The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Mixed feelings.
S&P 500 futures were flat overnight. The first batch of financials reported and they all beat. Goldman Sachs surprised the most. S&P futures didn’t react to the financial reports. Perhaps this was because IBM surprised the markets with a warning that they would miss Q2 revenues. With futures essentially unchanged on the morning, markets waited for the inflation data. CPI (3.5% vs 3.8% est & 4.2% prior) was cooler than expected. Futures jumped, yields fell, precious metals jumped, and the Dollar fell, all reactions that make sense for a material drop in CPI. The probability for a July hike from the FOMC fell to 16%. The S&P 500 opened trading up about 15 points. Over the session, trading was calm and the index tacked on some more points through the afternoon. Capital flow was light again at 82%.
The financial results, while officially a positive surprise, were expected. The IBM preannouncement was a negative surprise. The inflation data was a big positive surprise. Combining everything together, US equity markets decided that the net result was slightly positive. This is a bit odd. Fed hiking is the number one bearish possibility for stocks and that outcome, in the short term, is mostly off the table.
If you asked the longs yesterday, this CPI outcome was their dream print. It came true and yet the market only rallied modestly. Additionally the capital flow was very light as well. A good start to the earnings season and a great inflation datapoint should’ve been a significant catalyst. It wasn’t. This is a headscratcher.
The IBM news certainly factors in. The stock dropped 25%. IBM claimed that AI spending and concerns about security affected their clients’ spending. It seems reasonable that the explosive spending in and around the AI space would crowd out spending in other areas. The can of worms this opens naturally gives the market pause. What other businesses are getting crowded out? Is this budget-shifting a short term phenomenon or something more substantial? That is one of the new questions arising from the IBM situation.
We may learn the answers during this earnings season. Perhaps, the IBM news just splashed cold water on the entire season. What was supposed to be a season of widespread beats has become a season of widespread beats with perhaps a few devastating landmines to be determined.
Is the market’s new nervousness appropriate or misplaced? I’m not sure. The season is here though so we’re about to learn whether IBM was one of one of the first of many.
See you tomorrow.
-Mike
Visdom Market Commentary
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