The big NASDAQ sell-off last Wednesday in the wake of Google’s and Tesla’s earnings announcements caused a flight to quality. Although Google beat analysts’ consensus revenue and earnings estimates, its YouTube revenues were seen to be especially disappointing, which helped to trigger the sell-off. These abrupt NASDAQ sell-offs tend to reverse themselves, then settle down and oscillate, so more market gyrations are expected in the upcoming days. The best news is that the Fed is meeting this week, and the Fed cannot fight market rates much longer, so the odds of a key rate cut are rising. Our focus is on fundamentally superior growth stocks which we believe are on the verge of announcing wave after wave of better-than-expected second-quarter sales and earnings while providing positive guidance. The second-quarter earnings for the S&P 500 are forecasted to rise 9.3%, the strongest comparison in over two years. The breadth and power of the overall stock market is now improving in the wake of a seismic shift into Russell 2000 stocks since mid-July. This rotation is clearly anticipating multiple Fed key interest rate cuts, which will help boost domestic stocks, versus the big multi-national stocks that dominate the S&P 500. The impending Fed rate cuts will provide a “turbo boost” that the stock market and economy need.
Here are the most important market news items and what this news means:
- The big news this week will be the Fed’s Federal Open Market Committee (FOMC) meeting on July 31st. Due to the fact that the 2-year Treasury yield has declined from 5.046% on April 30th to 4.385% on July 26th, the pressure on the Fed to cut key interest rates is mounting, so it is virtually guaranteed that the FOMC statement will signal a key interest rate cut on September 18th. The “dot plot” survey of FOMC members will also be a big deal, since it will likely signal another key interest rate cut on November 7th (two days after the Presidential election). With the Fed finally joining other central banks and cutting key interest rates, the Fed will provide the “turbo boost” that the stock market needs to broaden out further and extend the current rally.
- Last week, former New York Fed President Bill Dudley on Wednesday came out with a powerful Bloomberg Opinion article entitled “I Changed My Mind. The Fed Needs to Cut Rates Now.” This week, another former Fed official, Alan Blinder, has an opinion piece in The Wall Street Journal entitled “The Fed Should Cut Interest Rates This Week.” Blinder said, “Money is tight right now. With inflation in the 2.5% to 3% range, depending on how you measure it, the current federal-funds rate of 5.25% to 5.5% leaves the real interest rate—the interest rate adjusted for inflation—around 2.5% to 3%.” Interestingly, Blinder added that “the 12-month PCE inflation rate has been flat or falling every month since last September. Looks like a trend to me.”
- Another reason that the Fed should cut key interest rates this week is that according to MSCI, in the second quarter, foreclosed and seized office buildings, apartments, and other commercial property reached $20.5 billion. This is the highest level since 2015 and up 13% from the first quarter. So clearly, the commercial real estate sector is now under distress, so Blackstone and other commercial property investors will come under increasing scrutiny.
- There is no doubt that Donald Trump’s embrace of cryptocurrencies is part of his outreach to Silicon Valley. Donald Trump at the Bitcoin 2024 conference in Nashville said he would fire SEC Chairman Gary Gensler (his term expires in 2026) and pick crypto-friendly regulators. Specifically, Trump said, “This afternoon, I’m laying out my plan to ensure that the United States will be the crypto capital of the planet and the Bitcoin superpower of the world and we’ll get it done.” Trump added, “We will have regulations, but from now on, the rules will be written by people who love your industry, not hate your industry.” Finally, Trump said he would a crypto industry presidential advisory council, create a stablecoin framework, and called for a scale-back in enforcement.
- The other reason that Silicon Valley is warming up to Donald Trump is that Peter Thiel, who was J.D. Vance’s former mentor and employer, pushed for J.D. Vance to be chosen as Vice President. Many in Silicon Valley, like Peter Thiel, are now euphoric about J.D. Vance being on the GOP ticket and advising Donald Trump. Based on the Bitcoin 2024 conference, I think it is safe to say that J.D. Vance’s influence is obvious. The Biden Administration and previous administrations have allowed the Magnificent 7 stocks to operate legal monopolies. Much of the anxiety recently surrounding the Magnificent 7 pertains to whether or not they can maintain their legal monopolies. The truth of the matter is that these legal monopolies will persist, but whenever there are cracks in their foundations, like Google’s disappointing YouTube results or Tesla’s lackluster guidance, Magnificent 7 stocks can get hit with profit-taking.
- Speaking of disappointing results, McDonald’s announced its first quarterly sales decline since 2020. Specifically, in the second quarter, McDonald’s same-store sales decline by 1%. This is not that big of a surprise, since French Fry supplier, Lamb Weston, also reported disappointing sales to restaurants and consumers. There are now increasing signs of consumer distress, especially for the bottom 20% of consumers who are struggling with inflation and trying to make ends meet. If the Fed ever needed a sign of consumer distress, McDonald’s sales woes were it, so hopefully this will help coax the Fed to cut key interest rates sooner than later.
Overall, the reversion to the mean continues, but this week’s earnings should have a major impact on whether this trend continues or whether this has been a buying opportunity of big tech. By the end of the week, we'll have all but NVIDIA of the Magnificent 7 numbers out, with their outsized weight in both market value and earnings contribution priced into the indexes. We saw a similar pullback in tech in April, only to see it run to new all-time highs after digesting the prospects. A repeat of that cycle going into the election won’t be a huge surprise, but a broadening of gains would be a better outcome.
