Consumer Spending Stable, Potentially Stalling Fed

(Thursday market open) Consumer demand takes the spotlight today with June retail sales and earnings from Netflix (NFLX). Stocks traded without much direction early as retail sales rebounded in June, climbing 0.6% month over month. That topped the consensus of 0.2% and May's sharp –0.9% decline.

"Despite uncertainty around tariffs, the consumer continues to spend," said Collin Martin, director, fixed income strategy at the Schwab Center for Financial Research. "Treasury yields rose following this release as stronger economic reports supports the case for the Fed to hold rates steady rather than cutting sooner than expected." Also on the economic front, weekly initial jobless claims fell to 221,000, down 7,000 from a week earlier. Continuing claims were steady but remained high at 1.956 million. "Initial jobless claims came in at a three-month low, suggesting that the labor market remains pretty steady for now," Martin said.

Stocks edged higher Wednesday and yields slipped but remained near one-month highs. Health care lagged over the last month but led Wednesday thanks to Johnson & Johnson’s (JNJ) 6% rally on earnings. "Stocks appear to be in consolidation mode, and doing so by moving sideways, rather than selling off, so the bullish resiliency remains intact," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "Inflation appears to be contained, for now, but we haven't really tested the economy with the new proposed tariff rates of 19% to 40%, assuming they remain in place past August 1."

1. Retail sales deeper dive: One question heading into today's retail sales report was whether consumers returned to shopping in June after a weak May despite the tariff picture staying unsettled and slight increases in goods inflation outlined by the last two days of Consumer Price Index (CPI) and Producer Price Index (PPI) data. The headline numbers suggest they did, but also could partly reflect higher prices, since the retail sales report data is nominal. However, sales growth topped CPI growth, a sign that the report reflects actual growth in shopping demand. There's more to retail sales than initially meets the eye. Control group retail sales—the only part used in calculating gross domestic product (GDP)—excludes sales from auto dealers, building materials stores, and gas stations. It rose 0.5%, beating analysts' expectations for 0.3%. Big retail sales gains in June came in categories like miscellaneous store retailers, motor vehicles and parts, building material and garden equipment, and clothing. Sales fell at furniture and electronics stores. Retail sales were up 3.9% annually.
    
2. Fed independence, Powell's future a possible headline risk: For anyone wondering just how sensitive markets are to threats against Federal Reserve monetary policy independence, Exhibit A was Wednesday when the S&P 500 index suddenly plunged on headlines that President Trump had asked Republicans in Congress if they thought he should fire Fed Chairman Jerome Powell. Trump quickly denied plans to fire Powell. The Fed chair's term ends in May and Trump has criticized him for standing pat on rates. However, even a new chairman is just a single vote. Seven policy makers see no rate cuts the rest of the year, according to Fed projections. Also, a rate cut that the market sees as unjustified might cause yields to rise on inflation and Fed independence concerns. "I think central bank independence has served us incredibly well. It's important," said Goldman Sachs (GS) CEO David Solomon, on CNBC Wednesday. "It's something we should fight to preserve."
    
3. Big bank earnings generally solid, but regional institutions could enhance view: Most big banks the last few days exceeded analysts' earnings expectations, but their stocks didn't react much. This could be because the sector rallied into earnings season and most large bank stocks had outpaced the broader market for the year. Net-interest income was a mixed bag, but executives painted the picture of a resilient consumer and decent levels of corporate borrowing. There was also strength in their Wall Street businesses, reflecting volatile second quarter trading. Goldman CEO Solomon cited an improved investment banking climate and noted that large investments being made in AI and the power to run AI ultimately is positive for banks due to the financing demands this brings.

• United Airlines (UAL) dropped 1.3% in early action. While its guidance was in line with analysts’ expectations and second quarter earnings per share topped Wall Street’s consensus, revenue pulled up just shy. On a positive note, the airline said demand—especially business demand—improved in early July due to less geopolitical and macroeconomic uncertainty, and that current guidance is conservative.
   
• Taiwan Semiconductor Manufacturing (TSM) popped more than 3% ahead of the open. Second quarter profit rose more than 60% and revenue climbed nearly 39% in the quarter that just ended. The company expects AI growth to help full-year revenue rise by around 30%. As a contract chipmaker, TSM's business can reflect overall demand in the industry. Chip stocks like Broadcom (AVGO) and Nvidia (NVDA) climbed early Thursday.
   
• Netflix climbed 0.6%.  Results later today could affect the broader market, as they have in the past. Shares have taken a breather the last two weeks after a sizzling spring. Last time out, the streaming firm's strong revenue growth impressed investors, so it has a tough act to follow. Wall Street consensus is for earnings of $7.08, up 45% from $4.88 a year ago, on revenue of $11.1 billion, up 15.76%.
   
• Abbott Labs (ABT) fell nearly 5% ahead of the open despite earnings that surpassed analysts' expectations. Revenue also beat. The company enjoyed strong medical devices demand, Reuters said, but the third quarter earnings forecast missed consensus views.
   
• PepsiCo (PEP) jumped nearly 2% as earnings topped Wall Street's consensus and the company now sees a smaller decline in 2025 adjusted earnings per share thanks in part to currency tailwinds.
   
• Starbucks (SBUX) fell 1.6% after Jefferies downgraded it to Underperform from Hold, saying the stock has gotten ahead of "reasonable expectations for improving fundamentals."
   
• Sarepta Therapeutics (SRPT) was up nearly 30% in pre-market trading after announcing it will cut costs in part with a 36% workforce reduction. It's also adding a black box warning to its gene therapy Elevidys, which analysts believe reduces chances of the product being withdrawn from the market after two patient deaths.
   
• Bitcoin (/BTC) fell 1% early Thursday despite news that the House of Representatives had advanced three crypto bills to the floor for debate, ABC reported. Stocks related to crypto, including Strategy (MSTR), Circle Internet Group (CRCL), and Coinbase (COIN) traded mixed. Circle is coming off yesterday’s double-digit gains.
   
• Archer-Daniels-Midland (ADM) fell more than 2% ahead of the open after Trump said Coca-Cola (KO) agreed to use real cane sugar in U.S.-sold drinks. As Barron's noted, ADM makes high-fructose corn syrup used in certain Coke products.
   
• So far this earnings season, more than 45 S&P 500 companies have reported and 87% of those have topped consensus, according to FactSet.
   
• Technicals for stocks appear bullish on a longer-term and intermediate term basis, "though near term it appears we need to digest and consolidate, as evidenced by the decelerating RSI levels, and that’s what markets have been doing over the past week or so." RSI refers to the momentum-tracking Relative Strength Index for major stock indexes.
   
• Chances of a Fed rate cut later this month were less than 3% early Thursday after the retail sales data, according to the CME FedWatch Tool, and odds of at least one cut by September were around 55%.

The small-cap Russell 2000^® (RUT—candlesticks) lost ground over the last week but is up nearly 18% since mid-April. That's basically on par with the S&P 500 index, but well behind the tech-focused Nasdaq-100^® (NDX—blue line). However, compared with the S&P 500 Equal Weight Index (SPXEW—purple line)—which weighs all stocks the same rather than by market capitalization and removes much of the influence of the tech and communication services mega-caps that propel the S&P 500 index—small caps are not just holding their own. They're doing much better. That said, the Russell 2000 is basically flat over the last year, so improvement is a near-term phenomenon.

Check out the Investors' Calendar for a summary of the top economic events and earnings reports on tap this week.

July 18: June housing starts, June building permits, July preliminary University of Michigan Consumer Sentiment, and expected earnings from 3M (MMM) and SLB (SLB).
July 21: June leading indicators and expected earnings from Cleveland-Cliffs (CLF), Domino's Pizza (DPZ), and Steel Dynamics (STLD).
July 22: Expected earnings from Coca-Cola (KO), General Motors (GM), Halliburton (HAL), Lockheed Martin (LMT), Northrop Grumman (NOC), Philip Morris (PM), Sherwin-Williams (SHW), Capital One (COF), and Texas Instruments (TXN).
July 23: Existing home sales and expected earnings from AT&T (T), Freeport-McMoRan (FCX), GE Vernova (GEV), General Dynamics (GD), Hasbro (HAS), Hilton Worldwide (HLT), Alphabet (GOOGL), Chipotle (CMG), CSX (CSX), IBM (IBM), T-Mobile (TMUS), and Tesla (TSLA).
July 24: ECB interest rate decision, June new home sales, and expected earnings from American Airlines (AAL), Dow (DOW), Honeywell (HON), Southwest Airlines (LUV), Union Pacific (UNP), Intel (INTC), and Newmont Mining (NEM).