Finimize - 🤳 Big earnings and the bigger picture

🔍 The focus this week: Big earnings, bigger picture

The AI-driven Big Tech rally lately seems like it could be running out of gas. And that puts some added pressure on behemoths Microsoft, Meta, Apple, and Amazon as they release quarterly results this week. The profit figures for these firms could change the whole story for the market, after a stellar start to the year that’s been driven by them and just a few other of the sector’s giants. Investors – who are likely holding their breath for even more standout performances – should brace for volatility. A mere whiff of disappointment could trigger another sharp selloff this week, just as it did last week.

And sure, those Magnificent Seven firms are likely to hog the spotlight, but it’s worth paying attention to the earnings reports from Procter & Gamble, Starbucks, and Mastercard too. Their figures are more than just numbers – they're a financial pulse check on the whole country. And that checkup comes at a crucial moment, as smaller firms – typically the ones more sensitive to domestic economic wellbeing – are beginning to regain momentum lost to those AI-linked tech lords.

Now, earnings snapshots are helpful, but they're essentially a look in the rearview mirror at the most recent performance. For a peek through the windshield at what’s coming up, you might want to keep your eyes on the world’s central banks. This week, the Federal Reserve, the Bank of Japan, and the Bank of England are all set to announce interest rate decisions. And since borrowing costs drive pretty much everything, what they do (and what they say) matters.

Of course, investors are eagerly anticipating rate cuts in the US and the UK, but there’s no guarantee they’ll see them now. Inflation has fallen closer to the central banks’ target, sure, but it's still too high and volatile for policymakers to feel confident enough to slash rates just yet. See, they’re cautious about triggering another inflation spike that could hurt the economy – and their credibility. But it’s a delicate balance: unemployment has been rising recently, and central banks don’t want to be forced into steep rate cuts later if the economy is slowing faster than anticipated. So rate cuts are likely on the horizon, but whether they’ll happen as early as this week is still anyone’s guess.

And that’s the story for almost every central bank out there – except Japan. See, Japan’s economy endured two decades of deflation and now is welcoming a little inflation action. That’s why it’s been the only major central bank to keep its key rates near zero. But consumer price rises have now been above target for more than two years, and the yen has fallen a bit too far too fast for the BoJ’s tastes, so don’t be surprised if these central bankers hike rates when they meet this week.

📅 On the calendar

• Monday: UK M4 money supply (June). Earnings: McDonald’s.
• Tuesday: Japan unemployment rate (June), eurozone economic growth (Q2), US consumer confidence (July), US job openings and labor turnover survey (June), eurozone economic sentiment (July). Earnings: Microsoft, AMD, PayPal, Merck, Pfizer, Procter & Gamble, Mondelez, Starbucks.
• Wednesday: China PMIs (July), Japan industrial production and retail sales (June), Bank of Japan interest rate announcement, Federal Reserve interest rate announcement, eurozone inflation (July). Earnings: Meta, Arm, Qualcomm, Mastercard, Boeing.
• Thursday: Eurozone unemployment rate (June), Bank of England interest rate announcement. Earnings: Apple, Amazon, Coinbase, Intel.
• Friday: US jobs report (July). Earnings: Chevron, ExxonMobil.

👀 What you might’ve missed last week

US

• Big Tech saw a big drop, as traders violently shifted from megacap AI plays to quieter corners of the market.
• The US economy grew at a peppier-than-expected pace, as consumer spending perked up.

Europe

• Eurozone business activity notched little growth, as the bloc’s top economy unexpectedly slumped.

Asia

• China surprised markets with an interest rate cut, a week after the much-touted Third Plenum meeting left investors feeling let down.

🤔 Why it matters

Big Tech has fueled the stock market’s rally through much of this year, but last week, it hit a major snag. Investors rushed to dump their Magnificent Seven stocks, worried that the firms’ earnings might never match the massive figures they’re spending on AI technology. They flocked instead to the all-but-forgotten small-cap corners of the market. And sure, there’s wisdom in buying small firms now – they’re likely to outperform as interest rates start to fall, for a start – but the sudden pivot had folks feeling anxious, just days ahead of quarterly updates from Microsoft, Meta, Apple, and Amazon.

The world’s biggest economy picked up its own pace in the second quarter – growing at a surprisingly quick 2.8% annualized rate – double the rate of the previous quarter. And that spunkier stride was thanks mostly to the country’s tried-and-true growth engine: the American consumer. The news was good, suggesting the US might be inching closer to a soft-landing scenario, where inflation eases toward the central bank target without triggering a recession. It’s a delicate balance, though, with some inflation measures still stubbornly high and certain segments of the economy experiencing a more pronounced slowdown.

Euro-area business activity expanded by the slightest of margins in July, weighed down by unexpected weakness in Germany. The surprisingly weak purchasing managers index comes as the European Central Bank considers whether to announce a second interest rate cut when it meets in September. Keeping interest rates high could help cool down the region’s stubbornly hot prices, but those higher borrowing costs might also stifle growth.

The People’s Bank of China took markets by surprise on Monday, slicing a key interest rate to 1.7% from 1.8%. The move had Chinese banks lowering their benchmark lending rates in kind, making borrowing cheaper across the board – from mortgages to personal loans. There was some hope that those rate cuts might help perk up an economy that’s showing its weakest growth in over a year. But it’s a far cry from what investors had been hoping for: a massive stimulus spending announcement in the wake of the big Third Plenum economic meeting.