Stocks Swing Wildly on Inflation Concerns and Earnings Surprises

The financial markets expected the Federal Reserve to leave interest rates unchanged at its recent meeting, and it did just that. However, three members of the FOMC dissented, voting to raise rates by 25bps in an effort to combat stubbornly high inflation. Bond investors voted with their feet, selling bonds and pushing yields higher. The 10-year Treasury yield topped 4.7 per cent and the 30-year moved close to levels not seen since 2007. Mortgage rates followed suit, climbing to the highest level in a year. Trouble in the bond market spread to stocks, with the Dow Jones Industrial Average losing more than 1,100 points Wednesday, for its biggest loss in over a year.

Microsoft came to the rescue, reporting strong second quarter earnings after the market closed on Wednesday. Revenue jumped 17 per cent year over year and topped the high end of the company’s own guidance. Capital spending plans were unchanged and free cash flow was projected to remain positive in 2027. The stock soared on the report, jumping 16 per cent and enjoying its best day since 2008. Microsoft helped the tech-heavy NASDAQ end a six-day losing streak with a 2.8 per cent rally. Meta didn’t join the party, though. It issued a soft revenue forecast and projected a huge drop in free cash flow. Its shares ended the day down eight per cent.

We saw a similar split on Friday, with Amazon soaring 15 per cent and Apple slumping seven per cent. Amazon revenue increased 20 per cent year over year, as consumers continued to spend and Amazon Web Services continued to see accelerated growth. Guidance also impressed. Meanwhile, Apple, which early in the week eclipsed a $5 trillion market capitalization, slid lower on memory cost pressures and a shortfall in service revenue. Outside of tech, Chevron topped earnings estimates with its largest quarterly net income since energy prices spiked in 2022. Exxon didn’t fare as well, as maintenance costs nicked its bottom line. Refining profits hit a four-year high but earnings per share missed expectations.

The S&P 500 ended the month nearly unchanged from June. Second quarter earnings have been strong, with 86 per cent of reporting S&P 500 companies surpassing consensus earnings estimates. However, inflation has remained a drag on the stock and bond markets, with continued hostilities in the Middle East keeping upward pressure on oil and gas prices. Looking ahead, earnings season rolls on, with reports from Eli Lilly, McDonalds, and SpaceX, among others. And markets will keep an eye on the Middle East for signs of a lasting peace deal. The President halted Iran attacks over the weekend, but whether a ceasefire holds remains to be seen.