Daily Brief - And down we go

TLDR: There was definitely a time when soft economic data was good news. Mostly because lower inflation + slowing economic growth would compel the Fed to cut rates sooner, and more aggressively. So why did stocks drop on weak economic news yesterday?

It’s complicated. Markets are tough to please. Fast slowing inflation and gently slowing economic data was fine. That’s “goldilocks” - a non-inflationary environment where yields are by and large poised to come down and equity valuations rise.

However - and this is mostly in the mind of the market - it’s a very fine line between “goldilocks” and “stagflation” … still high inflation and stalling growth. That’s a disaster. Yields can’t come down because inflation is high, forcing growth to stall even faster, bringing down earnings etc etc.

In reality, these two scenarios are not as knife edge as above but in the mind of a trader, they loom large. TL;DR Stocks tumbled Thursday after soft economic data sparked fears the Federal Reserve won’t cut interest rates in time to avoid a recession.

The ISM manufacturing index, a key gauge of U.S. manufacturing activity, fell to its lowest level since November. Also, jobless claims for the week came in higher than expected. This morning’s disappointing job report (114k jobs created vs. 180k expected, and a rise in the unemployment rate to 4.3%) is going to further reinforce the fears that the Fed will be too late - and has been too cautious - in cutting rates.

A while back we highlighted the labor-market driven Sahm indicator (chart above) that started to show some cracks in the economic armor: this will get attention again.

Market Movers: What next for S&P Sectors?

Below is the historical 1-month response from S&P sectors, when the Nasdaq Composite has previously fallen 5% in 1 month:

1. S&P Real Estate: 2.37%
2. S&P Energy: 1.73%
3. S&P Health Care: 1.63%
4. S&P Materials: 1.59%
5. S&P Utilities: 1.47%
6. S&P Telecom: 1.38%
7. S&P Technology: 1.38%
8. S&P Financials: 1.37%
9. S&P Consumer Staples: 1.20%
10. S&P Consumer Discretionary: 1.08%
11. S&P Industrials: 1.00%

Earnings Spotlight: META shines!

Meta's shares surged following their impressive second-quarter earnings report, where the company exceeded Wall Street expectations with earnings of $5.16 per share compared to the expected $4.73, and revenue of $39.07 billion surpassing the anticipated $38.31 billion.

Meta's robust performance was highlighted by its core business of digital advertising seeing a 22% growth, driven by Facebook and Instagram. While expenses included a notable charge for a facial recognition lawsuit settlement, capital expenditures were lower than expected at $8.47 billion.

Despite a slight drop in headcount, Meta's operating income soared by 58%, and the operating margin expanded to 38%. The company continues to invest heavily in artificial intelligence and virtual reality technologies, with plans for substantial capital expenditure growth in 2025 to support AI research and product development.

CEO Mark Zuckerberg highlighted Meta AI's trajectory to becoming the most used AI assistant globally, alongside significant advancements in their AI model Llama and augmented reality products.