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Tech Earnings & Fed Interest Rates Hike

U.S stocks closed strongly higher, capping off the best monthly gain since 2020. 

Stronger than expected tech earnings from Apple, Amazon, and Alphabet, the mega tech companies, soared after reporting earnings and guidance that were better than expected. 

The earning season, as a whole, was solid, as 75% of S&P 500 companies reported better than expected results beating estimates.  

This took away the focus of higher inflation data. 

The personal consumption expenditures price index, which the Federal Reserve uses for its inflation target, rose 1% from a month earlier and was up 6.8% since June 2021. The annual advance was the biggest in 40 years. 

For the week, the Dow ended higher by nearly 3%, while the S&P 500 added 4.3% and the Nasdaq Composite rose 4.7%. 

Here are the closing levels on Friday, 29th July 2022:- 

 Last Change %Change 
Dow Jones 32,845.13 +315.50. +0.97% 
S&P 500 4,130.29. +57.86. +1.42% 
Nasdaq Comp 12,390.69. +228.10. +1.88% 
U.S. 10Y 2.65%   
VIX 21.33 -1.00 -4.48% 

On Wednesday, the Federal Reserve raised the U.S. benchmark interest rates 75 basis points to a range of 2.25% to 2.5%. Powell said that they are likely to raise rates further depending on how the economy performs.  

He said “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data,” Powell said. “The labor market is extremely tight, and inflation is much too high.” 

The market took all of Powell’s comments as slightly dovish and rallied post the announcement. 

As mentioned in previous commentaries, the market wants to go higher and ignored the chance of another 75-basis point hike, or that inflation is much too high. 

The strong earnings from the mega techs especially have taken the market out of the bearish trend we have seen this year.  

The problem is the Fed is not going to be happy that the economy is not slowing down enough to lower inflation and it may work against the market to have such good earnings reports. 

Nevertheless, the shorts have been squeezed out and it is hard to see a reversal of this recent rally unless we get some really bad news or the Fed talk that indicates much higher rates to come.  

While some are calling this rally overdone, it looks like we are returning to the buy on dips mentality for now. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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