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U.S. markets have remained relatively flat as investors await:

• Fed interest rate cuts

• tech earnings

• unemployment data

World Central Banks are expected to follow suit of U.S. rate cuts as they transition away from fighting inflation in favor of promoting employment.

In today’s newsletter we will cover:

• Real estate performance

• Upcoming NVDA earnings

• Interest rate cuts

Markets 

• Over the last 3 months the real estate sector has surprisingly outperformed. Although the future economic outlook remains uncertain, inventories remain low, with sustained demand for residential and increased demand for certain types of commercial real estate. 

  • Structure shifts in the economy are underway following Covid. This includes the rise in e-commerce, which requires the expansion of logistic spaces for supply chain optimization. The following data supports this as industrial REITS have outperformed the sector within the last 3 months.

Nvidia Q2 2024 Earnings & Market Implications 

Nvidia is set to post earnings Wednesday, August 28th, which has many market participants watching closely. The company's price to earnings ratio remains high, indicating that growth is required to maintain their astronomical valuation. The data below includes previous quarter results as well as estimates.

These figures are only estimates, but the actual earnings will play a crucial role in driving Nvidia's valuation, as well as the valuations of other companies in the technology sector. A revenue beat will signal to the market that the company is positioned to capture the exponential growth from the adoption of the A.I. technology. On the other hand a revenue miss could signal a longer time horizon for the adoption of the technology. 

Much of this year's gains in the technology sector have been attributed to the promise of A.I. If Nvidia’s financials do not support this commonly held thesis, gains could be whipped away from other companies in the sector. In addition, technology companies are weighted very heavily on the major indices, meaning declines will be felt heavily. 

Imminent rate cuts

(Fed Chair alongside EU and Japan Central Bank presidents)

Investors have been waiting for months for the Fed to announce rate cuts. Over the weekend at an annual economic conference in Jackson Hole Fed Chair Powell announced “The time has come” for the Federal Reserve to begin to cut rates. 

Why Now

• Inflation is still above the Fed’s 2% mandate, however it will cut rates to promote economic growth. Alarming rising unemployment is an indicator to the Fed that restrictive rates are beginning to take a toll on the economy. 

• “We will do everything we can…to support a strong labor market as we make further progress toward price stability.” (Powell)

• As discussed in past issues the Fed is obligated to promote maximum employment. As of now FOMC members see growing unemployment as more important to tackle than inflation.

When & Timeline

• It's important to understand the Fed will remain data dependent and will continue to require data showing inflation is slowing down throughout a potential rate cutting cycle.

• “The timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” (Powell)

• A September rate cut after his announcement is now considered a given, however the size is not.

  • Further weak employment data would likely lead to a 50 basis point cut in September, being dubbed as a “super-sized reduction.”

• As described before, the timeline for rate cuts is unknown as it will rely on data. The Fed will likely cut rates well into 2025 if inflation remains under control.

  • Economists don't know if rates should return to the pre-pandemic record lows as debate grows around the subject.

(Bloomberg, Traders pricing in of rate cuts this year)

Interest rate cuts as explained will not happen overnight and instead will play out over a long period of time. The markets and financial services have had to adapt to a high interest rate environment for the past 2 years. We have identified the following areas that could be affected that we will explore in the future:

• Interest rate cuts will affect banks’ profit margins, reducing the spread between what they pay on deposits and their return.

• A cheaper cost of capital could lead to increased borrowing.

• Weakened U.S. Dollar

• Low yields will disrupt asset management, insurance, pensions, and other investors who have grown to love the high yields they can earn while investing in low risk fixed income products.

• Increased volatility as the markets continue to react to monetary policy and forecasts 

What to look out for this week

• Wednesday’s Earnings: Nvidia (NVDA), Salesforce (CRM), CrowdStrike (CRWD), Royal Bank of Canada (RY)

• Thursday: Initial Jobless Claims, Gross Domestic Product (Q2 First - Revision)

• Friday: Personal Consumption Expenditure (PCE)

We are two college students on a mission to immerse ourselves in the financial industry. We are eager to learn more and make new connections. Our goal is to share exciting and informative content that provides a broad picture of current events and offers valuable insights.

Authors: Ben Banchik, Zachary Singer

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