Earnings Roil the Market, But the Fed Is the Next Big Catalyst
The stage is set for more rotational action as the Magnificent Seven stocks struggle and the likelihood of interest-rate cuts increase.
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The market swung wildly overnight following a mediocre Microsoft MSFT earnings report, but there is good news in the semiconductor sector. While Microsoft’s results didn’t meet high expectations, management was upbeat on the conference call, and that helped to cut some of the loss. Other stocks such as Amazon AMZN and Meta Platforms META fully recovered their losses caused by the news, but there is no question that the Magnificent Seven stocks are no longer the primary driving force in the market.
News overnight that the Biden Administration is no longer seeking to impose export restrictions on semiconductor manufacturers in Japan, South Korea, and the Netherlands helped boost the sector after it was pounded on Tuesday by Nvidia NVDA. A solid report from Advanced Micro Devices AMD also helped the sector, but the big issue is whether Nvidia can hold above the Tuesday lows and regain some momentum.
The action on earnings news is particularly interesting as we head into the Fed interest-rate decision Wednesday afternoon. There is little chance that the Fed will cut rates today, the primary question, however, is to what degree Jerome Powell will signal the likelihood of an rate cut at the next meeting in September.
Fed Fund Futures have priced in the near certainty of two quarter-point hikes later this year, but the Fed has kept its options open and keeps saying it has to wait for further data. Any hint by Powell that the Fed is leaning toward a cut is likely to generate a positive reaction.
The combination of a poor response to Microsoft, the struggling Magnificent Seven group, and the greater likelihood of interest-rate cuts could accelerate the rotational action into the broader market and small-caps in particular. This rotation has been going on for a few weeks now, and many smaller stocks are in very good technical position for more momentum.
In the very early going on Wednesday, there has been a bounce in the entire market due in part to an increase in interest rates in Japan. Rates in Japan have been the highest since 2008, but this is a positive for big-cap technology as it impacts the dollar and is seen as a source of confidence in strong growth.
It was a very volatile session overnight, and it is likely to continue on Wednesday with the Fed and then earnings from Meta and others.
I’ll be focusing on the potential for more rotational action into small-caps.
At the time of publication, Rev Shark was long AMZN.
