Fed Takes Center Stage after Nvidia (NVDA) Earnings Event

futures ready to rally here this morning. Joining us for the discussion after Nvidia earnings and with economic data this morning right in the middle of the heat of the week Liz Ann Sonders chief investment strategist at Charles Schwab Liz, great to have you here this morning. Good morning Oliver. Thanks. Okay. So we got a pretty good batch of earnings last night from retail into Nvidia. Of course some cloud stuff to kind of a big late chunk of numbers. Does that update any of the key kind of outlook or profit metrics for the quarter. Yeah. And I think it's important first of all, to get Nvidia out of the way. I don't mean that in a derogatory sense, but maybe represents a bit of a clearing event to, to use a trader lingo. And I think now we're we're we're almost at the very, very end of reporting season. The outlook coming up for third quarter, which has deteriorated throughout the course of the reporting of second quarter, third quarter, deteriorated a little bit. That said, on a forward p e basis, the marching ahead to 2025 earnings, we've not seen a big dent to those. And maybe in support of this broadening out small caps rally, you're looking at least in the case of the S&P indexes, the expectation for 2025 earnings growth for S&P 500 is 15%. But it's almost 19% for S&P 600. Index of small caps. So I think that represents some enthusiasm too, that we're finally at that inflection point up heading into 2025 down the cap spectrum. Okay. Listen when you think about the economic data updates, they're too little GDP revision higher. I mean that's got to be welcome. It is welcome. And the consumption component of that as well not to mention the fact that that claims touched down a little bit last week was revised up a bit, but we're not seeing any kind of breakout on the upside in claims. And that is potentially a setup for next week's jobs report. There's a lot of uncertainty with regard to the weather impact. And what if anything, that contributed to the weaker July jobs report that we got in in August. But none of the data we're getting in advance of next week suggests that we're going to get another significantly disappointing numbers. But there is still that weather conundrum that is part of the debate. As to what was a contributor to last month's weakness. If we do hold on to this, what are the implications of us getting back to a three handle in GDP? Is that an accomplishment, yeah. I mean, I think we could get there, the labor market is somewhat obviously holds the key. I think, though, the collection of data at this point, not maybe supportive of the four rate cuts that is built into expectations for 2024, given that there's only three FOMC meetings, that suggests that one of them will be 50 basis points and not 25. We think it's a pretty high likelihood that the fed starts with 25, unless there's something shocking in the next two weeks. In terms of the data, and I'm not sure all else equal that what we have in hand inflation data combined with their other mandate on the employment front is supportive of an aggressive move by the fed. And as you and I have talked about before, quite a few times on this program, Oliver, be careful what you wish for. If you're hoping for an aggressive fed and a fed that feels the need to move up to 50 basis point increments based on history, aggressive cutting cycles are not rewarded by the equity market versus slow cutting cycles. You have about double the maximum drawdown within the 6 to 12 month period following the initial cut. If the fed is moving aggressively, ostensibly because they're moving aggressively, because they're combating a recession or financial crisis or some combination thereof. So you actually want to wish for a less aggressive fed, at least based on history. That's great. That's a really great stat and speaks volumes, right? That having to act out of a place of need and, you know, back up against the wall, obviously less preferable than having to do it on your own volition. So if that's where we're going, is the bear case falling apart here? And like water bears holding on to like, what's the counterpoint then to why we wouldn't just keep on grinding if feds can cut out of convenience and, you know, the GDP numbers are surprising in the earnings aren't leading to big sell offs. Well, I think the bear case does relate to employment and maybe a more pessimistic assumption of the path from here. And it is the case that if you're using the unemployment rate as a as a proxy for the labor market and it is highly lagging nonetheless, once the unemployment rate inflects, which it already has almost a full percent lower than where we are, it tends to continue to rise. So I think the bear case is the recession case and a deterioration that would justify the fed having to move aggressively. Maybe not as soon as the September FOMC meeting, but in the aftermath of that. So I think we're past the point of any bad economic news being a positive for the equity market. That has not been the narrative recently, but I think that represents the bear case, is that the weakness ahead of us is more severe than what the recent data would suggest above. Okay, and thinking about then kind of our timeline for knowing if these sort of, late cycle indicators are triggering, if they're coming to fruition, is it then a situation where, okay, employment from here typically just unemployment just keeps going up, right? Kind of the cat's out of the bag. Pandora's box has been open fed cuts, but it still goes that way. Does that mean the standard for success for us is like just kind of a static maybe kind of sideways situation for unemployment? Can we actually get it back down? Like, what's our bar here where we go this is impressive or this is not now this cycle has been incredibly unique. We all know that history shows that don't tend to just sort of bounce around at a certain low level in the unemployment rate, or reverse back down. It tends to be fairly linear, but there are so many aspects of this cycle that have just bucked historical trends that I won't, I won't ever say never when it relates to this, but I think the real key is not just the labor market data, but how that translates to confidence, consumer confidence, corporate confidence and consumer spending. Consumer spending has been resilient in the GDP revision we got today. That was revised higher. But I think that's the channel where we would see weakness become more acute in the economy is if deterioration further deterioration in the labor market, especially the albeit lagging, very high profile indicator, that is the unemployment rate and how quickly that can get into the psyche of businesses, of individuals, of consumers. So I think that would be the feeder into more weakness is starting maybe with the labor market. But feeding into that confidence and spending channel, I wouldn't suggest that's the base case at this point, but that would be the risk on the downside. Okay. And that's where still then we avoid the stuff that's going to really, really depend on robust like economic early cycle behavior. Is that the part of the market that we then have to be the most diligent about, the most careful about? Well, you know, going back to the whole slow cycles versus bad cycle, fast cycles, what you do tend to see is in slow cutting cycles, the cyclical side of the market tends to outperform the more defensive side of the market. We already talked about the drawdown differential, slow versus fast, but in slow versus fast cutting cycles, when the fed is operating more aggressively, it's the traditional defensive areas that that do well. So these bouts of cyclical leadership to carry going forward also requires, I think, a fed to be eyeing the escalator on the way down, not the elevator on the way down. Okay. So they got to keep, keep us out at a pace at a, you know, level that doesn't cause alarm, that doesn't reflect some of these more tenuous moments in history. Right. Lisanne thinking about, then lastly, kind of where their standard is, for Powell to actually have to go more, is there a certain particular threshold? Is there a bar that you think would trigger it, a level of unemployment or any particular report on the calendar that would be the most likely to make be that determining point? Yeah So I think maybe a combination of the upcoming PCE report and a weaker than expected jobs report, you might start to hear some chatter about a consideration of 50. Beyond that, though, there's some view right now that the inflation data has been put in the rear view mirror and that the fed is solely focused on the employment side of their mandate. In terms of the reaction function for what they do once they start cutting. I'm not so sure that's the case. I think it is still the combination. I've been saying that maybe, maybe inflation has moved from, you know, the windshield to the side view mirror. I don't think it's in the rear view mirror. Even PCE, which has been more mild than CPI, is not at the Fed's target. So I think that there is still that sort of dual switch for the fed and the monitoring of the combination of those two things, and within the employment data, the feeders into inflation like wage growth. So I don't think we want to start to dismiss the inflation data. I think that can still be a needle mover in conjunction with the labor market in terms of what the fed does. Okay So if we do get higher than expected numbers on inflation, I think we'll see the odds of 50 drop as a result. So these numbers still do matter I do I think they absolutely still matter. Yep. Okay. All right. That's good. Great stuff. Thank you very much. Wonderful conversation. I think that's an important point to the last one there that we could still be getting movements