The Fed’s favorite reading on inflation highlights the last week of the second quarter: What you need to know this week

The last trading week of the month, the quarter and the first half of 2024 will greet investors with a key inflation reading, a slight flurry of corporate results and a rush to superlatives to characterize another period of bearishness. consensus for markets.

Friday morning will bring investors May’s reading on the Personal Consumption Expenditure (PCE) price index, the Fed’s preferred measure of inflation, which is supposed to show prices on a “core” basis – which excludes food and energy – rose 0.1% last month. That would mark the slowest monthly increase since last November.

On an annual basis, core PCE inflation should jump 2.6%, at least from March 2021.

Earlier this month, the Consumer Price Index (CPI) showed that inflation continues to cool, a report that strengthened investors’ bets that the Federal Reserve would cut rates later this year. Fed forecasts released on June 12 indicated that the central bank expects to cut interest rates at least once in 2024.

The earnings calendar will remain quiet this week, and results from FedEx (FDX) on Tuesday, Micron (MU) on Wednesday and Nike (NKE) on Thursday will serve as highlights.

Micron’s report will be watched more closely for signs of how strong demand remains for AI across its portfolio. Nike’s report comes at a crucial time for the retailer, which has seen shares fall 11% this year as it works to fend off competition in its core athletic shoe market from rivals like Adidas and upstarts like On (ONON) and Deckers (DECK) Hook brand.

After market hours, some investor attention is also likely to be on Thursday night’s presidential debate between President Biden and former President Donald Trump, the first of two currently scheduled debates between the presumptive candidates.

Another AI rally

Last year, AI trading took the markets by storm. The S&P 500 rose over 22%, and the Nasdaq gained nearly 40%.

Coming into 2024, one of the most popular calls on Wall Street was that this rally would widen, bringing in remaining sectors of the market that were overlooked amid last year’s “AI Everything” rally.

However, during the first months of 2024, little has changed.

The performance spread between the S&P 500 and the Nasdaq has narrowed — the S&P 500 is up 14% this year, the Nasdaq up 17% — but the Dow remains a laggard, up just 3.8% so far in 2024.

Meanwhile, AI-related plays like Nvidia ( NVDA ), Super Micro Computer ( SMCI ), Broadcom ( AVGO ) and the aforementioned Micron are among the best performers in the S&P 500 so far this year. AI-related energy players Vistra ( VST ) and Constellation ( CEG ) are also among the best performers in the index year to date.

“The rally in the first half of the year showed value in ‘staying the course,'” wrote John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.

“In our view, the sharp change in the direction of bond yields at the end of 2023 and the continued rally in stocks since then illustrates the importance of investor patience and sticking to diversified portfolio allocations. Stocks have made gains further in the second quarter, despite the evidence of the economy The growth in the capital markets in the fourth quarter that continued in the first half of this year emphasizes the need to stay invested.

4 topics for 2024

In modern markets, for better or worse, earnings seasons never really end.

But as Wall Street strategists look to bow to first-quarter earnings with second-quarter results coming in starting after the July 4 holiday, Dubravko Lakos-Bujas and the equity strategy team at JPMorgan pointed out four main themes in a note to clients on Friday morning.

The first, of course, is AI.

Investments in AI, strategies and all types of referrals boosted earnings throughout the quarter. Data from FactSet showed that 199 members of the S&P 500 mentioned AI in their earnings calls through the end of May.

The JPMorgan team noted that companies remain “constructive around the topic of AI by making announcements about additional capital expenditures, new AI models, and updates on the organization’s continued reorientation toward AI product offerings.”

The second topic is weight loss drugs.

The best-performing stocks in the S&P 500 this year are largely focused on AI gaming. Sitting in the eighth best year-to-date gains of 52% is Eli Lilly ( LLY ), maker of popular weight-loss drugs Mounjaro and Zepbound.

Eli Lilly is also now the eighth largest company in the S&P 500 with a market cap of $800 billion.

The US consumer is the third key theme emerging from earnings season.

Specifically, what JPMorgan called “expects increases in the level of resilience given consumer price pushbacks, trade-offs and value-seeking behavior, particularly among lower-income consumers.”

As Walmart ( WMT ) CFO John David Rainey told Yahoo Finance in May, “We see wallets are still stretched, [customers are] still looking for value.”

Last week, retail sales data for May showed sales rose at a slower pace than forecast, while April sales were revised down sharply. At least one economist said the report adds to “signs that [consumers] they are trying a little”.

With consumer spending accounting for about two-thirds of U.S. GDP growth, how carefully — or boldly — shoppers are entering their portfolios is always a key input for investors.

The final topic noted by the JPMorgan team was “spend management,” which, like AI, is another holdover from previous years.

In 2022, as tech stocks were hit with rising rates, layoffs began to engulf an industry that had been aggressively hoarding talent in 2020-2021. Continued cost cleanup in 2023 helped investors grow excited about profit margins heading into 2024.

And management teams still have enough cover from the wider environment to continue to thin their ranks or pull back on other spending.

“We also remain focused on long-term efforts to sustainably reengineer our cost base,” Alphabet ( GOOG ) CEO Sundar Pichai told investors in late April.

“We continue to manage our headcount growth and align teams with our highest priority areas. This speeds decision-making, reduces layers and enables us to invest in the right areas.”

At the end of the first quarter, Alphabet employed about 10,000 fewer people than a year earlier. Earlier this month, the tech giant announced it had hired a new CFO.

Weekly calendar

Monday

Economic data: Dallas Fed Manufacturing, June (-14.9 expected, -19.4 previously)

Earnings: No visible earnings are scheduled for release.

Tuesday

Economic data: S&P CoreLogic Case-Shiller Home Prices, April (+0.33% month-over-month); FHFA Home Price Index, April (+0.1% month-over-month); Conference Board Consumer Confidence, June (100 expected, 102 earlier); Richmond Fed Manufacturing, June (0 ago)

Earnings: FedEx (FDX), Carnival (CCL), TD SYNNEX (SNX), Progress Software (PRGS)

Wednesday

Economic data: MBA mortgage applications, week of June 21 (+0.9% previously); New Home Sales, May (+2.5% expected, -4.7% previously)

Earnings: Micron (MU), BlackBerry (BB), General Mills (GIS), Paychex (PAYX), Levi Strauss (LEVI), Jefferies (JEF), Concentrix (CNXC), AeroVironment (AVAV), MillerKnoll (MLKN)

Thursday

Economic data: Q1 GDP, third estimate (+1.4% annual rate expected, +1.3% previously); Initial jobless claims, week of June 22 (238,000 previously); Durable goods orders, May (+0.1% expected, +0.6% previously); Pending Home Sales, May (-7.7% prior): Kansas City Fed Manufacturing Activity, June (-2% prior)

Earnings: Nike (NKE), Walgreens (WBA), McCormick (MKC), Acuity Brands (AYI), American Outdoor Brands (AOUT)

Friday

Economic data: PCE inflation, month over month, May (+0% expected, +0.3% previously); PCE inflation, year-over-year, May (+2.6% expected, +2.7% previously); Core PCE inflation, month-over-month, May (+0.1% expected, +0.2% previously); Core PCE inflation, year-over-year, May (+2.6% expected, +2.8% previously); Personal income, May (+0.4% expected, +0.3% previously); Personal spending, May (+0.3% expected, +0.2% previously); University of Michigan Consumer Sentiment, June (65.8 expected, 65.6 previously)

Earnings: No visible earnings are scheduled for release.

Correction: An earlier version of this story referred to Jonathan Golub, not John Stoltzfus, as chief market strategist at Oppenheimer Asset Management. Golub is a strategist at UBS.