MY HOT TAKES
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Investors are getting complacent just as volatility risk is ramping up
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The market hasn’t fully priced in the consequences of renewed tariffs
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Fiscal stimulus is under appreciated compared to Fed policy
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This earnings season may redefine investor expectations across multiple sectors
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It’s not the time to unplug—summer can still burn you
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You can quote me: “Sunning your buns sounds fun, but don’t lose focus because you could end up with an uncomfortable burn.”
Sun in your eyes. This week marks the first unofficial week of summer on Wall Street. The Independence Day holiday has a way of extending itself through Labor Day. Now, I am not saying that everyone is OOO–a cool new way of saying Out Of Office–but I am saying that this is the season for random vacations to celebrate Just Because, and for some reason, many investors become a bit complacent during this time. This could be a driving force behind the well-known adage and Efficient Market Hypothesis anomaly “sell in May and go away.”
However, if you have been paying attention, you probably know by now that this summer season may not be the best one to lose focus on the markets. This upcoming Wednesday marks the official end to the administration’s delay period for reciprocal tariffs, also known as Liberation Day Tariffs. Have you forgotten the Rose Garden ceremony in which the President unceremoniously announced massive tariff rates on pretty much every US trading partner. Massive, as in not trivial. Markets responded with a major swoon until the President announced a temporary delay along with efforts to negotiate.
The turn-around in stocks was helped by progress in negotiations with some of the US’s largest trade partners, and frankly, a bunch of rhetoric. But this week, it gets real. Do we have a deal or don’t we have a deal? What is the deal? Is it signed? With whom are those deals? To be honest, I don’t recall seeing any news of signed agreements yet. Well, there have been “frameworks” of deals signed with the UK, Vietnam, and China, and that’s it. Google agrees with me, though I would hardly call that an exhaustive research effort.
Over the weekend the President, along with Commerce Secretary Lutnick, announced that some countries' deadlines would be extended through August 1st. We don’t know which ones, though presumably they are the ones which are negotiating in good faith. The rest will likely get some sort of letter which will be sent out today detailing–imposing a final tariff rate, according to administration officials. Bottom line here? Poop will be finally hitting the fan over the next few weeks, and that will almost certainly have an impact on markets.
Also, in the weeks ahead, many are expecting economic numbers to start reflecting impacts of the currently imposed tariffs, which have been in existence these past few months. Will they cause inflation to rise? Will it be large or small? Will it be sticky or transitory? The answers to those questions will be forthcoming during this unofficial summer break on Wall Street.
You might have missed it last week as we slid into the long holiday weekend, but we have a signed tax reconciliation bill, the One Big Beautiful Bill Act (OBBBA). It includes tax relief for many as well as increased spending. Many of those tax breaks will have immediate effects. Will consumption increase as a result of more dollars in pockets, providing an economic boost? We tend to focus a lot on monetary stimulus, controlled by the Fed, but OBBBA is classic example of fiscal stimulus. We are likely to see some hints of the stimulus this upcoming quarter.
We have a critical earnings season which will officially kick off next week with the big banks. This earnings season is expected to show an overall marked decline in EPS growth from the last one, though many analysts have been raising estimates in the past few weeks. This will be a very telling earnings season. Some companies, who earlier in the year pulled guidance, may reintroduce them. Companies will presumably have more data on tariff impact to share with investors. Will AI continue its rocket ride? Will the financials finally see a pick-up in deal flow and increase banking fees? Will defense companies fill in the blanks and justify their recent surge in valuations? The S&P 500 Aerospace and Defence sector is expected to have a forward EPS growth of 65%! Will the consumer discretionary sector continue to have negative EPS growth? What about layoffs? We have been hearing a mildly alarming amount of layoff announcements which haven’t quite shown up in the official payroll numbers yet. Will those persist? Earnings season is always important, but this upcoming one has the makings of a pivotal one.
Answers to a lot of these questions will certainly move markets and inform part-time market influencer, Jerome Powell, Fed Chairman. He and his merry band of bankers will meet later this month to discuss interest rate policy. As of today, futures place a 5% likelihood of a rate cut. That’s down sharply from the 25% probability that preceded last Thursday’s employment numbers. However lots can happen between now and when the FOMC meets on the 30th. Lots of economic releases are on the calendar between now and then. These include inflation numbers and high-frequency employment data, both of which are primary Fed inputs.
Now, I am not saying that you shouldn't enjoy the wonderful fruits of summer, but I am saying that you might want to pay attention to the economy, the markets, and your portfolios like it is February. I cannot emphasize just how critical these next few weeks will be. Stay focused and try not to get suntan lotion on your paperwork, it can cause the ink to smudge.
THURSDAY’S MARKETS
Stocks jumped in last Thursday’s shortened session in response to the strong monthly employment numbers. Though a deeper dive revealed sluggish growth, investors were content with a headline beat as they were half out the door enroute to holiday fun. Bond yields adjusted upward reflecting diminished expectations of a Fed cut at the end of this month.