revenue and earnings. What’s more, the company raised guidance for the rest of the year. Meta, the company formerly known as Facebook, has invested heavily in Artificial Intelligence, and the initial results have been promising. Advertising revenue at Facebook and Instagram continue to outpace expectations, a healthy sign for Corporate America. The company also raised its expectations for its investments in AI for the rest of the year which sent Tech stocks higher still.
Amazon
Expectations were high for Amazon. The company delivered a strong double-beat. But 13% revenue growth and 30% earnings growth wasn’t enough. It was a sell-the-news event. The biggest issue was the underwhelming Amazon Web Services (AWS) performance relative to Microsoft, Meta and Google. AWS saw much slower growth than Microsoft’s Azure and Google Cloud. Importantly, AWS accounts for half the company’s profitability. Retail business remains solid. Tariffs haven’t yet curbed customer spending. The Bull case believes AWS was supply constrained and is expected to ramp in H2. But Amazon’s sell-off put big pressure on Tech and the overall Market. A correction was due.
Apple
The iPhone maker’s earnings report was as informative on the trade war as it was on the company’s quarterly performance. Apple also reported a double-beat, which was stronger than even the most Bullish of estimates on the Street. The company recorded its largest revenue growth in over 3 years. That was back in December of 2021. iPhone sales jumped 13% in the June quarter. iPhones account for nearly half the company’s revenue. Mac sales were up 14%. Sales in China were strong too.
This has been a challenging environment for the Cupertino company. iPhones are caught directly in the middle of the trade war. Both Washington and Beijing have been using them as leverage. Apple has been forced to adjust its global supply chain, long a strength, into a potential liability. The White House is threatening 25% tariffs on foreign-made iPhones. To limit the damage, Apple shifted production of U.S.-bound iPhones to India. It isn’t enough. Trump wants them made in America, which realistically is not feasible. But reducing dependence on China is. Apple said that 25% of iPhones are scheduled to be made in India by 2027. But now there’s this: India might be getting slapped with 25% tariffs. The iPhone is caught in the crossfire. It’s expensive. Apple is expecting a $900 Million hit.
A 25% tariff on iPhones not made in the U.S. could add over $100 to the cost of each device. Making in the U.S. would cost much more considering labor, facilities and lack of skills. You can’t just flip a switch on that. I don’t see how costs for high-end devices don’t go higher unless there’s a complete reversal in trade policy. Of course there have been concessions made all the time. And countries keep cutting deals. Outside of the iPhone, today pretty much all iPads, Macs, watches and AirPods sold in America are made in Vietnam.
Apple’s biggest issue is its AI strategy. Siri was an early AI tool that has not seen much in the way of advancement. Apple’s ability to innovate is being questioned. The lack of clarity and seeming failure to participate in this AI revolution has held the stock back. There’s been rumors that Apple was considering an acquisition of Perplexity to advance its presence in large language models. CEO Tim Cook said they have been active in M&A and are open to bigger deals. A return to a growth mindset and a bold acquisition could definitely bring the Bulls back to Cupertino.
GDP
The U.S. Economy grew faster than expected during the second quarter, bouncing back from a trade-driven decline at the start of the year. Gross Domestic Product increased 3%. That was well ahead of the 2% estimate. Reduced tariff threats played a major role, as activity picked up in April and May after the White House pushed out the higher tax. The Street doesn’t anticipate this growth rate to continue. It’s believed to have been a temporary event. Consumer spending increased by just 1.4%. It’s been slowing. Nagging high prices are an issue.
The Consumer accounts for 70% of America’s economic activity. A slowdown will be a major drag. Outside of AI, it doesn’t seem like America’s Economy is growing much at all. The Stock Market definitely reflects that.
The Fed
The Federal Reserve kept interest rates in place. The overnight rate stays at the range of 4.25%-4.5%. That was no surprise. The Market was pricing in just a 3% probability of a rate cut before the meeting. But it hasn’t come without controversy. President Trump has been vocal, early and often, on his displeasure of the Fed Chair. He would like to see lower rates. That’s not unique to this President. Pretty much all Presidents have pushed the Fed in various degrees to encourage looser monetary policy. None have been as direct nor gaudy as President Trump.
It’s not just the White House who disagrees with the Fed Chair. There has been dissent within the central bank. Fed Governors Bowman and Waller had been calling for a July cut in recent weeks. That’s the way they voted this week, going against the Fed Chair’s recommendation. Both Fed Governors cited the weakening Labor Market as reason to cut. That was before the July Job report. The Fed Chair has made it clear he wants to see the tariff impacts on prices before making a move. Stable prices is one of the Fed mandates. Maximum employment is the other. Both are moving in opposite directions. It’s quite the conundrum.
This break within the Fed is no small deal. There had not been a two-dissent meeting since 1993. Fed independence is essential to our financial system. Powell has been far from perfect. He’s clearly on a hot seat. But the optics of firing a Fed Chair and replacing him with someone else who would be perceived to act beholden to the executive branch would present major problems. The Bond Market is not worried about that now. It would likely be the first to know. We study the Bond Market constantly for clues. We will never stop doing that.
Jobs
One has to think the Fed Chair had the benefit of the July Job Report prior to the Wednesday meeting. Just 73K jobs were created in July. The Street expected 110K. The big miss was a big deal. But it was the previous monthly revisions that were bigger. 147K jobs created initially reported in June was revised down to just 14K. A 90% revision? That gave pause. When you add in the May revisions, there was a total of 258K job contractions. The unemployment rate also ticked up to 4.2%. That’s still on the low side. But it’s all moving in the wrong direction. This drew the ire of the President who fired the Bureau Chief of Labor Statistics following the release. The Market flinched a bit on that news. Credibility in data is essential. Independence from politics is required. Politics have permeated pretty much everything. However, it’s important to remember there were some major revisions under Biden’s Tenure as well, the birth/death adjustment they are using clearly needs to be fixed.
An extended stretch of joblessness is on the rise. The unusually large negative payroll revisions amplify the sluggishness. The percent of unemployed that have been out of work for at least 6 months has climbed to 25%. The Market is now pricing in an 82% probability of a Fed rate cut in September. It was a mere 37% twenty-four hours prior. The weakening Job situation triggered that. The Bond Market has been active too, with yields all across the curve falling. That sent prices higher. It’s a message from the smartest of money that the Economy is slowing and the Fed is still behind the curve.
The Fed continues to find themselves in the pickle we’ve chronicled. The job market is weakening, but the jobless rate is still historically quite low. Add a stickier inflation backdrop and it’s why you can see Powell doesn’t want to cut just yet.
Jobs & AI
There’s growing fear that AI threatens American jobs. The debate should be more about how AI influences future work versus replacement. It’s safe to say, AI will have a profound impact on pretty much every job. But what I tell young people: Don’t worry about AI taking your job. Worry about someone that uses AI effectively taking your job.
That said, Microsoft just released a Top 40 list of jobs most and least threatened by AI. Translators are atop the threatened list. Historians are second. According to the study, the jobs most exposed involve “knowledge work”. That consists of people doing computer, math, or administrative work in an office. Sales jobs are also high on the list. Roles that involve sharing and explaining information can increasingly be replaced with AI.
On the flipside, jobs that seem least threatened by AI are high-skilled manual labor. Number one was Dredge Operators, followed by Water Treatment operators, Floor finishers, and Pile Driver operators. There’s a strong need for plumbers and electricians. Vocational work is in high demand and tends to pay well. The Microsoft study emphasizes the impact that AI will have in work getting done. It said it’s not specifically job replacement. But you get the idea.
Geopolitics & Trade
More trade deals were inked this week, while other talks keep getting extended. China remains at the top of the list for significance when it comes to economic activity and trade. This week, Washington further eased Tech export restrictions to China in a move seemingly to enhance getting a deal done. It’s been reported that both sides are aiming for Trump-Xi meeting in the Fall. That meeting will not happen without a deal in place.
China is an ally and large trading partner to Russia. India trades heavily with Moscow too. They are both big buyers of Russian Oil. President Trump threatened to impose 100% secondary tariffs on Russian crude buyers in a bid to pressure Russia into ending its war with Ukraine. One of our Washington sources estimates the potential penalties on China and India puts 2.75 Million barrels per day of Russian seaborne Oil exports at risk. This helps explain why crude prices have remained elevated despite the economic slowdown.
Back to the Market:
There’s been many crosscurrents below the surface. Market breadth has been weakening. Stock leadership has been quite narrow. And the fuel that’s been powering this record rally has been showing signs of running dry. It’s been all about AI. Despite the S&P 500 hitting a fresh new high this week, the number of stocks that are above their 20-day moving average has contracted. In other words, fewer stocks are driving the Market and some of those leaders headed into the weekend with some new wounds. Amazon was one of them.
Keep in mind, the Dow hasn’t seen a new high all year, how about that? The strength has been relegated to the S&P and NAS with Tech the clear driver. The price action could be due for a correction, or another shot across the bow. Volatility is already quite elevated, and we are only 2+% off all-time highs. It’s not often you hit an all-time high but close down on the week. That just happened. The relentless rally is getting tired. The Market is ripe for rotation, and another correction. We anticipate more volatile price action and some healthy backing and filling in the weeks ahead. We’re ready for it. There’s no sleepy Summer sessions here.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
