What Happened Last Week
- Jackson Hole: Fed Chair Powell opened the door to a September rate cut in his speech on Friday at the annual central bank conference.
- Equity Rotation: Investors soured on tech and AI stocks in favor of small-caps and cyclicals.
- Retailer Earnings: Reports from key U.S. retailers revealed consumer resilience amid ongoing affordability concerns.
What We’re Watching This Week
- Nvidia Earnings: Investor expectations are high for this earnings report, as the stock has risen over 30% since its last earnings release.
- Inflation: The Fed will release its preferred inflation gauge on Friday. Japan and major European countries will also update their inflation measures.
- Fed Speak: Governor Waller, a key contender in the race to be the next Fed Chair, gives his economic outlook on Thursday.
Investment Management Team Views
Powell’s Jackson Hole speech solidified a September Fed rate cut and salvaged what was shaping up to be a tough week for equity markets. Mega-cap tech remained under pressure ahead of Nvidia’s (NVDA) upcoming earnings release due to concerns about overinvestment and a lack of monetization opportunities in the AI sector. The NASDAQ 100 closed lower on the week, despite gains for the S&P 500, an increasingly rare return divergence that last occurred almost one year ago and has only happened five other times since the start of 2023. Investors sold mega-cap tech stocks and rotated into cyclicals such as energy and materials. Small caps, up over 3% last week, were the biggest beneficiary of this rotation, notching their biggest weekly outperformance versus the NASDAQ 100 since July of last year.
The sharp repositioning in equity markets stood in stark contrast to the relatively muted action from interest rate and currency markets last week. Powell’s speech did not change the narrative on where Fed policy is headed, as yields and the dollar fell modestly to signal that. Put differently, while a September cut of 25 basis points (bps) is almost a done deal, what happens next depends on how the inflation and labor market data evolve. Last week’s Purchasing Managers’ Index (PMI) surveys are indicative – growth expectations came in stronger and upward pressure on prices was more acute than expected. Adding to this macro view is the picture from U.S. retailer earnings reports last week. Overall, the story was one of resilience for consumers, but ongoing price increases and uncertainty are still pushing some consumers to trade down.
The week ahead would be a typical slow summer one, if not for an earnings report from the most important company in the most important theme in the markets and economy today: Nvidia. Investor expectations are for a beat and raise as the hyperscaler capex has been exceedingly strong. Our focus will be on margins and the impact of tariffs and government policy on its future earnings stream. Outside of NVDA earnings, investors will continue to digest Powell’s speech from last week. Governor Waller’s outlook on Thursday and the Fed’s preferred inflation gauge on Friday will add to the outlook for interest rate policy.