What Happened?
Equity markets closed Friday’s session sharply lower, ending a brutally volatile week on Wall Street. After a relatively quiet first two sessions and an upward move on Wednesday following the FOMC interest rate decision, earnings reports and economic data later in the week aggressively reinforced the recent downward trend in stocks.
Although the Fed held rates steady, Fed Chair Jerome Powell’s comments suggested that rate cuts might begin at the September meeting, initially boosting bullish sentiment. However, second-quarter results from Amazon and Apple released after the bell disappointed investors, causing a significant drop in indexes on Thursday. Friday morning’s jobs report, which raised concerns about labor market stability and broader economic health, added fuel to the fire, reigniting the bearish trend. As a result, market participants ended the week on uncertain footing, forced to reassess their expectations for economic growth, the path of interest rates, and the future performance of companies.
Beneath the surface, the subpar reports from big tech companies forced the Technology (-5.3%) to suffer mightily while concerns over growth led economically sensitive sectors, such as Energy (-4.1%) and Discretionary (-3.5%), to fall. Defensive areas of the market finished higher led by Utilities (+4.3%).
Fed Holds Rates Steady And Notes Progress on Inflation
- The Federal Reserve Committee held their benchmark rate steady at 5.25-5.5%
- They made no obvious indications a rate cut was imminent, but signaled inflation is getting closer to target
- The language assumes the door is open for a cut in September
The key takeaway – In a move that did not surprise any investors, Jerome Powell and company did not make any changes on the interest rate front. Instead, as has been for the past seven months in 2024, everybody was glued to the statement and Powell press conference for any hints on what is to come on the monetary policy front. This time, the statement release was particularly intriguing, highlighting growing concerns among policymakers about the potential weakening of the labor market as inflation continues to decline.
Powell’s comments and the statement adjustments strongly suggest that the Fed is likely to initiate rate cuts at their next meeting in September. This expectation was further supported by the softening job numbers released yesterday. While Powell and others have believed that the risk of cutting rates too soon, thereby reinvigorating inflation, outweighed the risk of cutting too late, potentially triggering a recession, the balance has now begun to shift rapidly towards the latter.
US Hiring Slowdown Hits Stocks, Fuels Bets on Bigger Rate Cut
- Hiring slowed to 114,000 jobs last month, the Labor Department said, missing expectations
- The unemployment rate rose to 4.3%—its highest level in nearly three years
- Average hourly earnings were up 3.6% in July from a year earlier—above the recent pace of inflation
- The labor-force participation rate rose to 62.7% from 62.6% in June
The key takeaway – Since this hiking cycle began over two years ago to combat rampant inflation, we have discussed how the extremely tight labor market has complicated the Federal Reserve’s policy actions by applying upward pressure on prices. The strength of the labor market has also allowed the Fed to focus solely on inflation. However, this dynamic seems to be rapidly reversing as inflation continues to fall and the latest jobs report shows potential cracks developing in employment.
The calculus for the Federal Reserve on which side of their dual mandate to focus on—price stability and full employment—is shifting to become more in balance. Markets are beginning to adjust their forecasts, indicating a more aggressive rate-cutting period ahead combined with increased concern about the state of the economy. While falling rates in a healthy economic environment are positive for stock performance, rates slashed to address an unstable economy are not. This jobs report has increased the probability of the latter scenario.
Big Tech Fails to Convince Wall Street That AI is Paying Off
- Four members of the Magnificent 7 (Microsoft, Meta, Apple and Amazon) reported Second quarter results this week
- With the exception of Meta, investors were broadly disappointed with these market leaders figures and guidance
- Specifically, market participants found these firms ability to convert investment into AI to profits underwhelming
The key takeaway – As frequently discussed on business talk shows and across the investment landscape for the past two years, much of the stock market performance during this period has been driven by a handful of companies known as the Magnificent 7. These companies have repeatedly soared higher, primarily due to the growth in interest and investment in artificial intelligence. Their large weighting in major indexes has caused the market to follow them upward.
However, this surge in stock prices has led to extremely high valuations, which these companies must now justify with stellar earnings reports and future guidance. This week, the majority of these companies did not meet their lofty expectations, leading to a selloff in the market areas that had benefited from their success. The Mag 7 have spent billions building out their AI-focused products, and investors are anxious to see these expenditures tangibly convert to earnings.
From Around the Watercooler
Intel announced it’s cutting 15,000 jobs, or 15% of its workforce, as it falls behind in chip manufacturing
Uber partnered with Chinese EV maker BYD to adopt 100,000 vehicles for its ride-hailing platforms in Europe and Latin America
Delta’s CEO said the CrowdStrike IT outage cost the airline $500 million. The company has reportedly lawyered up to pursue damages
Bill Ackman’s firm withdrew its planned IPO of a US fund after investor demand fell short of expectations