The forecast is cloudy with a chance of Powell. Meta and Microsoft earnings could bring the thunder.
KEY TAKEAWAYS
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JOLTS report and Consumer Confidence showed mixed signals
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Today includes GDP, FOMC, ADP Jobs, and major earnings (Meta, Microsoft)
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GDP expected to rebound from Q1 contraction, but Private Investment may be weak
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Fed not expected to cut rates today, but Powell’s commentary and vote count matter
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Meta and Microsoft earnings will shape AI sentiment and broader market direction
MY HOT TAKES
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We’re at an inflection point—and markets don’t yet know which way the wind blows
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Private Investment matters more than people realize—it’s where recessions begin
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Consumers have kept the economy alive, but that pace is slowing
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Powell may not cut today, but political pressure is mounting fast
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Meta and Microsoft earnings are really a referendum on AI
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You can quote me: “Though today's FOMC release is likely to be an uneventful affair, one never knows, so be prepared to deal with wrench or bone, should one be thrown.”
The calm before. You see the clouds in the distance and they look angry. But right above you, the sun shines bright and true. There is a slight, almost undetectable breeze. You try to reckon whether those clouds are heading your way but it's too early to tell. You consult your smartphone and see that no rain is expected, but when you dig deeper you see that there is a 35% chance of rain. It’s too large to ignore, but 35% would hardly be considered to be a likely chance.
Friends, you heard me say it. In my notes and on live TV, this is the pivotal week for markets–an inflection point where we will either continue with bright skies or head into a tempest. Yesterday gave us the first licks of what might come with the JOLTS Job Openings report and Consumer Confidence.
JOLTS came in slightly lighter than expected and the prior month got a minimal writedown, indicating a marginally weaker employment environment for job seekers–less help wanted. Breaking it down, we saw notable gains in construction and government openings. What was surprising is the rising number of openings in Government jobs given the very public push to slim down. A gain in construction may be a result of the loss of illegal immigrant workers which are prevalent in that sector, though this data is inconclusive on that. A big part of the trade talk messaging has been around creating manufacturing jobs in the US. Well, it would appear that we already have plenty of them available. Though vacancies declined, there are still 415,000 help wanted slots for folks seeking manufacturing jobs.
Consumer Confidence ticked up in July with a better than expected print and an upward revision of the prior month’s level. Expectations for conditions down the road improved while confidence about the current situation slipped. Month over month changes in the breakdown show only minor changes. While confidence has certainly improved since bottoming in April, it is lower than it was in the 4 years leading up to 2025, and significantly lower than it was prior to the pandemic.
This morning we will get ADP Employment Change for the month, which is an appetizer for Friday’s official monthly number. Economists are looking for a slight gain of 76k after last month’s surprise -33k decline. While this is an important number, it is highly volatile and it has very low correlation to Friday’s number, though it can provide some color on the trend of the labor market.
The Fed will wrap up its 2-day FOMC policy meeting and release its decision in the afternoon. While the central bank is not expected to cut rates at this meeting, traders will be watching the vote count to see if there are any dissenters. A rare occurrence, but any dissent could indicate that cuts are coming sooner than later. Fed Fund Futures indicate a 66% chance of a cut at the Fed’s next meeting with an 86% chance of a second cut by yearend. Jerome Powell’s press conference is usually where all the action is. Powell is likely to toe the line and do his best to appear unfazed by the crazy amount of moral suasion being applied by President Trump for him to cut rates. Though we shouldn’t care, the Fed HQ remodeling may come up in the presser as well. Though it is likely to be an uneventful affair, one never knows, so be prepared to deal with wrench or bone, should one be thrown.
That brings us to sleepy GDP. Why would I call that a sleepy number? It is after all…um Gross Domestic Product, the sum total of everything produced in the US… measured in dollars, compared to last quarter, and then annualized. 👈That was intentionally described, because it really is a kludgy number. Backward looking and kludgy are the likely reasons that this is not a guaranteed market mover. Economists are expecting it to show an annualized gain of 2.2% for Q2. This is the first estimate of how well the economy did in the quarter that closed at the end of June, which includes April, in case you didn’t get it. April! Remember that GDP declined in Q1, and that is usually considered… um, not good. However, the number was skewed by an abnormally large burst of importing ahead of expected tariffs. Government spending was also lower than normal in Q1 which is not surprising given recent downsizing in DC. Q2 is expected to show a rebound in Government spending as well as a sizable -24% decline in imports. The decline may be partially linked to new tariffs, but it's most likely the result of the front-run orders from Q1–the product needed for the quarter was already on shore.
The other two major GDP components will be the most telling. Private Investment is expected to show a rare -8.0 decline as a result of slowing capital expenditures from companies due to challenging business conditions. This category includes business spending on equipment, structures, and intellectual property, as well as residential construction and improvements. It also captures changes in private inventories, reflecting goods produced but not yet sold. This category is largely in the hands of companies who are currently pondering future tariff impacts and likely pressing hold until more information is available. Though this category accounts for less than 20% of GDP, its health is critical. Recessions really start with businesses cutting back. Employment is not part of this, but unemployment typically comes with declines in investment.
That brings us to my favorite category: consumption. This one makes up more than ⅔ of GDP and it reflects all the goods and services purchased by you and me. Consumer spending slowed significantly in Q1, gaining only 0.5%, and economists expect a resurgence in Q2 with a gain of 1.5%. Did you increase your spending more in Q2 than in Q1? Well, we will find out this morning when the number comes out. Consumption has really been the engine of GDP growth in the past several years. Not just because of its hefty weighting, but because consumers have proven to be quite resilient in the face of toughening economic conditions. Many economists credit rampant consumerism for averting a long-expected recession prior to the pandemic. If you are unsure, just look at how aggressively consumption grew through the worst part of the pandemic. YOLO (you only live once), I guess… and maybe credit cards, not to mention that massive government bonus. That is all great, but remember that rampant consumption can also cause inflation. You know, lots of dollars chasing a fixed number of goods! Anyway, a 1.5% gain after a smallish 0.5% would be positive, but hardly “rampant,” inflation-causing consumption.
After the closing bell, we will get lots of important earnings, but the most important will come from Mag-7 members Meta and Microsoft. These growth giants are always important, but perhaps more important than ever given the high hopes put on artificial intelligence. Microsoft, a so-called hyperscaler and user of AI will be assessed on its cloud business and its capital expenditures. Last week, Alphabet came in with better than expected results in these two areas, so the bar will be high for Microsoft this quarter. Earnings are expected to have grown by around 14% which is slightly lower than the prior quarter’s 17.7% growth, but it is still respectable and above its longer term average annual earnings growth rate. Revenue growth is expected to have accelerated slightly to 14% from 13.3%.
Meta has been aggressively scaling its AI-related activity in recent quarters. While Meta is not a hyperscaler like Alphabet, Microsoft, or Amazon, it does build and maintain massive data centers for its own use. Meta’s LLaMA (Large Language Model Meta AI) is Meta’s family of open-source large language models designed to compete with proprietary models like OpenAI's GPT and Google’s Gemini. LLaMA is widely used in academic, research, and enterprise settings due to its accessibility and strong performance benchmarks. Meta has been on a very public spending spree for top AI talent as well as data center construction (CAPEX). Its closest advertising competitor is Alphabet which announced better than expected results for Q2, raising the bar for Meta. Analysts will be focused on gains in ad business resulting from its use of AI. This can justify the massive amount of infrastructure investment for not only Meta, but for the broader AI investment universe. Analysts are expecting a 10% growth in earnings resulting from a 14% increase in revenues, both lower than the prior quarters 32.3% and 16.1% respective gains.
These two earnings releases alone will impact the broader AI community as it is so tightly integrated today. Beyond AI, Microsoft and Meta make up nearly 10% of the S&P weighting, so, yeah they are important.
To be fair, as mentioned earlier, there are plenty of other really important releases today, so be on a sharp lookout for outliers that may portend what your mood may be like tomorrow, and more importantly, whether or not those clouds on the horizon begin to head your way. The breeze has stilled. Will it be followed by a shift, marking the arrival of a new front? We will certainly have a better idea by the end of the day. Stay focused, keep your umbrella handy, but don’t put away your sunblock just yet.
YESTERDAY’S MARKETS
Stocks declined yesterday because they can’t just go up every day, forever–really. Despite relatively benign economic releases, anxiety ahead of today’s packed schedule, which includes 2 Mag-7 earnings releases, was enough to shake out some profit takers.
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