The Fed Won't Help, But These Earnings Might

Why would the Federal Reserve cut rates?... Look at the jobs market... It's not breaking yet... Two more 'magnificent' earnings reports... Another $4 trillion company... AI spending keeps growing and pushing stocks higher...

Looking past the Powell-Trump drama...

Last night, we reported on the big takeaways from yesterday's Federal Reserve policy announcement and press conference by Fed Chair Jerome Powell.

In short, rather than giving in to President Donald Trump's name-calling ("too late" to cut Powell), the Fed chair said "too bad," and the Fed kept interest rates at the same level they've been for seven months.

Powell also doubled down on the role that the White House's tariff uncertainty is playing on monetary policy – specifically the inflation side of the Fed's "dual mandate" focus of 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 make the Fed do it anytime soon?

The answer isn't inflation, which is too "uncertain," Powell says. Today, the Fed's preferred inflation gauge – the personal consumption expenditures ("PCE") index – showed inflation accelerated in June, up 0.3%, amid tariff uncertainty.

And from the sounds of Powell yesterday, it might take several more months before he's ready to contend that tariffs are or aren't leading to inflation and direct consequences everywhere in 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 the Fed's 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 weakness.

ADP's latest monthly private-payrolls report yesterday showed U.S. firms added 104,000 jobs in July, more than forecasted and much better than the decline of 23,000 private-sector jobs in June.

However, Tuesday's 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, and the rate of new hiring hit a seven-month low.

Tomorrow, investors will have eyes on the latest unemployment rate from Uncle Sam when the July "nonfarm payrolls" report is released. A month ago, the unemployment rate fell to 4.1%. It could stay there or even fall again, based on a trend of decreasing initial jobless claims over the past month.

Putting it all together, it may be a "mixed bag" of labor-market data this month, which means that – barring a breakdown in the jobs market – a Powell-led Fed will likely keep rates the same as they wait and see about the path of inflation over the next few months.

At this point, I (Corey McLaughlin) think it's possible the Fed won't cut rates at all for the rest of this year. That might sound like "bad" news for those expecting some market juice, but it doesn't have to be. We've seen stocks push higher before, even with the central bank holding rates at steady levels for longer than people were initially expecting.

Plus, a big bullish driver could come from somewhere else, as Nick Koziol explains...

Two more 'magnificent' earnings reports...

After Tesla (TSLA) and Alphabet (GOOGL) kicked off earnings for big tech companies last week, social media giant Meta Platforms (META) and software titan Microsoft (MSFT) were next in line with quarterly earnings releases after yesterday's close.

Both companies topped Wall Street's estimates on earnings and revenue for their most recent quarter.

Meta's daily active users grew 6% to 3.48 billion – or almost 1 out of every 2 people on Earth.

As for Microsoft, Wall Street analysts watch its Azure cloud business closely. And Azure didn't disappoint – growing revenue by 39% and beating Wall Street's expectation of "only" 35.5% growth. That fueled Microsoft's overall Intelligent Cloud growth of 26% to $29.9 billion.

Investors loved both reports, sending Meta Platforms shares up roughly 12% and Microsoft shares up around 4% today. Microsoft was even higher on an intraday basis, and it crossed a $4 trillion market cap – becoming only the second company to do so, after Nvidia (NVDA).

Since these two companies represent a combined 10% of the S&P 500 Index and a similar chunk of the tech-heavy Nasdaq Composite Index, their big gains helped prop up those indexes on a mixed day in the markets.

But that's not all we learned...

Companies are still spending more on AI...

Microsoft reported capital expenditures ("capex") of $24.2 billion in its fiscal fourth quarter, up 27% year over year. That brought Microsoft's 2025 fiscal year capex to $88 billion.

The story was the same with Meta...

This year, Meta now estimates total capex of $66 billion to $72 billion, versus its previous forecast of $64 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.

As our colleague Josh Baylin explained in a recent DailyWealth essay, employees are the "ultimate currency" in AI...

The companies that win this war won't just have the best algorithms. They'll have the best strategies for attracting, retaining, and monetizing world-class AI talent.

It's clear that Meta is betting big on being able to get the best AI talent.

In short, there's a lot of money being spent on data centers, IT infrastructure, and even employees to get an edge in AI. Remember, just last week, Alphabet boosted its own capex outlook for 2025 to $85 billion.

This is good for the broad economy...

In May, we highlighted that 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.

As we wrote in the May 1 Digest...

AI data centers boosted this component of GDP to the highest level ever, according to Bespoke. And the last time IT equipment came close to this level was in 2000 – near the peak of the Internet bubble.

In yesterday'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% from the second quarter of 2024.

With an overall stronger GDP report compared with the first quarter, this component "only" contributed 0.1% to the 3% growth.

But as Renaissance Marco Research pointed out today, AI capex – which it considers IT processing equipment plus software – has added more to GDP growth over the past two quarters, on average, than consumer spending has.

Since the AI era launched in November 2022 (with ChatGPT), 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), it 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 spending big – trying 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 is seeing sales decline, it means folks are pulling back on spending for a near necessity.

Right now, that's exactly what we're seeing. In its most recent quarter, announced earlier this week, Starbucks' same-store sales fell 2%. That marked the sixth straight quarter of falling same-store sales.

Not only does that trigger Mike's indicator, it is also the longest streak of declining sales in Starbucks' history. And the previous streak wasn't a good time for the economy.

As Mike explained in his March issue...

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 what this Starbucks indicator might be saying 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, the job market weakening, or the idea that the long-expected rate cuts aren't going to come at all – could turn sentiment over.

Today, the market appeared to be digesting the idea that a rate cut might not be coming after the Fed's latest decision and Powell's remarks. The odds on a rate cut at the Fed's next meeting in September continued to dwindle to below 40%.

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.

New 52-week highs (as of 7/30/25): Broadcom (AVGO), Alpha Architect 1-3 Month Box Fund (BOXX), BWX Technologies (BWXT), Commvault Systems (CVLT), CyberArk Software (CYBR), DXP Enterprises (DXPE), Comfort Systems USA (FIX), GE Vernova (GEV), Intercontinental Exchange (ICE), iShares U.S. Aerospace & Defense Fund (ITA), JPMorgan Chase (JPM), Lumentum (LITE), Altria (MO), ProShares Ultra Technology (ROM), Synopsys (SNPS), TransDigm (TDG), ProShares Ultra Semiconductors (USD), Vistra (VST), and Utilities Select Sector SPDR Fund (XLU).

In today's mailbag, feedback on yesterday's edition, which covered the latest out of the Federal Reserve and mentioned a possible T-shirt idea... plus thoughts on new content for Stansberry Alliance members...

"Why does the Fed consider tariffs inflationary? Tariffs are tax policy, and the Fed does not normally consider government tax policies in setting the fed rate. Yes, tariffs can make products more expensive, but so can any other tax imposed by the government.

"The government could create a national sales tax of 10%. Immediately everything would be 10% higher, but the fed would not consider it inflation. Raising taxes on income, while not directly raising the price of goods, leaves me with less purchasing power which is inflationary. The fed wouldn't care.

"The underlying value of the goods has not changed, any increase attributed to the tariffs ends up in the government's hands, taking money out of the economy.

"I understand the fed seeing higher prices as inflation, but why should a tariff (tax) be viewed differently than any other tax?" – Subscriber David P.

"Perhaps that T-shirt should read (in honor of Marie 'the headless' Antionette) 'If they have no money, then let them buy stocks'...

"Also, if the price of gold goes to $3,500/Troy oz, that will be a 100X gain since Nixon took the U.S. off the $35/oz gold standard in 1971 (54 years ago; almost a 9% average return/yr since then). Paraphrasing good 'ole Ben Franklin: 'A dollar invested in gold then would now be $99 earned'." – Subscriber Lewis M.

Gabe, I'm up 128% following your recommendation at the Alliance Meeting this past fall. I took my initial cost off the table, and I'm playing with house money now. The run has just begun. Thank you!" – Stansberry Alliance member J.H.

"Market Maven sounds interesting. I'm with you." – Subscriber George W.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
July 31, 2025