Confusion Lingers as Fed Week Hits

Land of Confusion

Now did you read the news today?

They say the danger's gone away

But I can see the fire's still alight

There burning into the night

There's too many men, too many people

Making too many problems

And not much love to go around

Can't you see this is a land of confusion?

Well, this is the world we live in

And these are the hands we're given

Use them and let's start trying

To make it a place worth living in 

                     - Banks, Rutherford, Collins (Genesis), 1986

Yes... 

We can rehumanize each other, but we have to try. We should try. We will.

Most of my regular readers likely already know that I am a Christian. I come from the place and time of conservative family values. Not everyone thinks like I do. That's OK. Very few people have a similar life experience. That's fine. Many people are not Christian. Again, this is fine. Perhaps even if faith is placed elsewhere, all can find some common ground, and something in their heart from their own scripture or belief system to work toward reaching for something better. The following verse reels me back in when I get close to leaving the rails. Maybe, I hope, it can help guide at least one other person to a place of peace.

"Any bitterness or bad temper of anger or shouting or abuse must be far removed from you -- as must any kind of malice. Be generous to one another, sympathetic, forgiving each other as readily as God forgave you in Christ." 

                    - Ephesians 4:31-32

Fed Week

We're here. "Fed Week." Not only will the Federal Open Market Committee go into the committee's two-day policy meeting on Tuesday (tomorrow) likely to produce a short-term rate cut on Wednesday afternoon, but we're not quite sure on Monday morning who will comprise the Board of Governors.

The Senate is scheduled to vote on the confirmation of Stephen Miran to the board this evening. Miran, already a White House economic adviser, is Pres. Trump's nominee to replace former Fed Gov. Adriana Kugler, who abruptly resigned from her position after not casting a vote at the policy meeting that culminated on July 30. It is unknown just how quickly or even if Miran will be confirmed and if he is confirmed, if he can be sworn in quickly enough to participate in this meeting. That particular term will end in January, so this could be a short-term gig for Miran.

Then there is the ongoing saga of Fed Gov. Lisa Cook, who was fired from her position at the Board of Governors for cause (mortgage fraud) by the president and then at least temporarily reinstated by a U.S. District Court judge. The Department of Justice has appealed that decision to the U.S. Circuit Court in D.C. and asked for an expedited hearing. Attorneys for Cook then filed a request to that court to deny the Trump administration's request. The administration had been given until 3 p.m. ET in DC on Sunday to respond, which they did, renewing their appeal.

The Wall Street Journal reported over the weekend that at least on some documents, Cook described a property that may be involved here as a second home. This appears to confirm a story that ran at the Associated Press late last week. I am no legal scholar, but I would think that this development would at least slow down the DOJ's case and the president's power to remove Cook from her post. Longer term? I don't know, but I would be surprised if Cook were not to participate in this particular FOMC policy meeting. That's all the info we need for now.

Last Week...

Aside from the major news events of the past week that captured the nation's attention, the five-day period ended Friday was an important week for economists, traders and investors. This past Tuesday, markets were pleasantly surprised by August producer prices that hit the tape not just frozen in time but in a state of outright monthly deflation. Unfortunately, on Thursday, August consumer prices printed just a tad on the warm side. This was not all that unexpected as producer prices can lead consumer prices and July was a torrid month for producer prices.

This all but cemented the idea that the Fed would move ahead this week with the central bank's expected pivot toward a cycle of more dovish monetary policy. The horrendous deterioration in the University of Michigan's preliminary survey on Consumer Sentiment for September from the final survey for August added to that narrative.

Treasury yields continued their weekly slide (meaning Treasury debt securities rallied), while equities had a very nice week as well. The S&P 500 paused on Friday after having closed at record highs throughout the week. The Nasdaq Composite closed at five consecutive record highs last week, a record in itself that can never be broken, kind of like a 99-yard touchdown run or pass.

China

Tensions between the planet's two largest economies are under the microscope as the week begins. After meeting on Sunday, Treasury Sec. Scott Bessent and Vice Premier He Lifeng will meet for a second day on Monday in Madrid, Spain. The Chinese side is said to be pushing for a state visit by Pres. Trump to Beijing that would be seen at home as a diplomatic victory for Chinese Pres. Xi Jinping.

Under discussion are the resolution of Chinese-owned TikTok, improved U.S. access to rare earth metals and minerals and Chinese access to U.S. tech and agricultural exports. Ratcheting up the heat, overnight Beijing launched an anti-dumping investigation into certain U.S.-made semiconductor chips.

Beijing has also ruled that Nvidia NVDA violated antitrust laws in 2020 when it acquired Mellanox Technologies. Over the weekend, the U.S. Commerce Department also added two Chinese companies to its restricted trade list. Chinese purchases of U.S. soybeans are also being negotiated. Kind of reminds me of the old Foreigner song, "Head Games."

The Week That Was...

What the major to mid-major U.S. equity indexes did last week, as the nation focused on producer and consumer level inflation as well as tragedy...

- The S&P 500 gave up just 0.05% on Friday but gained 1.59% for the week.

- The Nasdaq Composite gained 0.44% on Friday and 2.03% for the week.

- The Nasdaq 100 gained 0.42% on Friday and 1.86% for the week.

- The Russell 2000 gave back 1.01% on Friday but gained 0.25% for the week.

- The S&P Smallcap 600 lost 1.32% on Friday and 0.54% for the week.

- The S&P Midcap 400 surrendered 1.1% on Friday and 0.44% for the week.

- The Dow Transports gained just 0.11% on Friday and 0.63% for the week.

- The Philly Semis popped for 1.65% on Friday, soaring 4.17% for the week.

- The KBW Bank Index closed "unchanged" (+0.01%) on Friday, gaining 1.99% for the week.

As was apparent last week, readers will see that these results were very hot and cold. There are winners and losers. It was a very good week for some investors and obviously it was a lot less good for others. On Friday, eight of the 11 S&P sector SPDR ETFs closed out the session in the red, led lower by Health Care (XLV) and the Materials XLB. Communication Services (XLC) led the winners.

For the week, nine of the eleven S&P sector SPDR ETFs traded higher. Technology (XLK), the Utilities (XLU) and Communication Services (XLC) easily paced the winners. Only the Staples (XLP) and Materials closed the week lower than where they began it.

The Chart...

I drew this chart up for readers on Friday. It has not changed much since then but I realize that this column has a Monday following due to its broad nature that may not match precisely its following as the workweek winds down. So, let's go through this so those who missed Friday can catch up and everyone can see what's happening to our markets right before their eyes. 

Readers will look back to the Day One Bullish reversal of trend on Aug. 22 followed by that mandatory pause the next day (Aug. 23) and the Day of Confirmation of Trend the day after that (Aug. 24). The S&P 500 then experienced a down day on Sept. 2 that had appeared to end that short trend by creating a new post-confirmation low. 

But that day ended with positive aggregate trading volume. That meant that the downward move did not have much conviction. Thursday re-established the bullish trend with a broad-based rally on notably increased trading volume. Friday presented as something of a pause. That's actually welcome. Now, this week might be quiet ahead of the FOMC policy statement this Wednesday afternoon. What happens between now and Wednesday afternoon matters to traders. Not so much for investors who do not trade. 

What happens after the Fed does its thing this Wednesday, ahead of this coming weekend, will either cement this bull market rally in place, providing a new foundation for further gains or not. Should there be a negative reaction on increased trading volume this Thursday and / or Friday, that will end up creating its own "Day One" (and not the good kind for the bulls) next week at this time

Earnings

We are still a month away from the start of the third quarter earnings season. According to FactSet, for the third quarter, Wall Street is looking for earnings growth of 7.6% on revenue growth of 6.2%. Technology, utilities and materials are expected to be the outperformers while energy is expected to take another beating. Eight of eleven sectors are expected to show earnings growth, while ten of eleven are expected to show revenue growth. For the full calendar year of 2025, Wall Street now sees S&P 500 earnings growth at 10.7% on revenue growth of 6.1%.

Surprisingly Optimistic?

Relying on FactSet's (I use FactSet a lot) weekly "Earnings Insight" newsletter, now that the second quarter earnings season is completed across the S&P 500, a couple of surprising items came to light...

- The terms "tariff" or "tariffs" were mentioned during 361 earnings calls during the Q2 reporting season, down 21% from 455 calls for the Q1 season.

- The term "uncertainty" was mentioned during 283 earnings calls during the Q2 reporting season, down 32% from 418 calls for the Q1 season.

- The term "inflation" was mentioned during 178 earnings calls during the Q2 reporting season, down 24% from 235 calls for the Q1 season.

Valuation

Still using data provided by FactSet, the S&P 500 ended last week trading at 22.5-times 12 months' forward looking earnings. That stands well above the five year average of 19.9-times for the index and its ten year average of 18.5-times. The S&P 500 also ended last week trading at 28.2 times trailing 12 months' earnings. That also stands well above the five year (25 times) and ten year (22.6 times) averages for the index. Nine of the eleven sectors are now trading above their five-year average valuations, led by Tech (29.5 times) and Consumer Discretionaries (29.2 times). Only the REITs (18.1 times) and Health Care (16.9 times) remain undervalued relative to their five-year averages.

The GDP Game 

Last week, the Atlanta Fed revised their GDPNow model for the third quarter up to growth of 3.1% (q/q, SAAR) from 3.0% the week prior. Among other regional central bank district branches running close to real-time GDP models, the New York Fed's estimate for Q3 growth now stands at 2.08%, down from 2.1%. The Cleveland Fed's model for the third quarter still stands at growth of 1.94%, while The St. Louis Fed model now stands at a paltry 0.16%, down from 0.56. Obviously, there remains no consensus.

Fed Funds Futures 

Fed Funds futures trading in Chicago are now pricing in a 100% probability for at least a quarter-point rate cut this Wednesday. There is actually a 4% chance priced in that the Fed will start its easing cycle off with a half-point rate cut. According to these markets, there is now an 84% likelihood for a second quarter-point rate cut on Oct. 29 and an 83% probability for a third quarter point rate cut on Dec. 10. There is now, according to these markets, another three-quarter points worth of rate cuts fully priced in for calendar year 2026. 

On The Docket... 

The Federal Reserve itself and expected changes to monetary policy are expected to dominate the week ahead, but that won't be the only thing traders and investors will have to focus on.

.... The Fed will be silent this week, at least until Wednesday afternoon. That is when the central bank's media blackout period will end with the release of the FOMC's official policy statement and the committee's latest quarterly economic projections. These releases will be followed a half hour later by Fed Chair Jerome Powell's press conference. Also unknown is whether or not Fed Gov Lisa Cook will still be employed at the central bank at that time. There are no Fed speakers scheduled to speak publicly later this week, but that is likely to change as the week evolves.

.... This will be a fairly active week as far as the macroeconomic calendar is concerned. The New York Fed will release its regional manufacturing sector survey for the month of September this morning to be followed by the Philadelphia Fed on Thursday morning. Tuesday will be the day of consequence economically this week, as August Retail Sales and August Industrial Production hit the tape. The Treasury Department will also go to auction that afternoon with $13 billion worth of Twenty-Year Bonds. August Housing Starts will land on Wednesday morning followed by the weekly Initial Jobless Claims on Thursday morning. Usually not that big a deal, after last week's jarring number, this week's print will be focused upon.

..... Scanning the corporate calendar, cyber-security king CrowdStrike Holdings CRWD, which is a long-time Sarge name, will host its Falcon Conference in Las Vegas on Tuesday. CEO George Kuntz will deliver the keynote address at noon ET. CrowdStrike will hold its investor day the following day. Also on Wednesday, Meta Platforms META will hold its Meta Connect Conference for developers.

..... The earnings calendar is lighter than light this week. Among better known firms, General Mills GIS will report on Wednesday morning. On Thursday morning, we'll hear from Darden Restaurants DRI to be followed by FedEx FDX and Lennar LEN on Thursday evening.

Economics 

(All Times Eastern)

08:30 - Empire State Manufacturing Index (Sep): Expecting 5.8, Last 11.9.

The Fed

(All Times Eastern)

Fed Blackout Period.

Today's Earnings Highlights

(Consensus EPS Expectations)

After the Close: PLAY (.92)

At the time of publication, Guilfoyle was long CRWD, NVDA equity