Stock Market: How Long the Rally Can Last?

Bank of America and Morgan Stanley yesterday were the latest big Wall Street banks to top expectations. Maybe more importantly, several smaller banks also defied the steep losses many were projecting, and most insiders believe balance sheets are strong enough to avoid a regional banking crisis that some feared could still be around the corner.

Earnings

Bulls are also cheering early evidence that artificial intelligence (AI) might deliver on its money-making promises after Microsoft introduced a new AI subscription service. The company’s new “Microsoft Copilot” will charge $30 a month for users to add AI capabilities to its widely used “Office” products, which could effectively raise subscription prices for enterprise customers by a whopping +83%.

Today, investors are anxious to hear from Netflix and Tesla, which are considered previews for what big tech companies might deliver in the weeks ahead. More bank results are also due today, including US Bancorp, Citizens, Zions, First Horizon, and M&T. Alcoa, Baker Hughes, Halliburton, Kinder Morgan, Las Vegas Sands, and United Airlines also report today.

Data to Watch

On the economic data front, Retail Sales for June rose +0.2% over May, which was below expectations but still the third consecutive month of growth. Coupled with data last week showing a meaningful slowdown in inflation, bulls view the latest retail sales results as further confirmation that the US is experiencing a “goldilocks economy,” in which the labor market and consumer spending is strong enough to prevent recession but not so strong that it reignites inflation. However, bears warn that consumer health is deteriorating amid still-high prices and increasing credit card debt. Bears also believe budgets are likely to be even more strained in the months ahead as student loan payments resume.

The only US economic data due today is Housing Starts and Building Permits for June. It’s worth noting that there is also growing concern about a slowdown across the wider global economy, particularly China.

Bears believe China’s economic slump alone could pull the whole world into recession, although many economists, including Treasury Secretary Janet Yellen, say the impacts of China’s downturn on the US are fairly limited. The bigger threat to the US economy right now could actually be the looming UPS worker strike, which experts say could cost the economy billions due to supply chain disruptions and increased shipping costs. It could also reignite inflation in some parts of the economy, in turn extending the time-frame for when the Fed might begin trimming interest rates.

The problems could also be compounded by a worker strike at regional trucking firm Yellow, where the union set a July 24 walkout date. The UPS strike is set to begin August 1. There seems to be a lot more worker walk-outs and strikes starting to happen as employees want more money to help battle higher inflation, but instead are running into corporate cost cutting. It seems like some of the power that shifted to the employees during covid is now trying to be reeled in by the corporate executives as they face much higher interest rates and heavier headwinds. It is going to be interesting to see how this battle plays out… how many work from home jobs are going to be cut, how many company perks will be slashed as margins are being squeezed and paying back covid loans start to come home to roost…