Time's Up.

Back in March, I bet the dad of one of my son’s friends that the Fed wouldn't cut rates this year. Things didn’t look great, and with an election looming, it seemed unlikely. Unfortunately for my dollar bill, that dad is Neil Dutta, head of Economic Research at Renmac. And guess what? Neil's right: the Fed has to cut rates this month, and probably at least two more times this year if we’re going to avoid economic calamity.

Why the Fed Needs to Cut Rates

The data supports three rate cuts this year. First, CPI has shown an easing of inflationary pressures, with June's annual inflation rate of 3.0% continuing the downward trend of the last two CPI prints. Second, the labor market is softening, with unemployment rising to 4.1% in June 2024, the highest since November 2021. Lastly, consumer spending, especially on discretionary items, is under pressure. Delta and Lufthansa reported declines in earnings with gloomy outlooks this week. Given that consumer spending accounts for a significant portion of GDP, a rate cut would certainly help spur on discretionary spending. If the fed does not act, this trend of data will likely continue - creating very poor economic conditions (higher unemployment, lower inflation, and high interest rates are like a wet blanket on a cold night).

What This Means for Investors

When the Federal Reserve cuts interest rates, certain sectors of the S&P 500 historically perform well. Health care stocks, for instance, have outpaced the S&P 500 by around 9 percentage points over the 12 months following the initiation of a rate-cutting cycle. Consumer staples have posted similar gains. Technology stocks usually don’t fare as well, so there may be a rotation out of those hot names and into other sectors.

Another area to focus on would be small and mid-cap value stocks. These stocks tend to benefit from more favorable borrowing conditions and increased economic activity spurred by lower interest rates. Small-cap stocks, which are more sensitive to changes in economic conditions due to their size and growth potential, often see gains. The Russell 2000 index, which tracks small-cap stocks, has experienced gains following rate cuts. Similarly, the S&P MidCap 400 index has historically shown strong performance in these environments, benefiting from both increased economic activity and lower borrowing costs.

My dollar bill has certainly been lost, but investments can still thrive with the right strategy. If history holds, then rotating into health care, consumer staples, and mid/small cap value, while consider rotating out of tech stocks, may be some prudent steps to take.

This week we’ll learn more as earnings season ramps up and more data comes out, let’s look at some of the more important happenings this week.

Earnings. This week we get reports from some heavy hitters that can move the market:

Blackrock. The world's largest asset manager, is set to report its earnings on July 15, 2024. The street expects an EPS of $9.88. BlackRock manages trillions in assets across various classes, including equity, fixed income, and alternative investments. Its earnings are crucial as they provide insights into global investment trends and economic health. As a major player in the financial markets, BlackRock's performance can influence investor sentiment and market direction. Strong earnings from BlackRock typically signal robust financial market activity, potentially boosting broader market confidence.

Bank of America. Bank of America, one of the largest financial institutions globally, is set to report earnings on July 16, 2024. The street expects an EPS of $0.81. As a key player in banking, wealth management, and investment services, its earnings offer critical insights into consumer spending, loan demand, and economic conditions. Strong earnings from Bank of America can indicate robust economic health and financial stability, positively impacting the broader market. Conversely, weak results may signal economic challenges, affecting investor sentiment and market confidence.

Netflix. Netflix, the global streaming giant, is scheduled to report its earnings on July 18, 2024. The street expects an EPS of $4.74. Netflix, known for its vast library of films and TV series, has been a pioneer in the subscription streaming service industry. Lately though, higher interest rates have made the cost of content explode, making it harder to grow subscribers. This earnings report will provide valuable insights into consumer behavior, subscriber growth, and the effectiveness of new content investments. Strong earnings from Netflix can indicate healthy consumer spending and confidence, positively influencing the broader market. Conversely, weaker earnings may signal potential issues in consumer spending patterns and market sentiment. This chart is certainly trending up and approaching 52 weeks high, with this technical setup, strong earnings could push past resistance.

Alcoa. Alcoa, a global leader in bauxite, alumina, and aluminum products, will report earnings on July 17, 2024. The street expects an EPS of $0.01. Alcoa's performance is a key indicator of the industrial sector's health, as its products are essential in various industries, including automotive, aerospace, and construction. Earnings from Alcoa provide insights into commodity prices and demand trends. Strong results can signal increased industrial activity and economic growth, influencing broader market sentiment. Conversely, weaker earnings might suggest slower industrial production and potential economic challenges. Let’s see if this earnings report can break this chart out of consolidation and back to fresh highs.