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This week is setting up to be the biggest for stocks in some while. The Fed will meet on Tuesday and Wednesday, then announce their rate decision at 2 p.m. Wednesday, followed by a press conference from Chair Jerome Powell at 2:30. Then, on Friday, we will get the jobs report for July. Underpinning all this will be one of the busiest weeks of the earnings season, with highlights including Apple (AAPL), Beyond Meat (BYND) and Mastercard (MA).

So, what should traders and investors expect, and where should their focus be?

The Fed: Normally, the Fed decision would be the natural choice as the most impactful event of any week. This quarter, however, it seems there is almost unanimous agreement on what to expect. Economists and Fed watchers are anticipating a cut of twenty-five-basis points (1/4 of one percent), although there are a few dissenters on both sides, some saying no cut and others favoring a fifty-basis point move.

Even if we accept the majority view though, there is still a chance that Wednesday’s decision and press conference will move markets. That move is priced in, but assuming it comes, how the FOMC justifies it and what indications they give as to their intentions for the future could prove disruptive in either direction.

The uncertainty stems not from what the Fed does, but what it says. The central bank could paint a picture of an economy heading for trouble, which would not be good news, or express confidence that they have everything under control, which would reassure some pessimists. The problem is that rates are such strong drivers of stocks now that the market reaction, in either case, is likely to be the opposite of the logical. A worried Fed is more likely to cut again this year, a confident one less so, and that will drive the reaction.

Jobs Report: After a decade or more of obsessing over the Bureau of Labor Statistics monthly take on the jobs market, it seems so strange to say it, but the jobs report will, barring a real shocking number, probably be the least influential thing this week. We have been at effectively full employment for some time, with wages increasing steadily. In that context, fluctuations in the monthly numbers are not that significant.

Expectations are for non-farm payrolls (NFPs) to drop back below 200k to around 170k, with hourly earnings increasing 3.2%, slightly above last month’s 3.1%, and the unemployment rate remaining steady at 3.7%. If there is any potential for a shock, it comes in the revision of last month’s NFPs. If that strong read were to be revised significantly downward, it would, after a weak GDP reading last week, encourage the bears.

Earnings: As a traditionalist who clings to the belief that stock prices should reflect the profitability and prospects of individual corporations, it pleases me to say that, despite all the other noise, earnings will set the tone this week. With nearly half of S&P 500 companies having reported, results are robust, with 77% beating expectations. There is no reason to think that will change this week, but the fly in the ointment could be guidance and commentary.

The same FactSet Earnings Insight Report linked to above shows that nearly three times as many companies have revised guidance downwards as have given an optimistic outlook. With firms like Apple, Mastercard and Yum Brands (YUM) that have massive international exposure reporting this week, a run of pessimism about global conditions could weigh heavily on the market.

If that does come, it will have an outsized impact. All data are subject to interpretation, and pessimism about the future would make any negative comments from the Fed or weakness in the job numbers seem much more significant.

On balance then, it looks like this is not a week to make any big moves. The most likely net outcome is that we finish the week higher, but there are significant risks. Negativity from the Fed or corporations could sour the mood quickly, as could a downward revision of last month’s NFPs and, with stocks at or around record highs, any negativity will be exaggerated and any move down has the potential to be swift and sharp. The best strategy, therefore, is to hold steady and wait for the dust to settle before making any moves.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.

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