We’re not so sure if the earnings reports from Alphabet (GOOG) and Microsoft (MSFT) were the equivalent of getting over a hurdle so much as they were the equivalent of getting over a hump. To be sure, there wasn’t a lot of angst wrapped up in the price action for those stocks, which is to say there wasn’t any real fear that they would drop some bombs on investors.
They didn’t. Both companies exceeded consensus estimates for earnings and revenue. Alphabet duly impressed and is up 6.0% in pre-market trading, whereas Microsoft simply impressed and provided a fiscal Q1 revenue outlook that was slightly lower than expected, creating an excuse for some to take some money off the table. Shares of MSFT, up 46% year-to-date, are down 3.6% in pre-market trading.
The mixed response to the reports from these heavyweight companies, not to mention the lingering sense that the market is due for a pullback and that an FOMC decision is due out later today, has led to some squishy trading in the equity futures market.
Currently, the S&P 500 futures are down 12 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 56 points and are trading 0.3% below fair value, and the Dow Jones Industrial Average futures are down 104 points and are trading 0.3% below fair value.
This is not an ominous look for the broader market by any means. Better-than-expected results from Boeing (BA), Coca-Cola (KO), and AT&T (T) have been soothing influences along with a nice jump in Union Pacific (UNP) following news of a CEO change.
The look of the equity futures market, then, is the look of resignation that it is getting more challenging for this rally to keep running unabated in the near term with market multiples becoming more demanding of validation.
In other words, a lot of good news — or hope of good news — has found its way into stock prices already in the parabolic run off the March lows.
Enter the Fed, which is going to raise the target range for the fed funds rate by 25 basis points today to 5.25-5.50%. That news will be handed down at 2:00 p.m. ET, but it is the policy sermon on the mount from Fed Chair Powell at 2:30 p.m. ET that will capture the market’s undivided attention, as participants will be eager to hear if what he signals about future policy action is blessed be the bulls or blessed be the bears.
What he will say — or, at least, what we think he will say — is that inflation is improving, but that core inflation is still too high. Still, the committee will continue to take into account the lag effect of prior rate hikes as it determines if additional rate hikes are necessary. That decision, he will say, is going to be data dependent and that the Fed is not on a pre-set course.
What he will emphasize is that the Fed is not even thinking about cutting rates and that policy rates are apt to stay higher for longer to ensure inflation is under control and back in-line with the Fed’s 2.0% objective.
Frankly, that view shouldn’t come as a surprise to the market, which is inclined to believe that today’s rate hike will be the last from the Fed in this tightening cycle. The risk of upset, then, is a Fed chair who goes out of his way, with his words and tone, to shoot down that thinking.
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Originally Posted July 26, 2023 – Earnings and the Fed in market’s sightline
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