The Russell 2000 surged early this month, gaining over 11% in a week or so, reflecting a “seismic shift” in the breadth and power of the overall stock market. Some market pundits said this seismic shift came in anticipation of multiple Fed key interest rate cuts, which will help boost domestic stocks, versus the big multi-national stocks that dominate the S&P 500. One piece of evidence for this theory is that one of the hottest sectors, homebuilders, was especially strong, especially after fixed-rate mortgages declined to a median 6.87% rate, the lowest level since March, another indication that the impending Fed interest rate cuts could soon provide a new “turbo boost” to the U.S. stock market and economy later this summer.
Then, last Wednesday, the semiconductor stocks were hit hard with profit-taking over concerns about any possible new trade restrictions under Trump. Fortunately, on Thursday, Taiwan Semiconductor, which makes chips for Apple, Microsoft and Nvidia, announced that its second-quarter sales rose 40% (versus analyst estimates of a 35.5% increase), the fastest pace since 2022. TSM’s sales of high-performance computing chips used in Artificial Intelligence (AI) rose 52% in the second quarter, so the bottom line is that TSM could re-ignite the semiconductor industry, in addition to a wide array of AI-related stocks.
The truth is that each stock will stand on its own merits during the earnings announcement season, which begins in earnest this week, with many tech stock announcements.
Here are the most important market news items and what this news means:
- A Microsoft spokesperson pointed out that a 2009 agreement with the European Commission prevented the company from enhancing Windows 365 operating security more rigorously. Essentially, Microsoft is blaming the European Union’s (EU) restrictions for preventing Microsoft from fixing the CrowdStrike software upgrade glitch that crashed cloud servers worldwide. The EU’s agreement specifies that Microsoft must share its application programming interface (API) for Windows Client and Server operating systems with third-party security software developers, but last week’s CrowdStrike incident highlighted the risks of such openness. Interestingly, Apple has been restricting developers from access to its operating system API since 2020. Google is also not bound by similar API regulations. Despite the clear security benefits of being able to control its operating system, the EU is not anticipated to grant Microsoft permission to restrict certain developer access to its API and reverse its 2009 agreement without intense lobbying efforts.
- The most anticipated news this week is expected to be durable goods on Thursday, and the Personal Consumption Expenditure (PCE) on Friday. The PCE announcement is expected to be very positive and cause the Fed to issue a dovish Federal Market Open Committee (FOMC) statement on July 31st. This dovish FOMC statement will likely help the stock market have a strong start in August.
- The upcoming Democratic National Convention (DNC) in Chicago will be historic. President Biden endorsed Kamala Harris as his replacement, but it is unknown if the DNC Super Delegates will accept Kamala or call for a more energetic candidate. The Harris campaign has announced that they now have a majority of delegates to secure the nomination at the DNC. However, the 400+ Super Delegates are different than the regular delegates at the DNC, so ironically if Harris continues to poll poorly against Trump, it remains uncertain if she will win a majority of the powerful DNC Super Delegates.
- Israeli Prime Minister Benjamin Netanyahu arrived in Washington D.C. this week to address Congress. Shockingly, no one from the Biden Administration was present to greet Netanyahu. The disagreements that the Biden Administration has over Israel’s Gaza operations to clear out Hamas has reached a new low. Since Israel is the most important U.S. ally in the Middle East, the spat with the Biden Administration is expected to hurt Kamala Harris with Jewish voters.
- Interestingly, thanks to Elon Musk and Donald Trump’s selection of J.D. Vance to be Vice President, Silicon Valley is warming up to backing the Trump/Vance ticket after overwhelmingly supporting Democrat candidates for President in the past. The fact that J.D. Vance worked for some Silicon Valley elites like Peter Theil helps as does the fact that the Trump Administration did not aggressively sue big technology companies, like Amazon and Apple, which the Biden Administration is now pursuing in federal courts. I should add that after Donald Trump’s assassination attempt, Elon Musk officially endorsed Trump and said, “The last time we had a candidate this tough was Theodore Roosevelt.” Additionally, Mark Zuckerberg said that Donald Trump’s immediate reaction after being shot was “badass” and inspiring, which helps to explain his appeal to voters.
- Since Donald Trump wants to end the electric vehicle (EV) mandate to save the Big 3 that have struggled to make money on EVs, the onshoring of battery plants has stalled, especially while there is a glut of cheap LFP batteries from China. LG Energy Solution is slowing down the construction of its third battery plant with GM in Michigan. Also notable is that SK On, which is South Korea’s third largest battery manufacturer and a supplier to Ford and Hyundai, declared a substantial quarterly loss. SK On has two battery plants in Georgia in conjunction with a joint venture with Hyundai, plus had plans to build three more battery plants with Ford in Kentucky and Tennessee. Since the money to build these plants utilizes funds from the Biden Administration, I suspect that due to a global battery glut and the probability of a Trump Administration, SK On will not build these additional battery plants in the U.S.
Overall, the stock market has a lot of momentum from strong earnings, actual and anticipated, improving market breadth and a dovish Fed. If I were running the Fed, I would cut key interest rates on July 31st and September 18th. However, the Fed will most likely issue a dovish FOMC statement on July 31st to set up an impending key interest rates cut on September 18th. After the November Presidential election, I expect another Fed rate cut on November 7th. These key interest rate cuts will essentially represent a “turbo boost” for the overall stock market to propel it significantly higher. In the wake of what is anticipated to be the most overwhelming electoral college victory since Richard Nixon won 49 states, Donald Trump should have a pro-business mandate that should help the stock market surge in anticipation of robust economic growth in 2025 and beyond.
