A Data Deluge Brings a ‘Moment of Truth' for Markets This Week

Yahoo

2 days ago

(Bloomberg) -- Wall Street pros are staring down a pivotal week that will likely set the tone for the rest of the year in markets and the economy.
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First and foremost is the conclusion of the Federal Reserve's meeting on Wednesday, and although it isn't expected to cut interest rates, traders and investors will be poring over commentary for clues about the path ahead. Then there's a string of Big Tech earnings with Amazon.com Inc., Apple Inc., Meta Platforms Inc. and Microsoft Corp. all reporting. And sprinkled throughout are some of the leading indicators on the state of the economy, from gross domestic product to nonfarm payrolls.
In other words, if there ever was a five-day stretch that would define the second half of the year, this is it.
'This week's packed calendar — trade negotiations, the FOMC, the jobs report and four of the Magnificent Seven names reporting — makes it truly a moment of truth for markets,' said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI. He was referring to the Federal Open Market Committee, the panel within the Fed that sets interest rates.
The fire hose of releases will test investors' faith in the resilience of the US economy and the stock market's seemingly unstoppable rise. And with President Donald Trump's self-imposed tariff deadline of Aug. 1 — which he's said won't be extended — markets are hoping for some sense of stability on trade negotiations after months of whiplash.
'I think there is more of a chance of markets getting clarity on the continued resilience of the economy, while we get less clarity on the trade front,' said Kevin Gordon, senior investment strategist for Charles Schwab & Co. ''Reciprocal tariff' deadlines are staggered for some of our largest partners, and there are still lingering questions around already-announced deal frameworks, so I don't think of Aug. 1 as some magical date on which we'll stop being gripped by tariff anxiety.'
S&P 500 companies are generally beating forecasts and profits are up 4.5% from this time a year ago, according to Bloomberg Intelligence data. Firms like Southwest Airlines Co., which said tariffs shaved $1 billion from its annual pre-tax profit this year, expect to see improvements in the second half. 'We already see signs that demand is coming back in volumes,' Chief Executive Officer Bob Jordan said in an interview.
Much of the earnings strength is being driven by wealthier customers. American Airlines Group Inc. highlighted strength in their premium cabin demand, while Deckers Outdoor Corp. cited pricey shoes like Ugg sheepskin boots and Hoka sneakers. United Airlines Holdings Inc. and Delta Air Lines Inc., said corporate travel was leading their rebounds.
On the flip side, Chipotle Mexican Grill Inc. cut its guidance because the 'lower-income consumer is under pressure,' Chief Executive Officer Scott Boatwright said, which has led to a drop in spending.
There are other signs of stress, with companies like Conagra Brands Inc. and Abbott Laboratories discussing higher costs due to tariffs. In particular, consumer discretionary stocks are expected to see profit declines into the start of 2026 as trade policies start to bite, Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper warn.
'We already have some corporate commentary as to what effect tariffs are having and will at an individual level,' said Dan Greenhaus, chief economist and market strategist at Solus Alternative Asset Management. 'But the truth is, we probably need several more months before having a firmer handle on the cost distribution.'
Economic Uncertainty
Economic data has also been uneven as the tariff impact is just starting to hit. The government's initial estimate of second-quarter GDP is expected to show a notable rebound in growth after a monumental surge in imports caused a contraction at the start of the year.
'It won't be until after the market and economy have had an opportunity to digest the new tariff rates that become effective on Friday that we will know where we stand,' said Michael O'Rourke, chief market strategist at JonesTrading LLC.
Other reports due this week may point to some softening in the economy. Economists expect consumer spending barely grew in June after adjusting for inflation, and other estimates point to a continued slowdown in hiring and uptick in unemployment. They're also projecting an acceleration in the Fed's preferred measure of inflation — the personal consumption expenditures price index — as tariffs start to hit.
'It's not the cliff that most people are always looking for when it comes to an economic downturn, but it is a visible slowdown if you take the time to actually lift the hood and look at the underlying details,' said Gregory Daco, chief economist at EY-Parthenon.
Despite all the uncertainty, the stock market is trading at record highs as fears of worst-case tariff scenarios have failed to materialize. The question is how long that can last.
'I think there are a few different factors here. First, there are signals that the labor market is holding up well, wages are growing faster than inflation — both of which supports the consumer in aggregate,' said Cayla Seder, macro multi-asset strategist at State Street. 'When it comes to the stock market, earnings have been beating a low bar, which has indicated the companies are holding up better than feared.'
--With assistance from Shelly Banjo and Matt Turner.
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