What to know today

  • The Fed will cut sometime soon.
  • Financials will report earnings.
  • Telecoms will reap 5G gains.

A Change Is Gonna Come

Sounds like a rate cut is on the way.

Federal Reserve Chair Jerome Powell will finish up two days of testimony on Capitol Hill today. 

For my money the Wednesday session will score much higher on the unintentional comedy factor than the Tuesday session.

The US Senate takes itself a little too seriously, the US House of Representatives not at all seriously enough.

Maybe it’s because Senators face voters only every six years and Representatives are basically constantly campaigning for their two-year terms.

Senators talked a lot about relatively arcane but really important things like capital ratios for big banks.

Representatives will get us knee-deep in all kinds of things. Powell’s turn in the House Financial Services Committee hot seat begins at 10:00 a.m. ET.

Recent incoming data indicate that employment growth is moderating and inflation pressures are easing.

Powell already set the new tone early in his prepared remarks delivered to the Senate Banking Committee: “Elevated inflation is not the only risk we face.”

He did mention the risk of cutting too soon and re-stoking inflationary fires.

And he said once more that “more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”

But a change has come.

You could even hear it in the absence of any partisan rancor: Democrats talked about risks of waiting too long to cut like rising unemployment and housing costs and slowing manufacturing activity and Republicans basically acquiesced by their silence.

Powell drove home the point from the perspective of his and his institution’s dual mandate.

“The latest data show that labor-market conditions have now cooled considerably from where they were two years ago – and I wouldn’t have said that until the last couple of readings,” he explained.

Claudia Sahm, the chief economist at New Century Advisors and the author of the Sahm Rule, said we know the Fed’s direction from here.

“The alarm bells aren’t sounding right now,” Sahm said, noting that the labor market has cooled considerably, “but you are certainly pointed in that direction.”

It’s not going to happen when the Federal Open Market Committee meets July 30-31.

But futures traders are now pricing in a 25-basis-point cut at the September 17-18  meeting, the last one before the November 5 presidential election.

“I’m not going to be sending any signals about the timing of future actions,” Powell said, though policy makers will make their calls “meeting by meeting.”

deep dive

Which Way Financials

Big banks begin to report on Friday.

It’s almost impossible to have a bull market without financials participating.

It’s a sprawling sector with diverse industries including banking, insurance, capital markets, financial services, and real estate.

Within banking alone we can distinguish between the “too big to fail” money centers and old-school regional lenders.

Although it’s No. 3 in year-to-date performance with a gain of 11.01 percent, the Financial Select SPDR Fund $XLF has been trending sideways-to-negative since April.

Earnings season could provide a fresh catalyst for the sector and the broader market too.

JP Morgan Chase & Co $JPM, Wells Fargo and Company $WFC, and Citigroup $C will get things started for the group on Friday.

Although XLF is No. 3 in terms of year-to-date stock market performance, analysts expect financials to report only the seventh-best second-quarter earnings growth rate among the 11 sectors at 4.3 percent.

The Financial Select Sector SPDR ETF $XLF is the third-best performer among the 10 sector ETFs with a year-to-date return of 11.01 percent.

According to FactSet, insurers and market makers will post year-over-year earnings growth of 31 percent and 23 percent, respectively.

Banks are expected to be a major drag with an aggregate earnings decline of 10 percent. Regional banks are expected to post negative growth of 26 percent.

Pressures from some of the headwinds facing banks both big and small, such as interest rates, should begin to abate soon.

Deal-making activity shows signs of picking up, while the smaller lenders should be cycling out of the particular problems they’ve endured.

As Federal Reserve Chair Jerome Powell said during his testimony on Capitol Hill on Tuesday, uncertainty in the commercial real estate market will likely persist for at least a couple of years.

Management commentary around provisions for both commercial and credit card losses will be pivotal.

The same is true of any statements about the future managers will make during their upcoming conference calls.

We’ll see whether what they have to say moves them off the present trend – and in what direction.

deep dive |
July 10, 2024

Which Way Financials


Goldman Makes a Telecom Call

VZ and T are attractive at these levels.

Back when I was running things at Utility Forecaster, Verizon Communications $VZ and AT&T $T were mainstays in my model portfolio.

They were there because they generated consistent income with a little bit of growth on top.

Their ability to maintain their relatively consistent dividend performances has come under some question in the nearly 10 years since I left UF.

AT&T cut its payout in early 2022 after 35 years of dividend growth. Though Verizon has raised its dividend for 20 years straight, both stocks have severely underperformed the S&P 500 since the first quarter of 2015.

VZ is down nearly 16 percent and T is down more than 40 percent compared to a gain of more than 170 percent for the index. Heavy investment and heavy debt loads are weighing on both stocks.

Goldman Sachs says things are about to change for the two big American telecommunications companies.

Upside from here will be supported by payoffs from extensive investment in 5G infrastructure as well as the potential to be realized from artificial intelligence.

AT&T $T has posted a gain of 12.04 percent so far in 2024 compared to a gain of 16.92 percent for the S&P 500.

VZ has put together a decent rally over the last 12 months, extending its gains into 2024 on the strength of its 5G network and the expansion of its core wireless franchise it’ll support, according to analyst James Schneider.

Schneider rates the telecom a “buy” with a 12-month price target of $50. VZ closed at $41.30 on Tuesday.

Among the 28 Wall Street analysts who cover the stock, 13 rate it a “buy,” 13 rate it a “hold,” and two rate it a “sell.”

Verizon Communications $VZ has posted a gain of 9.55 percent in 2024 compared to a gain of 16.92 percent for the S&P 500.

Schneider suggests AT&T’s communications services business, including cable and digital TV, on top of its own 5G capabilities provide a solid platform for growth.

T has also enjoyed a substantial rally over the past 12 months, rising more than 20 percent, including more than 8 percent in 2024.

Further upside will be realized “as the company delivers more consistent financial performance while paving the way toward enhancing capital returns via a potential buyback.”

Schneider rates the stock a “buy” with a 12-month price target of $22. T closed at $18.80 on Tuesday.

A total of 16 Wall Street analysts rate T a “buy,” while 11 rate the stock a “hold” and two rate it a “sell.”

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