(Friday Market Open) Investors’ heads were in the cloud this morning on solid Microsoft (NASDAQ:MSFT) earnings even as hopes of a more-aggressive rate cut by the Fed later this month kept sentiment lofty.
Shares of MSFT were up more than 2.8% in early trading this morning after the technology giant surpassed expectations on its top and bottom lines. Its Intelligent Cloud revenue was up 19%. And while the 64% revenue growth in its Azure public cloud business represented a slowing growth rate, it’s still nothing to sneeze at.
While you never want to make too much from one company earnings report, the strength in cloud services likely shows strong demand from businesses, which goes against the grain of how corporate spending has slowed across the economy.
The results for the world’s biggest publicly traded company by market cap seemed to help ease some concerns about this earnings season, which has seen some mixed results.
Fed In Focus
The market also continued to derive momentum from dovish comments from a Federal Reserve official that increased expectations that the central bank will be more aggressive than previously thought in cutting rates at its meeting later this month.
“It’s better to take preventative measures than to wait for disaster to unfold,” New York Federal Reserve President John Williams (NYSE:WMB) said in a speech. “When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”
According to the futures market, the probability for a 50-basis-point rate cut increased to more than 70% after Williams’ speech before easing back.
The Fed told media outlets that Williams’ speech was academic in nature, had to do with two decades of research, and didn’t intend to hint at what policy makers might do at their upcoming meeting. This morning, the futures market was showing the probability of a 50-basis-point cut was around 40%.
As we’ve said before, it would seem that the Fed might be more conservative and issue a 25-basis-point cut. While there is plenty of uncertainty out there because of the trade issue and just how strong corporations are at the moment, we just had a great jobs report and the American consumer seems to be pretty healthy.
With the Fed entering its traditional quiet period before a rate decision, it looks like the market is just going to have to wait and see what the central bank ends up doing and how it ends up talking about the decision it makes.
Earnings Drive Markets Long Term
That leaves time for investors to focus on earnings season, which has been mixed as more and more companies report.
We’ve had disappointing results from Netflix (NASDAQ:NFLX) and CSX (NASDAQ:CSX), but several banks have shown that there remains life on the consumer level. And the fact that some companies reporting better than expected earnings seems to be providing some optimism to help keep the market near all-time highs, even as it is also buoyed by expectations of a Fed rate cut. Through Thursday, with more than 12% of S&P 500 companies reporting, around 84% have beaten earnings expectations, CNBC reported, citing FactSet data.
Aside from concern about this earnings season, the big drag arguably keeping the market from moving even higher is the continued uncertainty surrounding the trade situation between the U.S. and China.
On the earnings front, NFLX shares dropped more than 10% on Thursday even though the streaming giant reported stronger-than-forecast earnings. The company missed on revenue, said it lost 126,000 domestic paid subscribers and only added 2.83 million international paid subscribers when Wall Street was expecting many more. The company led the losers in the S&P 500 Communication Services sector, which finished the day solidly in the red and was the day’s worst performing sector.
Meanwhile, Morgan Stanley (NYSE:MS) beat on earnings and revenue, and the banks’ shares climbed more than 1.5%, helping the Financials sector tie for the biggest gains on the day Thursday, up 0.82% along with Consumer Staples.
International Business Machines (NYSE:IBM) gave a boost to the Information Technology sector as its shares jumped nearly 4.6% after the company posted stronger-than-forecast earnings.
FIGURE 1: STORES OF VALUE. Dovish comments from a Federal Reserve official weighed on the U.S. dollar ($DXY - candlestick) Thursday as odds of a more-aggressive rate cut climbed. The lower buck helped support gold futures (/GC - purple line). Data source: ICE (NYSE:ICE), CME Group (NASDAQ:CME). Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
A Mixed Bag: Just as earnings season has investors weighing some disappointing results against some that have beaten expectations, economic data have also been a mixed bag this week. June retail sales came in better than expected, but June industrial production was flat when a gain had been forecast. June housing starts and building permits were weaker than Wall Street expectations, but a housing market index for July registered higher than had been forecast. It seems like the economy overall is doing OK but that there are pockets of weakness.
Leaders Lagging: In one of the data points that came in soft this week, the Conference Board on Thursday said its Leading Economic Index (LEI) for the U.S. dropped 0.3% in June. A Briefing.com consensus had expected no change. It offers another data point that contributes to the narrative of investor caution in the face of expectations of slowing global growth, especially as weakness in new orders for manufacturing was one of the primary contributors to the decline. “As the U.S. economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year,” the Conference Board said.
RV There Yet? If you’re looking for an example of how tariffs that the U.S. has put on billions of dollars of Chinese goods might be crimping economic growth in America, look no further than the recreational vehicle market. Even as prime camping season approached, wholesale RV shipments through May were down 22.1% compared to where they were at this point last year, according to the RV Industry Association. “The industry has taken hits from U.S. tariffs on steel and aluminum and other duties on scores of Chinese-made RV parts, from plumbing fixtures to electronic components to vinyl seat covers,” according to a Reuters report. “Tariff-related price hikes have forced manufacturers to pass on some of the increased costs though higher RV prices, which in turn has contributed to slower sales.”
Good Trading