Tame inflation at the retail as well as wholesale levels as measured by the Consumer and Producer Price Indexes (see below) helped propel all major large cap gauges to closing record highs on Thursday with the only slight laggard being the Dow Jones Industrial Average. As we see it, the catalyst for a summer melt-up could be strong second quarter earnings. We don’t see a meaningful pullback unless there is a reversion from the President Trump we witnessed in the second quarter back to the first. The reasons for the V-shaped recovery that investors witnessed during Q2, namely a focus on deregulation and economic growth rather than fixating on tariffs, hopefully will be remembered by the President as we plod through what has thus far been a hot, dry summer.
· The second quarter earnings season is about to kick in to high gear this coming week, which could provide a glimpse into what the remainder of the summer might have in store for investors. According to FACTSET, “for Q2 2025 (with 12% of S&P 500 companies reporting actual results), 83% of S&P 500 companies a positive EPS surprise and 83% of S&P 500 companies have reported a positive revenue surprise.” Even though this is a relatively small percentage of companies that will report, those that have, namely the big banks (JP Morgan Chase, Wells Fargo, Bank of America, Citigroup), all have surprised to the upside, an indication that the economy remains on firm footing.
· Federal Reserve Governor Christopher Waller, purportedly on the short list to replace current Fed Chair Jerome Powell lobbied for a rate cut while at a speaking engagement this past week, noting that “with inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate. I believe it makes sense to cut the FOMC’s policy rate by 25 basis points two weeks from now.” (The FOMC will conduct its regularly scheduled two-day policy meeting July 29-30.) Let us add that we see no harm should the Fed decide to cut by 25 basis points (0.25%) but see no real economic tailwind as a result either, other than that it will signal to investors the Fed’s willingness to step in should the economy slow despite its continuing concern over the potential for tariff-related inflation. That said, a cut at this meeting is possible, but not likely.
It’s The Economy…”
· Housing Starts rose 4.6% or by 58,000 to a seasonally adjusted annualized rate (SAAR) of 1,321,000 during June as compared to 1,263,000 in May (-0.5% y/y). Of note is the fact that according to the U.S. Census Bureau there must be approximately 350,000 housing starts per year to replace those lost to natural causes, man-induced causes or by the growing U.S. population. During May, Single-family housing starts fell 4.6% or 43,000 to 883,000 from 926,000 (-10.0% y/y). Meanwhile Multifamily housing starts rebounded 30.0% to 438,000 in June (26.6% y/y) from 337,000 during May. Building Permits, a key barometer for future starts, rose 4,000 to 1,397,000 in June as compared to May (-4.4% y/y). (Source, U.S. Census Bureau)
· The University of Michigan reported that the Preliminary July Reading of Consumer Sentiment edged up to 61.8 (-6.9% y/y) from a final June level of 60.7. The preliminary July expectations component improved to 58.6 (-14.8% y/y) from a final June 58.1 as the preliminary July current conditions component rose to 66.8 (+6.5% y/y) from a final June 64.8. According to the Survey of Consumers Director, Joanne Hsu, “year-ahead inflation expectations fell for the second straight month, plunging from 5.0% last month to 4.4% this month. Long-run inflation expectations receded for the third straight month, falling back from 4.0% in June to 3.6% in July. Both readings are the lowest since February 2025 but remain above December 2024.” (Source, Univ of Michigan)
· Prices at the wholesale level as measured by the Producer Price Index were unchanged during June, after rising 0.3% in May. Over the past year the PPI has risen 2.3%, down from 2.7% in May as well as from a peak rate of 11.7% during March 2023. Energy prices rose 0.6% during June (-2.6% y/y) after falling 0.3% in May. Finished food prices rose 0.2% during June (3.3% y/y) after holding steady in May. Ex- food and energy, the core PPI rose 0.3% during June (2.6% y/y), after rising 0.2% in May. (Source, U.S. Bureau of Labor Statistics)
· The Consumer Price Index rose 0.3% during June (2.7% y/y), the highest in five months and after edging 0.1% higher in May. The CPI has fallen from a y/y high of 9.1% during June 2022. Energy prices rose 0.9% during June (-0.8% y/y) after falling 1.0% in May. Food and beverage prices rose 0.3% during June (3.0% y/y) after rising a similar amount during May. The cost of shelter rose 0.2% during June (3.8% y/y), after rising 0.3% during May. Excluding food and energy, the core CPI rose 0.2%, after rising by 0.1% during May. Over the past year the core CPI has risen 2.9% y/y, well below the September 2022 peak of 6.6%. (Source, U.S. Bureau of Labor Statistics)
Economic Reports scheduled to be released this week include the following: on Tuesday, June Index of Leading Economic Indicators; on Thursday, the Weekly Report of Initial Claims for Unemployment Benefits and June New Home Sales.
A slew of companies are scheduled to report Q2 Earnings Season this week, including Verizon Communications (VZ), Texas Instruments (TXN), Coca-Cola (KO), Philip Morris (MO), Intuitive Surgical (ISRG), IBM (IBM), T-Mobile (TMUS), Alphabet (GOOG), Tesla (TSLA), Service Now (NOW), NextEra Energy (NEE), GE Vernova (GEV) and Thermo Fisher Scientific (TMO).