Daily Brief - Fed day

TLDR: The Fed is great at timing markets. Beware of the first rate cut.

You see that slight uptrend in unemployment? That is what can move the needle for the Fed - coupled of course with softer inflation pressures.

Today you can expect the Fed to lay down the groundwork for a September rate cut. As to what this means for markets, you might be surprised.

The Fed has an uncanny track record for market timing. If you switched your portfolio to fixed income after their first rate cut in each cycle you’d achieve outstanding excess returns as a cyclical investor.

We find ourselves in a market that is technically oversold, and a dovish Fed might provide support in the short term. But in the mid term, this could be a sign of weakness to come.

How to trade it

For allocators, this is the moment of reckoning. You have the biggest choice in this cycle ahead of you - to lean on Treasuries or not? Can you abandon the AI momentum train? Market timing is hard.

For traders, a dovish Fed is a factor that supports buying dips at least for short rallies. But beware, the TLI is bearish. Check our Leading Indicators email today.

Market Movers: Historical impact of a cut on the S&P sectors

Below is the historical 1-month response from S&P sectors following previous rate cuts by the FED:

1. S&P Technology: 1.74%
2. S&P Telecom: 1.06%
3. S&P Materials: 0.65%
4. S&P Consumer Staples: 0.19%
5. S&P Health Care: 0.01%
6. S&P Consumer Discretionary: -0.14%
7. S&P Energy: -0.24%
8. S&P Industrials: -0.27%
9. S&P Real Estate: -0.62%
10. S&P Utilities: -1.42%
11. S&P Financials: -1.49%

Earnings Spotlight: META's time to shine?

Following Alphabet's earnings report, which revealed lower-than-expected ad revenue and caused Meta to drop post-market, the Facebook and Instagram parent now has an opportunity to distinguish itself from its competitors.

For the second quarter, analysts expect Meta to report earnings per share of $4.74 on revenue of $38.3 billion, a significant increase from last year's $2.98 per share on $31.9 billion in revenue. Meta's Family of Apps, encompassing Facebook, Instagram, WhatsApp, and Messenger, is projected to generate $37.7 billion in revenue, up from $31.7 billion in the previous year's second quarter.

However, not all aspects of Meta's earnings report are expected to be favorable. Wall Street remains cautious about the tech sector's ongoing investments in AI, with uncertainty about when these investments will translate into revenue gains.