Mag-7 Earnings, Inflation Data, and a Pivotal Jobs Report: What You Missed

Stocks closed lower yesterday, spooked by big spending tech companies who announced earnings- AND SPENDINGS after Wednesday’s close. The down day for the S&P500 snapped a 5-month winning streak for the index which gave up around -1% for October.

It aint’ over ‘till it’s over. Wow! What a week it has been for the economy, the markets, the weird NYC weather, and some popular stocks. Oh wait, it’s only Friday morning 4:12 AM on Wall Street and we still have a bunch of numbers and a whole trading session before we can call it a week, crawl home, and ponder yet another pivotal week ahead in which we will HOPEFULLY learn who will be sleeping at the White House in January and we can get a headcount of the remaining doves roosting at the Fed, if any. Ok, take a breath, have a sip of your coffee – take another breath. I got you. Here is everything you might have missed leading up to this morning.

Housing prices continue to climb, consumers are gaining confidence, ADP noted a bigger than expected spike in hiring last month, the US economy grew at a respectable pace last quarter thanks to consumers, consumers spent way more than economists were expecting in September, AI companies also spent more than analysts expected, people still like getting those smiley-faced boxes on their front porch, that weirdly named inflation index (PCE Deflator) ticked closer to where the Fed wants it… and, oh yeah, next week’s presidential election is still neck and neck. As a result of all that, the S&P500 has given up -1.59% since last Friday’s close. How are you doing?

Did you catch all that? For most of us that second sentence about the S&P500 was all most of us needed, but for the more “well-informed" amongst us, we surely want to know just a bit more, because, who knows, maybe the news was interpreted incorrectly, and this is a real buying opportunity… or maybe not. Let’s see.

Housing prices climbing. They do continue to climb my friends. According to the Federal Housing Finance Agency (FHFA) this biggest monthly gains for August occurred in the western region (north and south) and the southeast, while in the northeast, prices declined modestly. If you don't believe the FHFA, we will see it pop up in the inflation discussion below where housing is still one of the biggest troublemakers.

Consumers are confident. They are, and I love that lolololol! My regular readers know how much I love confident consumers. Why? Repeat after me. Confident consumers consume, consumption makes up 2/3 of US GDP, so as long as consumers are confident, we should be confident that the economy will remain healthy. And it has – keep reading.

The US Economy grew at a respectable pace last quarter. Indeed, the Bureau of Economic Analysis took a first stab (estimate) at economic growth in Q3 and came up with 2.8% annualized growth. Now, economists were expecting 2.9% and GDP in Q2 was 3.0%, but 1) economists are terrible at forecasting, and 2) 2.8% is darn respectable considering that the Fed has held both feet on the economic brakes since March of 2022. Also, it is well within the respectable range since the Great Recession / Global Financial Crisis. Do you want to give a guess as to what contributed to that growth. Don’t be surprised. Consumption picked up from the prior quarter while Fixed Investment, typically associated with business investment grew, but at a slower pace than the last 6 quarters. Let’s tag that last bit of info as “watch carefully,” because companies need to be confident too. After all they pay salaries. More on that in a bit, but first, some more on one of my favorite topics.

Consumers spent more than economists were expecting last month, I mean in September… which was last month… yesterday. Anyway. The Fed likes to watch monthly Personal Spending data from the Bureau of Economic Analysis because THE SAME REASON WHY I AM OBSESSED WITH CONSUMPTION, and because it is somewhat correlated with inflation. “Did he just say inflation?” I did. Remember, that may be easing, but it is still top of mind for consumers – AND THE FED, which is still holding interest rates in the restrictive zone. So, what is the story on inflation? Keep reading, my friends.

The PCE deflator is getting closer to the Fed’s target. The Personal Consumption Expenditure price index (formerly known as deflator in most places except this note) increased by 0.2% in September, which was slightly more than the 0.1% gain the prior month. The increase put the year over year price gain at 2.1%, which was down from August’s upward revised 2.3%. You may notice that the number is getting pretty close to that 2.0% target. Actually, for some strange reason, the Fed looks at the so-called "Core PCE” number, which excludes food and energy costs, because they are historically volatile. It is strange given that we consumers need both of those things to survive, we are sensitive to inflation in those, and… they were both a big factor in the inflation boom. When most of us think of inflation, we think of, well – things, like cars, TVs, furniture, bicycles, golf clubs, etc. Those are examples of durable goods, and believe it or not, prices of durable goods have gone down in the past year. That’s right, deflation. Also deflated in the last year are energy and fuel prices. Services however remaining on the climb are the key contributor to whatever is left of inflation. Do you want to know what the biggest contributors to inflation are? Sure, you do, housing and healthcare. Did I have to tell you that? No, because, if you pay bills, you know. All in all, inflation, while still looming, seems less of a headwind to the markets these days.

ADP reported a larger-than-expected number of new hires in October. Coming back to confident consumers, what do you suppose is a key factor in that level? That’s right, the job security. If companies are hiring, consumers are less worried about their future financial health. Think about it, you were more likely to pop for that new TV so you can watch your team in the World Series if you are confident in your future employment prospects. Now that my team lost 🥺⚾, maybe I will buy something else to ease the pain, like, say a new golf driver. NOT SO FAST. The JOLTS Job Openings number from earlier in the week showed a decline in job vacancies from the prior month, missing economists’ estimates significantly. Will consumers remain confident? I was planning to save this for last, but because we are on the topic of jobs, lest we forget that this morning we will get the monthly employment report from the Bureau of Labor Statistics. Why is everyone talking about it? Because the Fed is laser focused on it right now, pinning its interest rate strategy on its health. Will it be a 50 basis-point or 25 basis point cut before the end of the year… OR NONE AT ALL? Well, if you have been following me, most of the week’s data has been somewhat neutral to positive for the economy. With the economy showing no signs of failure, the Fed may not feel the strong urge to accommodate us with a rate cut next week. However, knowing that maintaining a healthy labor market is ½ of its dual mandate, the country’s employment situation will take priority in its policy decisions. Weaker = more rate cuts sooner, and stronger = fewer rate cuts over a longer period of time. Investors clearly favor the former, so pay attention to this morning’s release. Economists are expecting the unemployment rate to stay constant at 4.1%. As aforementioned, economists tend to be bad at forecasting, so anything goes. New Nonfarm Payroll are expected to be just 100,000 jobs, which is lower than August’s super-sized gain of 254,000 jobs. Remember, that bigger-than-expected gain was the beginning of yield spikes and market volatility. I mentioned that in case you didn’t think this morning’s report is important.

Finally, I would be remiss if I neglected to talk about what is probably the only real thing that will impact your wealth between now and the end of 2025 and beyond. That’s right, earnings season. Let’s start with the shiny ones, you know, the maybe-for-long-fabled Mag-7 stocks. We got five of them this week. Alphabet, Microsoft, Meta, Amazon.com, and Apple all beat analysts’ forecasts on EPS and Sales. Earnings growth slowed from the prior quarter as expected, but they all still sport far better growth than the broader S&P500 and most of their peers. Alphabet surprised with very positive stats on not only its core business, but also its AI and cloud related activities and the news was received positively. Amazon.com was able to maintain strong operating margins and its core retail offerings really excelled. Its cloud business came in very near estimates, though slightly below consensus. The market applauded the results. Microsoft came up with solid numbers all around. Though it was a little light of estimates in its intelligent cloud business, further analysis shows that the company far exceeded analysts' expectations in AI’s revenue contribution to its Azure cloud business. However, analysts, and the market, were concerned about the company's increased capital expenditures necessary to maintain and grow its position in the super-scaler class. A similar concern overshadowed Meta’s release, despite its relatively healthy all-around results. AI opportunities are large and growing, but it costs money to fill the demand, and Meta and Microsoft were punished for doing so. I suppose that leaves Apple. With the US smartphone market steady, all eyes are on growth in China. While the numbers from China are still respectable, the results came in a bit lighter than what analysts were expecting. With no real positive or negative surprises, investors are left with wondering whether the companies 33x PE is too expensive. That leaves us with 3 wins to 2 market disappointments. If you add Tesla from last week, that comes to 4 wins. We will have to wait until later this month to get the final tally with NVIDIA.

I have been unfair with my focus on the Mag-7; there have been other notable earnings this week. In the S&P500, broader tech is more than halfway through and has beaten EPS estimates by 1.87% on average, while similarly consumer discretionary stocks have beaten by a much higher margin of 11.77%. Communications, which includes 2 of the Mag-7 sported 0 misses to date. Notable S&P500 beaters (minus the ones mentioned above) include Cadence, Ford, Waste Management, Corning, Qorvo, Stryker, Visa, Humana, Biogen, ADP, AbbVie, Bookings Holdings, eBay, Clorox, Allstate, Regeneron, Merck, Bristol-Myers, Comcast, and Mastercard, amongst others. Notable misses include DR Horton, PayPal, American Tower, Caesar’s Entertainment, Chipotle, Otis Worldwide, Caterpillar, Eli Lilly, Amgen, Starbucks, Public Storage, Aflac, MetLife, Equity Residential, American Water Works, Estee Lauder, International Paper, Intel, and IDEXX Labs. As a whole, 350 S&P 500 companies have announced to date with an average EPS and Revenue beat of 7.09% and 1.47% respectively. Lots more next week.

Now, you can take a breath. Breathe in, hold, breathe out. Repeat. We are ok. Don’t miss this morning’s employment report, and please check in on Monday to get ready for the week ahead with calendars and details.

YESTERDAY’S MARKETS

NEXT UP

• Change in Nonfarm Payrolls (October) is expected to show an increase of 100k jobs, lower than last month's 254k release.
• Unemployment Rate (October) probably remained unchanged at 4.1%
• ISM Manufacturing (October) may have risen to 47.6 from 47.2. Don’t fall asleep after the morning release, this 10:00 AM number can move the markets.

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