Market News and Analysis: Earnings Surprises and GDP Growth Amidst Political Events
Introduction:
As the second-quarter earnings season comes to a close, the S&P 500 has seen positive surprises in both earnings and sales. With 79% of companies reporting positive earnings surprises and 60% reporting positive sales surprises, the blended year-over-year earnings growth rate stands at 10.9%, the highest since the last quarter of 2021. The upcoming earnings report from Nvidia on August 28th is expected to be the grand finale of the season.
Economic Growth Amidst Manufacturing Recession:
Despite a manufacturing recession that has persisted for the past 21 months, the service sector and rising energy exports continue to fuel the growth of the U.S. GDP. This growth is further supported by the upcoming Presidential election cycle, with promises of new benefits and tax policies from candidates such as Kamala Harris. Consumer confidence is expected to rise as these promises are made.
Important Market News and Implications:
1. Democratic National Convention and the Kansas City Fed’s Retreat:
The Democratic National Convention (DNC) and the Kansas City Fed’s annual retreat in Jackson Hole will dominate the news this week. While protests related to Palestine were expected, the official protests have been moved offsite, reducing the risk of disruptions. The focus of the retreat will be on the economic outlook, with Fed Chairman Jerome Powell’s speech on Friday being a key highlight.
2. Payroll Job Revisions and GDP Forecast:
On Wednesday, the Labor Department is set to announce a “glitch” in the statistics, which may result in the revision of up to 1 million payroll jobs. This revision is primarily due to people working multiple jobs. Goldman Sachs estimates a downward revision of 600,000 jobs, while JP Morgan expects a revision of 360,000 jobs. Such a revision may lead to an increase in the unemployment rate, which could be embarrassing during the DNC. Additionally, the Atlanta Fed has revised its forecast for third-quarter GDP growth from 2.4% to 2%, indicating a potential slowdown.
3. Crude Oil Prices and Geopolitical Tensions:
Crude oil prices remain high due to Russia’s troubles following the Ukrainian incursion into its Kursk region. The potential escalation of tensions in the Middle East, especially if Iran retaliates against Israel, further contributes to the high prices. Russia’s crude oil exports have already declined by 13% since April, with a weekly decline of 360,000 barrels per day. These factors contribute to the uncertainty in the oil market.
4. Gold Prices and Lack of Confidence in Central Banks:
Amidst the chaos in the global economy, gold prices have risen by 20% this year, reaching $2,500 per ounce. This increase can be attributed to the lack of confidence in central banks and the prevailing uncertainty. As a result, there has been a surge in the demand for gold coins and bars, with American Eagle gold coins being available at retailers like Costco.
Insights from the Democratic National Convention:
Kamala Harris’s campaign against food “price gouging” is expected to be a major focus at the DNC. The campaign promises to introduce federal bans on price gouging in the food and grocery industry, aiming to prevent big corporations from exploiting consumers. However, a potential issue arises as major food producers, such as Hormel and Tyson Foods, actively assist their immigrant workers in obtaining legal status in the U.S. This contradiction poses a challenge to the Harris campaign’s threat to punish these companies, as they play a role in assimilating immigrants and facilitating their legal status.
Brazil’s Budget Deficit and Potential Currency Devaluation:
Brazil’s large budget deficit, currently standing at 10% of GDP, has led to a weak Brazilian real. President Lulu da Silva’s administration has struggled to control spending, potentially leading to the need for a currency devaluation, similar to Argentina. In an attempt to defend the real, the Brazilian central bank has been raising interest rates, with forecasts indicating a rise to 10.5%.
Conclusion:
As the earnings season comes to a close, Nvidia’s upcoming earnings report is highly anticipated, with a forecasted rise of 156% in earnings per share. The company’s position as a market leader has played a significant role in the impressive rebound of the stock market. While economic growth remains fueled by the service sector and energy exports, geopolitical tensions and uncertainty in central banks continue to impact crude oil and gold prices. The DNC and the Labor Department’s payroll job revisions will be key events to watch, as they have the potential to influence market sentiment and economic indicators.
