Earnings, earnings, earnings.
In the week ahead, second quarter earnings season will kick into high gear as three of the four members of FANG will report results.
Netflix last week reported earnings that disappointed and shares of the streaming platform fell sharply, and this week all eyes will be on Google parent company Alphabet (reporting Monday), Facebook (reporting Wednesday), and Amazon (reporting Thursday). All three companies will release their results after the market close.
Outside of the FANGs, there will be plenty of earnings action — 174 S&P 500 members are set to report results this week.
Last week, earnings results, Trump’s criticism of the Federal Reserve and continued noise on the trade front all combined to lead the major equity indexes precisely nowhere, though the Nasdaq sits just below a record high after hitting a closing high on Tuesday.
And though another strong quarter for corporate earnings is about to take full flight — data from FactSet indicate that second quarter earnings are on track to rise 20.8% over last year — expect the market discussion to continue to be dominated by trade.
“Trade dominates news headlines and investor discussions,” wrote David Kostin, head of US equity strategy at Goldman Sachs, in a note to clients published Friday.
“Tariffs benefit some domestic industries, but pose a risk to S&P 500 earnings through reduced revenues (lower exports) and weaker margins (higher input costs). Our geographic sales baskets price some bilateral trade risk with China, but not a global trade war.”
Specifically, Kostin notes that soybean prices indicate market expectations for a 25% tariff on U.S. exports to China next year. The firm points out, however, that S&P 500 companies directly derive just 2% of their sales from China, potentially muting the impact of a trade war between the U.S. and China.
Wednesday: Facebook (FB), Boeing (BA), UPS (UPS), Coca-Cola (KO), PayPal (PYPL), Ford (F), Visa (V), Gilead (GILD), AMD (AMD), Qualcomm (QCOM), General Dynamics (GD), Hilton Worldwide (HLT), Anthem (ANTM)
Thursday: Amazon (AMZN), Starbucks (SBUX), McDonald’s (MCD), MasterCard (MA), Celgene (CELG), Comcast (CMCSA), Under Armour (UAA), American Airlines (AAL), Altria (MO), Discover Financial (DFS), Intel (INTC)
Monday: Existing home sales, June (+0.2% expected; -0.4% previously)
Tuesday: FHFA home price index, May (+0.3% expected; +0.1% previously); Markit flash manufacturing PMI, July (55.1 expected; 55.4 previously); Markit flash services PMI, July (56.5 expected; 56.5 previously); Richmond Fed manufacturing index, July (18 expected; 20 previously)
Wednesday: New home sales, June (-2.9% expected; +6.7% previously)
Thursday: Initial jobless claims (215,000 expected; 207,000 previously); Wholesale inventories, June (+0.5% expected; +0.6% previously); Durable goods orders, June (+3% expected; -0.4% previously)
Friday: Second quarter GDP, first estimate (+4.3% annualized growth expected; +2% previously); Personal consumption, second quarter (+3.1% annualized growth expected; +0.9% previously); University of Michigan consumer sentiment, July (97.1 expected; 97.1 previously)
Powell vs. Trump
“We have been warning for months that a dispute was inevitable between President Trump and Fed Chairman Jerome Powell,” said Greg Valliere, chief global strategist at Horizon Investments, in an email on Friday.
“We thought it would come later this year, after more Fed tightening, but Trump apparently has decided to send a signal now. There are implications.”
On Thursday, CNBC published an excerpt from its interview with Trump that ran on the network in full Friday morning. And in this excerpt, we heard Trump discussing his displeasure with the Fed’s past and likely future decisions to raise interest rates. On Friday, Trump added in a tweet that the Fed raising interest rates now, “hurts all that we have done.”
“I’m not thrilled,” Trump said in his interview with CNBC. “Because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best.”
Trump told CNBC that his displeasure with the Fed raising rates reflects how he would feel as a private citizen. But as Valliere wrote Friday, Trump has now put his views on the Fed on the record. There is no going back, both for Trump and for Powell.
“The damage has been done,” Valliere said. “And we would argue that Trump’s displeasure with Powell…will ratchet up as the Fed continues to raise rates.”
At its June meeting, the Fed release its latest economic projections, which indicate the central bank will likely raise its benchmark interest rate twice more in 2018 — first in September, then again in December.
And as Valliere sees things, whether the Fed sticks to its outlined plan or changes course, the motives of Powell and the Fed at-large are now subject to questioning, both from a financial markets and political perspective.
If the Fed sticks with its path, the central bank could be seen as raising rates simply to prove the point that it is beyond political influence. JP Morgan’s Michael Feroli said in an email Thursday that, “an argument can be made that the President’s comments may skew the Committee in a hawkish direction: if a decision is a close call then the appearance of kowtowing to the President may bias them toward raising rates.”
On the flip side, a change in the Fed’s policy forecast — perhaps even if warranted by incoming data — may be seen by markets as the central bank kowtowing to pressure from Trump. So no matter what decisions the Powell Fed makes over the balance of Trump’s first term, Trump’s comments have opened to door to speculation about political influences weighing on monetary policy, no matter if these influences are unfounded or not.
Through a little more than a year and a half of Trump’s presidency, little about his tenure has been conventional. And Trump’s appointment of Powell to replace Janet Yellen at the Fed was one of the least interesting decisions made during his presidency.
In the Trump era, however, the arc of history bends towards the unexpected and unconventional.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland