VIDEO: Powell Can Underwhelm After 25-Point Rate Cut

In today’s Portfolio video, Chris Versace lays out the three items coming this week that have the potential to power the stock market and the Portfolio higher as we close out October. Positive developments on the trade front, including progress on a US-China trade deal, are lifting the market on Monday.

The earnings season accelerates this week, with key holdings in the S&P 500 and Nasdaq reporting on Wednesday and Thursday. Chris discusses consensus AI and data center capital spending forecasts and explains why we need to be mindful of whisper expectations. He also explains why, even though he expects a 25 basis-point rate cut by the Federal Reserve this week, comments by Fed Chair Powell have the potential to underwhelm the market.

With all that in mind, we explain how we’re approaching the next few days, especially if the market melt-up continues.

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Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here, and here we go. The last week of October, a month that has so far been strong for the market and the portfolio. Closing out last week, both were at or near record highs. Now, I suspect that some of you and others out there will be counting down the days until we reach that candy-filled bonanza known to some as Halloween, and we'll be ready with some tricks and treats of our own as we move throughout the week and get ready for the little festival, if you will.

But I have to say that if you read Friday's weekly roundup, then you know that we're going to have to navigate, probably, one of the most important weeks of quarterly earnings, an expected Fed policy decision, and the pending meeting between presidents Trump and Xi. Now, before we talk to all that, let's just talk about the market here, again, at or near record levels. The PE multiple as we talked about, it's a little stretched. So we're going to be paying very close attention to quarterly results, looking for the E in PE to grow.

And so far, the data from FactSet shows the current quarterly earnings season is better than expected. And we've also started to see some upward movement in those second half consensus EPS numbers for the S&P 500. Checking in with the relative strength index or RSI levels, neither the S&P 500 nor the NASDAQ composite is near being overbought. Yeah, the figures, they're not as neutral as they were a few weeks ago, but certainly not overheated.

What this means is that if we get a week of positive developments, we should see the market move higher as we close out the week and the month of October, one that historically has been a positive one for the markets. Now, I will say that while that's the expectation, it doesn't mean that things can't get a little bumpy along the way. But I will share that coming into today, we do have some favorable headlines.

I'm specifically talking about some of the Trump trade deals, Cambodia, Malaysia, further progress on Thailand and Vietnam deals. But probably most important, the US and China have reportedly reached a framework for a trade deal that will avoid the additional 100% tariffs on China. And President Trump and Xi Jinping are expected to finalize the deal during their meeting this Thursday.

Now, that's a welcome development. However, we do know that there can be some last minute saber rattling. We understand that that's part of the negotiation process. We've talked about that over the last few weeks. Our eye is on the prize. Let's see what happens on Thursday and what those deal-- and what those terms are. And of course, as we like to say, the devil is in the details.

We're also seeing some reports that Treasury Secretary Scott Bessent has narrowed down the list of potential Fed chairs to five going forward, and that Trump is expected to choose a finalist by the end of the year. My position on that is, we'll have to see who this person is. And I strongly suspect that they will be in line with the president's thinking for lower interest rates, which could be good for the market. It could be good for certain parts of the economy, housing and other interest-rate-sensitive areas.

But that, remember, won't happen until Fed Chair Powell steps down in May. I'd also say that before we get overly excited about this, let's remember that monetary policy, it is set by a committee, not any one individual. And with that, we do have the Fed's next monetary policy decision coming Wednesday afternoon. The market widely expects a 25-basis-point rate cut. We do too.

But I will share that the recent data that we discussed with you last week-- and specifically, I'm referring to the October flash PMI report-- we did see a modest pickup in the number of jobs that were created during the month. And inflation levels, as we saw, they remain at elevated levels. But we also have to factor in, not only those job creation comments, but as we discussed with you last week, we do appear to be seeing a growing number of layoffs.

So we're going to want to pay very close attention to how the Fed is thinking about this, both in their policy statement on Wednesday, but also in Fed Chair Powell's comments during the ensuing press conference. Now, I suspect that Powell is likely to say the Fed is going to remain data-dependent. Not surprising, but even more so now, given the lack of data that we're seeing due to the government shutdown. We suspect that's what he's going to say.

The market, they do have an expectation for another rate cut in December. We, of course, continue to follow the data, just like the Fed. And my suspicion is that depending on the tone Powell uses, the market may not be quite as understanding as we are, and that perhaps the market could get a little bumpy, again, subject to what Powell not only has to say, but the tone with which he says it. So we will be watching that very closely.

On the topic of the government shutdown, just real quick, with President Trump out of the country, odds are of a resolution coming this week. I would say they're rather low. And I also do think that when we talk about economic data and think about the shutdown, we do have to recognize that it is going to take time for that missed monthly data, not only to be published, but to be collected.

So recognizing this, we are going to continue to focus on the data that we do get and will continue to triangulate what it means for the economy, monetary policy, and of course, the market. That means we're going to have some big data, not this week, but really, next week with the October PMI data, ADP employment report, Challenger job cuts report, and the like. But let's not get ahead of ourselves.

I say that because we have a big week of earnings ahead, probably the busiest week thus far. And it's going to be, yes, a barn burner in that subject-- on that subject, I should say, for the portfolio. We've got 10 positions reporting with the busiest, of course, being Wednesday, Thursday, a close second. Why Wednesday? Meta, Microsoft, Google. We also have ServiceNow. Toss in the Fed. It's going to be a big day. Thursday, Amazon and Apple.

But let's just step back for a second and say, we recognize that AI data center and the corresponding companies that are poised to benefit from that massive build-out and spending, that's been a big driver for the market success so far this year. What this means is that during those two days, between Meta, Microsoft, Google, and Amazon, what is said about AI and data center spending is going to be crucial to the market.

I will share that data tabulated by Bloomberg finds that those four companies, again, Microsoft, Alphabet, Amazon, Meta, they're projected to spend a combined 360 billion in CapEx this year, the vast majority on AI and data center. And those four, again, data tabulated by Bloomberg, says that they're expected to spend 420 billion next year. Now, of late, we've heard that Microsoft is capacity-constrained, and odds are that it's not only going to last into next year. Probably the middle of the year at least.

But odds are that Microsoft is not the only one that is capacity-constrained. And we can say this given the figures we've seen recently on AI adoption and usage. Here's the thing. Not all companies are going to be talking about their 2026 capital spending plans. Yeah, we might get some directional cues, and I hope that we do. I think what we'll be looking for is confirmation that the second half of the year capital spending will be greater than the first half of the year.

But I will also remind you that when we think about this time of year, whisper numbers are kind of a thing that we have to contend with, not only just for quarterly earnings, but in this case, given the impact and influence of AI and data center capital spending. Odds are there's going to be some whisper numbers out there for what some folks are thinking could be sky-high figures that we might get.

This can be a little frustrating, even though-- and I say that because even though the numbers, whether it's earnings, capital spending numbers, can be up big year over year, they just might be a little out of touch relative to those whisper numbers. And that, when it happens, can result in a little bit of a pullback in some stocks. So yeah, are expectations running high? They are.

But I will share that we will be looking at these figures and the comments, kind of like we do with Costco's monthly sales figures. And what I mean by that is we have to recognize that we are starting to lap very big numbers, and it's not just Costco. Taiwan Semiconductor and others. So we want to have that context in the back of our minds.

Having said that, do we expect a big leg up in AI and data center capital spending levels? We do. But we also, again, realize that we're not going to get those hard 2026 figures yet, at least until companies report their December quarter results. What we'll be looking for is directional cues, like I mentioned. And we recognize, again, that they may not satisfy some.

As a result, given that potential risk, both with Fed Chair Powell's comments, as well as the risk that we might have that whisper number influence on AI and data center capital spending expectations, we're going to watch the market over the next two days. And if it melts up, like I think it will, given some of the trade headlines that we're seeing, there might be some prudent action called for Tuesday, maybe Wednesday morning.

We're going to have to see. We're going to have to see where the market is. We're going to have to see where some of these stocks in the portfolio are, and make a judgment call at that point. So with that, I will say, please be sure to check your emails, your alerts throughout this week. It's going to be busy. We're going to have a lot of comments.

And as you can understand, if we make any moves with the portfolio, we want to make sure that you are right there with us. The fact I said that we have a lot coming at you this week goes double for today. And I say that, because we'll have the usual look at the S&P 500 chart. We'll have another chart that will be looking through, as well, other comments.

And of course, at the end of the day, we will be having our latest set of portfolio office hours. So stay tuned. Buckle up. It's going to be a busy one, but we will be right there with you.