The Fed Won't Help, but These Earnings Might
The Weekend Edition is pulled from the daily Stansberry Digest.
Looking past the Powell-Trump drama...
At the Federal Reserve policy announcement and press conference on Wednesday, rather than giving in to President Donald Trump's name-calling ("too late" to cut Powell), the Federal Reserve chair said "too bad," and kept interest rates steady.
Powell also doubled down on how the White House's tariff uncertainty is affecting monetary policy. Specifically, it risks hurting the inflation side of the Fed's "dual mandate" to ensure stable inflation and maximum employment.
That brings up a good question... If prodding from the president won't convince the Fed to cut rates, what would?
The answer isn't inflation, which is too "uncertain," Powell says. On Thursday, the Fed's preferred inflation gauge – the personal consumption expenditures ("PCE") index – showed inflation accelerated 0.3% in June.
It sounds like it might take several more months before Powell is ready to state that tariffs are or aren't leading to inflation and other consequences across the U.S. economy.
So right now – absent something like a market panic or unplanned emergency – the trigger for the Fed to lower rates must be the other part of its dual mandate: the labor market.
Keep an eye on the jobs market...
As we've said before, the Fed is formally tasked by Congress with ensuring "stable prices" and "maximum employment" in the U.S. economy. And the labor market is showing some serious weakness.
Automatic Data Processing's latest monthly private-payrolls report showed U.S. firms added 104,000 jobs in July, more than forecast and much better than the decline of 23,000 private-sector jobs in June.
However, the Job Openings and Labor Turnover Survey wasn't as strong. It showed the number of job openings in the U.S. fell by 275,000 to around 7.4 million last month. The rate of new hiring hit a seven-month low.
And to top it all off, the July "nonfarm payrolls" report came out yesterday – with worrying results. The economy added only 73,000 jobs last month... far less than even the modest expected gain of 100,000.
Not only that, but the totals for May and June were revised down by 258,000 jobs combined.
It's a big danger sign for the labor market – and it might make Powell more likely to change his mind. Futures traders seem to think so... As of Friday afternoon, they saw an 85% chance of the Fed cutting rates by 0.25 percentage points in September. That was up from just 38% odds the day before.
On the plus side, rate cuts are likely to boost asset prices... which is good news for folks who've been waiting for some market juice.
And another big bullish driver could come from somewhere else. Nick Koziol explains from here...
Companies are still spending more on AI...
Earlier this week, Microsoft (MSFT) reported capital expenditures ("capex") of $24.2 billion in its fiscal fourth quarter, up 27% year over year. That brought Microsoft's fiscal year 2025 capex to $88 billion.
The story was the same with Meta Platforms (META)...
On Wednesday, Meta reported that it now estimates annual total capex of $66 billion to $72 billion. In the second quarter alone, capex jumped 12% to $27 billion.
But Meta isn't just spending on data centers and other AI-related infrastructure. The company also said that hiring competition for AI roles will be its second-largest expense growth driver. And we see why...
OpenAI CEO Sam Altman has said that Meta is offering OpenAI employees $100 million signing bonuses to jump ship. Turns out, savvy, skilled humans are important for AI companies in addition to the technology itself.
It's clear that Meta is betting big on being able to get the best AI talent.
In short, companies are spending a lot of money on data centers, IT infrastructure, and even employees. Remember, just last week, Alphabet boosted its own capex outlook for 2025 to $85 billion.
This is good for the broad economy...
Big Tech's heavy investment in data-center infrastructure gave a huge boost to the economy in the first quarter. Measured by "nonresidential fixed investment in IT equipment," data-center investment surged 16% year over year.
In Wednesday's second-quarter GDP report, we got more confirmation of the trend... Data-center investment rose 2% from the first quarter to more than $600 billion. That was up more than 20% year over year...
With an overall stronger GDP report compared with the first quarter, this measure "only" contributed 0.1% to the 3% growth.
But as Renaissance Macro Research pointed out on Thursday, AI capex – IT processing equipment plus software – has added more to GDP growth over the past two quarters, on average, than consumer spending.
Since ChatGPT launched the AI era in November 2022, data-center investment has soared more than 27%. And this trend isn't slowing yet.
We've never seen this amount of spending from technology companies before. The only time we've seen similar spending (the Internet bubble) ended poorly for the sector, the broader market, and the economy as a whole. Our heads aren't in the sand about an AI bubble ending the same way eventually.
But, for now, the biggest companies in the U.S. are still doing whatever it takes to get a leg up in the AI race. And the market isn't showing any concerns about it.
Still, some recent earnings haven't been as glowing...
Over the past few months, we've written about the "Starbucks indicator."
Our colleague and Stansberry's Credit Opportunities editor Mike DiBiase created this recession indicator – noting that anytime the ubiquitous coffee retailer has had consecutive quarters of declining same-store sales, the U.S. entered a recession.
The reasoning is simple... Starbucks (SBUX) is a huge brand that sells something folks drink every day. So if Starbucks sees sales decline, it means folks are pulling back on spending for a near-necessity.
And that's exactly what we're seeing today. Earlier this week, Starbucks reported same-store sales fell 2%. That marked the sixth straight quarter of falling same-store sales.
That's the longest streak in Starbucks' history. And the previous streak wasn't a good time for the economy. As Mike explained in March...
Starbucks' same-store sales have now fallen four straight quarters. This streak matches the longest in its history. The only two other times this occurred were during the 2008 financial crisis and following the pandemic... both coinciding with recessions.
Though, like runaway AI spending, investors aren't worried about this indicator yet.
Stocks continue to climb the "wall of worry" and set new highs... And we're seeing signs of extreme bullishness – with traders pumping up "meme stocks" again.
But there are reasons to assess risks in your portfolio and prepare for a potential cooldown from the nearly relentless post-Liberation Day rally over the past few months. Any potential surprises – like a return of high(er) inflation, or soaring unemployment – could turn sentiment over.
So while it's not time to go "all out" of stocks, we're not saying it's time to go "all in" either. If you're looking to put new money to work, there are good opportunities... But be choosy.
Good investing,
Corey McLaughlin with Nick Koziol
Editor's note: As CEO of our parent company MarketWise, Dr. David "Doc" Eifrig is sharing his first message to ALL readers in his new role. He confronts some hard truths about the government's broken promises... and reveals why investors are blindly walking into three retirement traps. So, if you want to sidestep what he calls the "Great Devaluation," check out his message for more details about the plan he personally follows.